AMR Corp. and its primary subsidiary American Airlines have endured a prolonged period of negative cash flow and a lack of significant cost structure reduction. This provides an outlook for continued cash losses, states Moody's Investors Service, which has downgraded AMR's senior implied rating from B1 to B3, as well as AMR and American's senior unsecured ratings from B2 to Caa2. Despite $2.8 billion in cash on its balance sheet, Moody's notes that an increase in lease-adjusted debt, limited access to capital markets and the erosion of the airline's once substantial net worth has significantly reduced its financial flexibility. Earnings have been affected by a slow revenue environment and continued high costs, with EBITDA results negative for the past eight quarters, according to Moody's.
"Over the last year, we have reduced our costs by $2 billion, which is a larger cost reduction than any other airline in the industry, but we still have a ways to go," an AMR spokesman said. He stated that the company is working at making further reductions targeted at $4 billion per year. The Moody's downgrade is a reflection of the precarious times facing the airline industry, he noted, adding that the company acknowledges that the company's most recent financial results are unsustainable.
In June of this year, American must meet a minimum cash flow covenant for its completely drawn $834 million credit agreement. Moody's predicts that American will have to receive a waiver from its banks or repay the outstandings.
*The Goodyear Tire & Rubber Company's recent covenant waivers for its credit agreements raised concern for Fitch Ratings, which has downgraded Goodyear's unsecured debt from BB to B+. Mounting pension and financial obligations compromise the world's third biggest tire maker's liquidity levels, Fitch states. Insufficient cost structure reductions, market share losses and a competitive price environment have further contributed to Goodyear's declining margins. Turnaround is not expected to be easy, considering factors such as the recent spikes in raw material prices, labor renegotiations coming this April and a flat outlook for the North American replacement tire market.
Goodyear faces about $600 million of maturing debt over the next 12 months, which includes term loan debt. Fitch believes that Goodyear will be able to satisfy its contractual cash requirements through 2003, however a liquidity squeeze could emerge in the next 24 to 36 months in the absence of an operating upturn and sustained positive cash flow. Furthermore, Fitch expects Goodyear to experience higher financing costs on its bank, receivables and any refinancing activity, further impacting its credit statistics. A Goodyear spokesman noted that Fitch has not yet met with the company to discuss its 2003 business plan.