DALLAS - Southwest Airlines, which is leading a $519 million bond-funded redevelopment of its home airport Dallas Love Field, saw its senior unsecured debt rating downgraded two notches to Baa3 by Moody's Investors Service yesterday.
The downgrade came a day after Southwest reported a second-quarter profit of $54 million, or 7 cents per diluted share, down 83% from $321 million, or 44 cents per diluted share, for the same quarter in 2008.
"Even with its industry-leading low cost structure and successful execution of new revenue initiatives, Moody's believes that continuing weak yields in the North American airline industry will likely constrain Southwest's credit metrics until overall economic conditions materially strengthen," said Moody's vice president Jonathan Root.
In commenting on the downgrade, the airline noted that it "continues to be the only investment-grade domestic airline."
Despite the rough economic conditions, "Southwest maintains the strongest balance sheet in the industry with a strong competitive cost advantage," said spokesman Paul Flaningan. "Our liquidity is also strong with $2.4 billion in cash and short-term investments and $600 million fully available under our revolving credit facility."
Standard & Poor's, which has had the airline's BBB-plus corporate credit rating on negative watch since April 16, had not issued a new report before deadline yesterday. Fitch Ratings also rates Southwest's senior unsecured debt at BBB-plus.
The downgrade will not affect Southwest's redevelopment of Love Field or its new service to New York's LaGuardia and Boston's Logan airports, a spokesman said.
"While we plan to reduce our 2009 available seat miles in the 5 to 6% range versus last year, our continued focus on maximizing the efficiency and profitability of each published flight schedule has positioned us to take advantage of strategic growth opportunities even in this challenging economic environment," Southwest chairman and chief executive Gary Kelly said Tuesday in announcing earnings.
Kelly said he expects third-quarter revenue to decline even more than the 6% drop in the second quarter, calling the current economy "without a doubt, one of the worst revenue environments for the airlines."
In addition to downgrading the senior unsecured bond rating from Baa1 to Baa3, Moody's lowered ratings on the airline's pass-through and enhanced equipment trust certificates.
Despite the negative rating action, analysts generally view Southwest as one of the strongest performers in an industry that has been in turmoil much of the time since the Sept. 11, 2001, terrorist attacks. Since then, the major carriers have faced stress from record fuel prices, two wars, dramatic new security measures and a global recession.
"Despite the expectation of weaker credit metrics, Moody's is maintaining investment-grade ratings on Southwest because the company's business model should enable it to sustain its leading competitive position through periods of industry adversity," Root said.
In January, Kelly said the airline was committed to its redevelopment of Love Field despite the carrier's plan for no growth.
Under the Love Field plan that grew out of gradual easing of restrictions on service from the close-in Dallas airport, Southwest will have 16 gates with Continental Airlines and American Airlines each maintaining two.
Financing of the Love Field project will come from tax-exempt bonds backed by lease payments from Southwest, Kelly said. A new entity known as the Love Field Airport Modernization Corp. would issue the bonds. The first tranche would likely come in September. The debt would be rated according to Southwest's credit rather than airport revenues.
Dallas' Love Field airport bonds are rated BBB by Standard & Poor's and Baa2 by Moody's. Fitch does not rate the airport bonds.