Fitch Ratings-Chicago-05 January 2017: Fitch Ratings has assigned the following rating to American Airlines, Inc.‘s (American; ’BB-’/Outlook Stable) proposed Pass-Through Trusts Series 2017-1:

—$197,777,000 class B certificates due in February 2025 ‘BBB’.

KEY RATING DRIVERS
The ‘BBB’ rating is based on Fitch’s bottom up approach, which calls for the rating to be notched up from American’s corporate rating of ‘BB-’. The recommendation represents +2 notches of uplift for a high affirmation factor, +1 notch for the presence of a liquidity facility and +1 notch for recovery. Fitch has applied an additional notch of uplift for the B tranche rating due to recovery prospects that are above average compared to precedent B tranches. Fitch’s criteria stipulate that recovery for the B tranche should be at least 115% in a ‘BB’ level stress scenario. In this case the B tranche recovery exceeds that criteria, warranting an additional notch. Fitch’s model indicates that the B tranche will become increasingly overcollateralized through the life of the transaction.

The issuance of the B tranche leads to a slight increase in the stress scenario LTVs for the AA and A tranches as Fitch assumes a full draw on the liquidity facilities in its stress scenarios. The higher LTVs do not affect the AA or A tranche ratings.

Affirmation Factor
Fitch considers the Affirmation Factor (likelihood that American would affirm this aircraft in a bankruptcy scenario) for the aircraft in this portfolio to be high as all of the aircraft are considered strategically important for American. Although the ERJ-175s in this collateral pool arguably represent the weakest pieces of collateral, they represent a positive in terms of the transactions’ affirmation factor. As of year-end 2016 American will still operate a fleet of roughly 280 regional aircraft with 50 or fewer seats. Fifty-seat regional aircraft are far more likely to be rejected in a potential restructuring than brand new ERJ 175s as the smaller planes are more costly to operate, they do not offer a business class cabin, and they are not preferred by customers. The ERJ 175 is also more attractive than either the 66 seat CRJ-700 or the 77-seat CRJ-900 due to the ERJ’s wider cabin, which many travellers prefer. As such, American has a large pool regional aircraft that are more likely to be rejected in a bankruptcy scenario than the ERJs in this pool.

The A321 and the 737-800 provide the backbone of American’s narrowbody fleet. Although the 7 A321s in this pool will represent a fairly small portion of American’s fleet of nearly 200 A321s, they will represent some of its newest. American has only 21 more current generation A321s on order (per Ascend) before it is scheduled to begin taking delivery of A321 NEOs in 2019, meaning the aircraft in this fleet will continue to represent its youngest current generation A321s throughout the life of the transaction. The newness of the 737-800s in this pool is another positive for the affirmation factor. Although the three 737s represent a small portion of AAL’s narrowbody fleet, American currently operates roughly 76 737-800s that are more than 15 years old, which are more likely to be rejected in the event of a bankruptcy.

The 787s in this pool are also strategically important to American as they replace older 767s and operate with a much higher level of fuel efficiency. The unique characteristics of the 787 also open the possibility of serving new routes that may not have made economic sense with other aircraft. The 787 also seems to have a long-term place in American’s widebody fleet plan, whereas smaller sub-fleets of aircraft like the A330 could get phased out over time.

Liquidity Facility: The class B certificates benefit from a dedicated 18-month liquidity facility that will be provided by Citibank N.A. (‘A+’/‘F1’/Stable Outlook).

KEY ASSUMPTIONS
Ratings for this transaction are driven by a harsh downside scenario in which American declares bankruptcy, chooses to reject the collateral aircraft, and where the aircraft are remarketed in the midst of a severe slump in aircraft values.

RATING SENSITIVITIES
Subordinated tranche ratings are based off of the underlying airline IDR. As such, Fitch may upgrade the B tranche by a notch if American were upgraded to ‘BB’. However, the B tranche may not be downgraded if American were downgraded to ‘B+’, as Fitch’s EETC criteria allows for a wider notching differential for ‘BB’ and ‘B’ category rated airlines.

Fitch has assigned the following ratings:

American Airlines 2017-1 pass-through trust:
—Series 2017-1 class B certificates ‘BBB’.

Fitch currently rates American as follows:

American Airlines Group Inc.
-Long-Term IDR ’BB‘;
-Senior unsecured notes ’BB/RR4’.

American Airlines, Inc.
-Long-Term IDR ’BB‘;
—Senior secured credit facilities ’BB+/RR1’.