Moody's cuts Continental

Moody's Investors Service downgraded Continental Airlines, Inc., affecting $16.1 billion of debt. Ratings lowered include Continental's senior unsecured notes, cut to Caa2 from B3, senior secured loan certificates, cut to Ba3 from Ba2, senior secured term loan B, cut to B3 from B1 and preferred stock, cut to C from Ca. Continental's enhanced equipment trust certificates were mostly lowered two or three notches. The outlook is negative.

Moody's said it cut Continental because of the financial risks posed by recent substantial declines in air travel demand and yields, and the probability that these conditions will continue through a substantial portion of the second quarter.

This decline in demand and the resulting reduction in revenues and potentially cash flow, comes at a time of the year in which the company typically rebuilds financial strength in anticipation of the seasonally weak fourth and first quarters. Should cash flow not strengthen during the course of the second and third calendar quarters, the company could face the normally cash flow negative fourth and first calendar quarters with more limited liquidity and financial flexibility.

Acknowledged in the ratings is the probability of government assistance to the airline industry including Continental and an increase in demand as the most active period of the war in Iraq comes to a close and the currently high level of passenger concern due to SARS is reduced, Moody's said.

The negative outlook reflects the high level of uncertainty regarding demand and pricing dynamics, Moody's added. Increased passenger traffic is dependent on a quick return of consumer and business confidence which have been adversely affected by a weak economic outlook and concerns related to the war in Iraq. Even with an increase in demand, pricing may remain very competitive with the probability of continued aggressive pricing based on to the need of several carriers to generate cash even at the expense of longer term profits.

Moody's cuts Northwest

Moody's Investors Service downgraded NWA Corp and its primary operating subsidiary Northwest Airlines, Inc., affecting $5.9 billion of debt. Ratings lowered include Northwest Airlines' senior unsecured debt to Caa1 from B2 and secured revolving credit facility to B1 from Ba3. Enhanced equipment notes and enhanced equipment trust certificates were mostly lowered two notches. The outlook is negative.

Moody's said it lowered Continental because of the increased financial risks to debt holders due to a reduction in demand and a resulting expectation of weaker cash flow that could continue for the foreseeable future.

Weak cash flow in the second and third quarter, generally a period of strong positive cash flow for Northwest, would place additional strain on the company as it enters the fourth and first calendar quarters which are more traditionally cash flow negative.

Acknowledged in the ratings is Northwest's highly proactive approach to cost cutting and liquidity management, the probability of government assistance to the airline industry including Northwest, the possibility of an increase in demand as the most active period of the war in Iraq comes to a close, and the adverse implications for airlines of current concerns related to SARS, Moody's said.

The negative outlook indicates the significant operating and financial challenges facing Northwest in the near term, Moody's added. Increased passenger traffic is dependent on a quick return of consumer and business confidence which have been stalled by a weak economic outlook and concerns related to the war in Iraq. Pricing is expected to remain very competitive, even with an increase in demand, as financial pressures could prompt some carriers to set fares to generate short-term cash rather than longer term profits.

The high degree of uncertainty regarding near term cash flow presents the possibility that Northwest may not be able to sustain sufficient liquidity over the next two quarters to warrant maintaining the current ratings as it enters the weaker portion of its seasonal cycle.

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