CHICAGO — A takeover of bankrupt American Airlines by US Airways could bruise some airport credits, with the risks most acute for their hub facilities, Moody’s Investors Service warned in a special commentary released Wednesday.
Tempe, Ariz.-based US Airways announced its intention to pursue American in regulatory filings last month. American’s parent, Fort Worth-based AMR Corp., wants to emerge from federal Chapter 11 as an independent company, but earlier this month company officials said the airline had agreed with its creditors’ committee to review strategic consolidation options.
Under bankruptcy rules, the airline has the exclusive right to submit a reorganization plan through Sept. 28.
AMR, which filed bankruptcy on Nov. 29, is seeking court approval to void its labor contracts in an effort to cut more than $1 billion in costs. Late last month, American’s three largest unions announced their support for a US Airways takeover.
“The effect on the airport sector of the consolidation would be expected to be negative, given the trend for consolidation in the U.S. airline sector has tended to increase average airfares and pressure enplanements lower,” analysts wrote, adding that specific characteristics of the combined airlines might soften the blow.
Combined, the two carriers would operate seven hubs and the proximity of four in the Northeast “provides opportunity for consolidation, which would affect the credit standing of some individual airports,” Moody’s wrote.
American’s hubs are at Aa2-rated Chicago’s O’Hare International Airport, A1-rated Dallas-Fort Worth International Airport, A2-rated Miami International Airport, and Aa2-rated John F. Kennedy International Airport in Queens, N.Y.
US Airways operates hubs at Aa3-rated Charlotte International Airport in North Carolina, A2-rated Philadelphia International Airport, and Aa3-rated Phoenix Sky Harbor International Airport in Arizona.
The two have a strong presence at Aa2-rated LaGuardia Airport in Queens, , while Aa3-rated Reagan National Airport, serving the District of Columbia, is a focus city airport for US Airways.
“Between Reagan National Airport, Philadelphia, LaGuardia and JFK, Moody’s would expect to see some reduction in service from a fully merged entity,” analysts wrote. “Additionally, as the merged entity gained bargaining power through the threat of removing service, airline-derived revenues could be pressured downward as airports seek to lower costs to retain the airline’s presence.”
On the positive side, the merger’s impact on capacity reductions would be lessened given a lack of overlap in their existing routes. However, Moody’s does expect “small negative credit impacts to regional originations and destinations airports as decreased competition will likely result in increased airfares, which have demonstrated negative impacts on enplanement levels.”
The combined airline would hold no more than a 13% share of the domestic market and would have no greater than 46% market share at any rated airport. Outside of their hub and focus city airports, US Airways and American would not dominate any rated airport.
In a number of cities, the combined presence would overtake other airlines as the primary carrier.
“The effect of reduced competition would be strong where neither airline is particularly dominant, but the combined airline becomes the primary carrier or becomes large enough to compete with a dominant airline in a particular market,” analysts wrote.
Such a scenario occurs at Baa1-rated Fresno Yosemite International Airport in California where United Airlines is the dominant carrier, with 30% of market share. Combined, US Airways and American would account for 45% of passengers.
At A2-rated Richmond International Airport in Virginia, the two would account for 38% of passengers, unseating Delta Air Lines with 25% of market share.
Some corporate and municipal holders of American’s debt have launched their own financial review of whether a merger would prove beneficial financially, including municipal holder OppenheimerFunds Inc., Bloomberg News reported. The firm did not return a call for comment.
Municipal bondholders are represented by trustees Bank of New York Mellon, Manufacturers and Traders Trust Co., Law Debenture Trust Co. of New York, and U.S. Bank NA.
American has $3.2 billion of municipal debt, including $1.5 billion of unsecured bonds that are secured by a lease or other asset and another $1.7 billion that are secured by a leasehold mortgage or leases.
The authors of the Moody’s commentary included Earl Heffintrayer, Kurt Krummenacker, Chee Mee Hu, Maria Matesanz and Kristina Cordero.