S&P cuts Atlas Air Worldwide to B-plus
(Press release provided by Standard & Poor's)
NEW YORK, May 15 - Standard & Poor's said today it lowered its corporate credit rating on Atlas Air Worldwide Holdings Inc. to single-'B'-plus from double-'B'-minus. The rating action reflects increased risk in both the company's financial and business profiles, stemming from current industry pressures and an increasing focus on new, more risky service offerings. The outlook is negative.
Purchase, N.Y.-based Atlas, which provides heavyweight air cargo services through its Atlas subsidiary and scheduled, high-frequency airport-to-airport cargo services through its Polar subsidiary, has about $2.5 billion of debt (including off-balance sheet leases).
"Because of its high operating leverage, substantial debt burden, and reduced industry demand over the past year, Atlas has experienced a deterioration in financial measures, and liquidity has become constrained," said Standard & Poor's credit analyst Lisa Jenkins. At year-end 2001, lease-adjusted debt to capital was 84% and EBITDA interest coverage was 1.4 times (x). Industry conditions are expected to remain challenging this year and, as a result, no material improvement in financial performance is expected over the near term. Over the longer term, Atlas should benefit from a rebound in air cargo demand. However, because of its changing business mix, Atlas will likely experience more volatility in operating results.
Until last year, Atlas' primary business was the provision of ACMI (aircraft, crew, maintenance, and insurance) services for airlines, a business in which it is a market leader. In 2001, Atlas expanded its product line to include fractional ACMI; partial ACMI; dry leases (aircraft, maintenance, and insurance but no crew) for aircraft; and charters. Also in late 2001, the company acquired Polar Air Cargo Inc., a provider of scheduled airport-to-airport cargo services as well as other nonscheduled cargo services. Polar's scheduled service is a different type of business and serves different customers than does Atlas' existing ACMI freighter services and carries a higher fixed cost component. The purchase of Polar increased Atlas' fleet of aircraft and its lease obligations at a time when air freight market conditions were under significant pressure. Adding to risks in the near term is Atlas' preexisting commitment to acquire four new 747 aircraft despite existing overcapacity. Financial risk is also heightened by substantial debt maturity requirements over the next few years.
International commercial air freight demand weakened sharply in 2001. No material improvement is expected this year although, over the longer term, growth prospects are still considered positive. The cyclical and price-competitive nature of the industry will remain a challenge for Atlas as will the matching of additional aircraft with contracts and the renewal and pricing of expiring contracts.
Ratings assume that Atlas will maintain current levels of liquidity over the near term and generate a gradual improvement in financial measures as industry fundamentals begin to strengthen. A protracted downturn in industry demand or difficulties in executing the new business strategy could lead to further financial pressures and could result in further downgrades.
