Fitch Ratings upgraded Southwest Airlines Co.'s long-term issuer default rating to A- from BBB+, with a stable outlook, saying the U.S.-based carrier is capable of maintaining its low level of credit risk during a potential economic downturn and in times of weak air travel demand.
The rating agency said Southwest's low credit risk level is shown by its positive free cash flow since 2008 and its balance sheet that is supported by a large number of unencumbered assets. It also cited the carrier's financial flexibility and conservative financial policies.
"The company's large base of unencumbered planes allows for capacity to be reduced if demand were to decline as well as providing an alternate source of secured funding if needed," Fitch said.
Southwest's low cost model also allows the company to lower fares during a downturn to boost demand while maintaining profitability, the rating agency added.
Fitch said the rating upgrade also reflects reduced risk stemming from Southwest's significant revenue and market share growth, its position as the biggest U.S. domestic carrier, and the consolidation of the country's airline industry.
The rating agency expects Southwest's credit metrics to remain fairly stable over the intermediate term, and its adjusted leverage to stay around 2x over the next several years.