RATINGS RATIONALE



The Parent's Ba3 corporate family rating reflects American's scale and competitive position as the world's second largest airline based on revenue, balanced by elevated financial leverage above 5x from a historically aggressive financial policy and an operating margin that continues to trail industry peers. Leverage remains elevated because of the heavy reliance on debt for repurchasing more than $11 billion of its shares while funding the majority of almost $26 billion of capital investment mainly from operating cash flow over the most recent five years. The rating also considers the company's inferior operating margin and weak free cash flow relative to its US legacy airline peers, Delta Air Lines and United Airlines.

The success of the company's strategy to grow ancillary revenues, increase fees for premium seating and services and more generally, sustain annual operating margin above 11% will be important drivers of expanding free cash flow that exceeds Moody's expectations

The ratings could be downgraded if: 1) the company continues to emphasize share repurchases rather than begin to reduce funded debt, 2) the EBITDA margin does not strengthen above the 17.4% at December 31, 2018, 3) the aggregate of cash, short-term investments and availability on revolving credit facilities is less than $5.0 billion, 4) unrestricted cash is less than $3.5 billion, or 5) Debt to EBITDA does not decline below 5x, Funds from Operations + Interest to Interest approaches 3x or Retained Cash Flow to Debt does not exceed 15%.

The term loan will be secured by landing and take-off slots, foreign gate leaseholds and route authorities for American's service to and from London Heathrow and certain other cities in Europe. The appraised value of the collateral, supported by the importance of London Heathrow as a hub, provides significant cushion against the minimum collateral coverage ratio of 1.6x.