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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.

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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

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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%.

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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.

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Fitch Ratings - Chicago - 25 November 2019:

Fitch Ratings has affirmed American Airlines Group Inc.'s (American) Long-Term Issuer Default Rating (IDR) at 'BB-'. The ratings also apply to American's primary operating subsidiary American Airlines, Inc. In addition, Fitch has taken various rating actions on American's EETCs as detailed at the end of this release.

American Airlines Group Inc.'s 'BB-' rating is supported by the company's market position as one of the largest airlines in the world, a dominant position in key hubs and prospects for improving FCF and declining leverage over Fitch's forecast period. However, Fitch considers some of American's credit metrics to be weak for the rating. Credit metrics have been pressured over the past two years by a combination of one-time events including labor issues and the 737 MAX grounding, and by rising labor costs and by an intensely competitive environment. Fitch expects metrics to improve over the next 1-2 years as declining capital expenditures allow for debt reduction and as various revenue initiatives continue to take hold.

American's adjusted leverage at Sept. 30, 2019 was 5.1x, up from 4.9x at the same point in 2018, which Fitch considers high for the rating. EBIT margins declined in the LTM period to 8.2% from 8.5%. Fitch previously stated that American's metrics would need to improve in order to avoid a negative rating action. The Stable Rating Outlook reflects the one-time nature of some of American's performance in 2019. However, failure to see material improvement in leverage and profitability metrics in 2020 is likely to lead to a negative rating action.

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