AA Loan Analysis Sept2014

Recovery Report:

American Airlines Group Inc.'sRecovery Rating Profile

Recovery Analysts:

John W Sweeney, New York (1) 212-438-7154; [email protected]

Greg T Maddock, New York (1) 212-438-7205; [email protected]

Primary Credit Analyst:

Philip A Baggaley, CFA, New York (1) 212-438-7683; [email protected]

Table Of Contents

Recovery Ratings Rationale

Recovery Analysis

Legal And Structural Considerations

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT SEPTEMBER 24, 2014 1

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Recovery Report:

American Airlines Group Inc.'s Recovery RatingProfile

Recovery Ratings Rationale

• We are updating our recovery analysis on American Airlines Inc. to reflect the company's proposed $750 million

seven-year term loan, new $400 million five-year revolving credit facility, and $400 million incremental upsizing to

the existing $1 billion revolving credit facility (which will increase the revolving credit facility commitment to $1.4

billion).

• The company will use proceeds from the new term loan financing and new/incremental revolving credit facility

capacity for general corporate purposes.

• Our recovery analysis on the company incorporates a going-concern discrete asset valuation.

• The '1' recovery rating on American Airlines Inc.'s new senior secured revolving credit and term loan obligations

reflects priority and valuation allocation dynamics.

• The '1' recovery rating on American's existing senior secured revolving credit and term loan obligations remains

unchanged.

• Our '5' recovery rating on American Airline Group's senior unsecured notes due 2019 remains unchanged.

• The respective '1' and '5' recovery ratings on US Airway Group's existing senior secured term loan and unsecured

debt obligations remain unchanged.

Standard & Poor's Ratings Services uses its recovery analytics to arrive at its issue-level ratings on the debt of most

speculative-grade nonfinancial corporate issuers (those rated 'BB+' or lower). Depending on the recovery assessment

for a given debt issue, the rating on that issue is notched up, down, or not at all from our corporate credit rating

assigned to the issuer of the debt (see "Criteria Guidelines For Recovery Ratings," published Aug. 10, 2009, on

RatingsDirect).

For the latest complete corporate credit rating rationale, see the research update on AAG, published Aug. 29, 2014, on

RatingsDirect. For the analysis assigning ratings to the new note issue, see the media release on AAG, published Sept.

18, 2014.

Table 1

American Airlines Group Inc.--Credit Profile

Corporate credit rating B/Positive/--

Estimated gross enterprise value at default $21,050 mil.

Simulated year of default 2017

Facility/issue

Estimated principal at

default

Issue

rating

Recovery

rating

Expected

recovery Maturity

Debt at obligors on primary debt

AA $1.4 bil. revolver-LTAM (includes $400 mil.

incremental increase)

$1,400 mil. BB- 1 90% to 100% 2019

AA $400 mil. new revolver $400 mil. BB- 1 90% to 100% 2019

AA $1.9 bil term loan $1,825 mil. BB- 1 90% to 100% 2019


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Table 1

American Airlines Group Inc.--Credit Profile (cont.)

AA new seven-year term loan B $750 mil. BB- 1 90% to 100% 2021

AA secured notes $2,577 mil. N.R. N/A N/A Various

AA revenue bonds $1,093 mil. N.R. N/A N/A Various

AAdvantage Miles $45 mil. N.R. N/A N/A 0

US Airways term loan B-1 $965 mil. BB- 1 90% to 100% 2019

US Airways term loan B-2 $0 BB- 1 90% to 100% 2016

Airways equipment loans $1,193 mil. N.R. N/A N/A Various

AA and US Airways EETC notes§ $6,015 mil. N.R. N/A N/A Various

US Airways Group sr. unsecured note $500 mil. B- 5 10% to 30% 2018

AA sr. unsecured notes $750 mil. B- 5 10% to 30% 2019

Unsecured debt claims (pensions, OPEBS and

leases)

$12,783 mil. N.R. N/A N/A Various

N.R.--Not rated. N/A--Not applicable.

Recovery Analysis

In line with Standard & Poor's criteria, we utilized a discrete asset valuation approach, comparing each debt instrument

with our estimate of the value of the assets securing its repayment. We then considered the excess residual value in

relation to unsecured and undersecured claims, including non-debt claims such as pensions, OPEBs, and rejected lease

claims.

Table 2

American Airlines Group Inc.--Stressed Valuation

--Simulated default assumptions-- --Simplified waterfall--

Simulated year of default 2017 Gross enterprise value $21,500 mil.

Net enterprise value $21,500 mil.

Valuation split in % (Obligors/Non-obligors) 100/0

Collateral value available to secured creditors $21,500 mil.

Secured first-lien debt $16,800 mil.

Recovery expectations 90% to 100%

Other secured indebtedness $700 mil.

Recovery expectations N/A

Secured second-lien debt $47 mil.

Recovery expectations N/A

Total unpledged enterprise value $4,000 mil.

Senior unsecured note debt obligations $1,285 mil.

Other pari-passu unsecured claims $12,800 mil.

Recovery expectations 10% to 30%

Note: All debt amounts include six months of prepetition interest. Collateral value equals asset pledge from obligors after priority claims plus

equity pledge from non-obligors after non-obligor debt.


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Recovery Report: American Airlines Group Inc.'s Recovery Rating Profile

Simulated default scenario

Standard & Poor's simulated path to default assumes that American Airline Group is forced to file for bankruptcy a

second time (third time for US Airways Group) in 2017 because of very adverse industry conditions, such as a fuel

price spike combined with a recession or outside shocks such as terrorism or a global outbreak of epidemic disease. In

this scenario, the airline faces a precipitous decline in air travel, making it difficult to recover added fuel expense by

raising fares.

Other assumptions include:

• LIBOR rises to 200 basis points (bps) in 2017, the default year;

• Credit spreads rise by 100 bps as a result of deterioration in its credit profile;

• All mandatory amortization payments are made before the point of default; and

• About six months accrued but unpaid interest outstanding on the various debt instruments.

Valuation

We believe that if American Airlines Group were to default, there would continue to be a viable business model given

the size of its fleet, its extensive routes, and its valuable landing slots and gates. American Airlines Group and US

Airways Group's bankruptcies lowered labor costs and reduced legacy debt. We believe that stakeholders would be

able to maximize their recovery value through reorganization rather than through liquidation.

Although we believe the American Airlines Group would reorganize, we based our recovery analysis on a valuation of

the discrete assets. As a result of the capital-intensive nature of the airline industry and the inherent value of its key

assets, we used this discrete asset analysis as a proxy for enterprise value. Furthermore, we assume that

bankruptcy-related administrative claims are incorporated within the discount rates on the asset values.

The collateral for secured debt consists of cash from the cash control account, and appraised values of routes, slots,

and gates conducted by independent appraisers. Also included are aircraft at depreciated values at the simulated

default date and current appraised values of spare parts, engines, ground support equipment, and related real estate

with adjustments for likely realization.

The appraisers value the routes based on their value to the airline in terms of its revenue-generating potential, cost

structure, and profitability in the calculations, rather than their potential value to another airline. The appraisers' use of

long-term forecasts and discounting of future cash flows implies the choice of a discount rate that significantly affects

the resulting present value. We tend to choose discount rates and growth assumptions that result in values that are at

the more conservative end of a range of values provided by appraisers of these routes (the appraisals are not public).

Below are our assumptions underlying the discrete valuation in our stress scenario, reflecting the contracting air travel

environment and higher fuel prices that reduce value of the collateral.

Key valuation assumptions include:

• 50% of realizable value applied to appraised values on U.S.-Latin American routes, slots and gates;

• 50% to 60% of realizable value applied to U.S.-London and U.S.-Asia routes, slots and gates;

• Unsecured non-debt claims include 100% rejection of OPEB and pension obligations and 40% operating lease

rejection rate applied to present value of leases with lessors;


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• 45% of minimum control cash account as cash collateral;

• 75% of Washington Reagan Airport slots, 60% of New York La Guardia Airport slots, and 50% of the Philadelphia to

London Heathrow Airport route;

• 75% of eligible accounts receivable;

• 65% of eligible spare parts and engines;

• 40% of eligible flight simulators; and

• About 60% of eligible aircraft and mounted engines.

Results

Our default scenario estimates about $16.8 billion in funded secured claims (revolver and term loan, secured notes,

various secured financings, and equipment trust certificates outstanding plus six months of accrued interest) at the

time of default. The $21.5 billion of realizable assets pledged to secure the bank and other senior secured debt affords

these claims a very high (90%-100%) recovery. After payment of other secured debt obligations totaling $700 million,

approximately $4 billion of value is available for distribution to unsecured creditors. The American Airlines Group Inc.

and US Airway Group unsecured noteholders' unsecured deficiency claims of $770 million and $515 million,

respectively, for each outstanding note and other various unsecured creditor claims and non-debt unsecured liabilities

(which we estimate at about $12.8 billion) would constitute pari passu unsecured claims against the $4 billion of

remaining recovery value.

As a result, the recovery rating on American Airline's proposed revolving credit and term loan facilities is '1', indicating

our expectation for very high recovery to senior secured lenders.

The recovery ratings on American Airlines Inc.'s existing/upsized revolving credit facility and existing term loan

remain unchanged at '1', indicating our expectation of very high recovery to senior secured lenders. The recovery

ratings on United Airway Group's existing term loan B1 and B2 tranches remain unchanged at '1', indicating our

expectation of very high recovery to US Airways senior secured lenders.

The recovery rating on American Airlines Group Inc.'s senior unsecured note due 2019 remains unchanged at '5',

indicating our expectation of modest recovery (at the high end of the 10% to 30% range) to AAG senior unsecured

noteholders. Our recovery rating on US Airways Group's existing senior unsecured notes due 2018 remains a '5',

indicating our expectation for modest recovery (at the high end of the 10% to 30% range).

Legal And Structural Considerations

American Airlines Group Inc., a Delaware corporation, is a holding company and its principal wholly-owned

subsidiaries are American Airlines Inc. and US Airways Group. Both American Airlines Inc. and US Airways Group Inc.

are first tier operating subsidiaries of American Airlines Group Inc.

Capital structure

With the exception of US Airways Group's senior unsecured notes that mature in 2018 and American Airlines Group's

senior unsecured notes due 2019, almost all of the existing and contemplated debt is secured and exists at the

operating subsidiaries: American Airlines Inc. and US Airways Inc.


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The 2018 maturity date of the existing revolving credit facility will be extended to be coterminous with the

contemplated $400 million five-year revolving credit facility, which will mature in 2019.

The parent holding company, American Airlines Group Inc.'s obligations under the senior notes are fully and

unconditionally guaranteed by American Airlines Inc. and US Airways Group Inc., and its indirect wholly owned

operating subsidiary, US Airways Inc.

Security and guarantee package

American Airlines' existing revolver and term loan facilities are secured by a pledge of American Airlines Latin

America slots, gates, and route authorities that support American's flights to and from Argentina, Brazil, Chile,

Uruguay, Bolivia, Colombia, Ecuador, Peru, Venezuela, and Paraguay.

American Airlines' proposed revolving credit facility and term loan B will be secured by American's routes between the

U.S. and London (Heathrow—seven pairs). U.S. and Japan (Narita—four pairs), and U.S. and China (Shanghai and

Beijing--one route each) and related slots and gate access required to operate the routes. American's AAdvantage Loan


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is secured by a second lien on these assets.

US Airways' term loans B-1 and B-2 are secured by a first priority perfected security interest in a diverse collateral

pool, which includes airport gates and slots at Ronald Reagan Washington National Airport (DCA) in Washington,

D.C., LaGuardia Airport (LGA) in New York, and London Heathrow Airport (LHR) in London, England; the company's

Heathrow route; eligible accounts receivable; spare engines, spare parts, and ground service equipment; certain

aircraft; and flight simulators and real estate assets.

US Airways Group's senior notes due 2018 are unsecured, but, post-merger, the US Airway senior notes, American

Airlines' existing revolver and term loan, and US Airways' term loan B-1 and B-2 tranches are all cross-guaranteed.

American Airlines Group Inc.'s senior notes due 2019 are unsecured obligations and are fully and unconditionally

guaranteed by American Airlines Inc. and US Airways Group Inc., and its indirect wholly owned operating subsidiary,

US Airways Inc.

Documentation/covenants

The American Airlines proposed and existing revolver and term loan facilities require minimum collateral coverage of

1.6x, respectively, and minimum liquidity of $2 billion. The US Airways term loan tranches require 1.5x collateral

coverage and the same minimum liquidity of $2 billion.

Insolvency regime

The company and its subsidiaries operate their businesses in the U.S., and therefore, are subject to the U.S. Bankruptcy

Code, which we consider relatively favorable to creditors. (See "Debt Recovery For Creditors And The Law Of

Insolvency In The U.S.," published June 20, 2008.) In the event of a bankruptcy filing, we assume that the company

would include all of its domestic subsidiaries in the filing.


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AA Loan Analysis Sept2014

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