Alaska gets investment grade BBB- rating from Fitch

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Fitch Ratings has rated Alaska Air Group BBB-, an investment grade rating that gives it access to cheap unsecured debt on the capital markets.

The rating agency cites the Seattle-based airline’s low leverage, solid financial performance and strong operating margins for its issuer default rating in a report today. The carrier’s outlook is stable.

“Fitch believes that ALK [Alaska] is much better positioned to operate through future downturns while maintaining adequate credit protection than it was in the past,” says the rating agency. “Fitch's expectations are based on the significant improvements in ALK's balance sheet and cost structure as well as the broadening of the airline's route network since the last recession.”

Alaska, which owns Alaska Airlines and Horizon Air, had $1.42 billion in cash, cash equivalents and marketable securities, and $721 million in long-term debt net current maturities at the end of March.

The airline’s manageable level of debt maturities, at about $114 million annually for the next two years, and 66 unencumbered aircraft are credit positives, adds Fitch.

"An investment grade credit rating affirms the work we have done to improve our business and strengthen our balance sheet," says Brandon Pedersen, chief financial officer of Alaska, in a statement.

Southwest Airlines is the only other carrier in the USA with an investment grade rating, an achievement that is very rare among global airlines.

The rating allows Alaska to tap unsecured capital markets cheaply and easily. Southwest has routinely been able to raise debt with interest rates between 5.125% and 6.84% in recent years, which is lower than many secured enhanced equipment trust certificates (EETCs) issued by mainline carriers before spreads tightened and base rates fell beginning in 2012.

The A tranche of the most-recent secured EETC, a $949.4 million deal by United Airlines in March, achieved a spread of 126bp over 10-year US treasuries for an all-in rate of 4% on 24 March. The tranche was rated A by Fitch.

An investment grade airline should be able to achieve comparable – or better – rates in the market currently.

Mark Eliasen, treasurer of the Seattle-based airline, told Flightglobal in March that the carrier is considering raising secured debt against some of its Boeing 737s in the second half of 2014.

The airline was looking for the best option in terms of cost, rate, terms and flexibility at the time, he said.

Lenders said that they see Alaska as a great credit, regardless of what type of debt it selects, at the ISTAT Americas conference in March.

Fitch cites the expansion of Delta Air Lines at Seattle/Tacoma International airport as the main credit negative facing Alaska. The agency anticipates pressure on the smaller airline’s yields at the airport through at least the middle of 2015.

Alaska operates about 60% of its capacity from the Seattle/Tacoma airport, notes Fitch.

The airline’s strategy to diversify its network away from Seattle, with additional connections at its hub at Portland International airport and new routes from Salt Lake City, San Diego and San Jose (California), are credit positives, adds the agency.