Standard & Poor's Ratings Services today placed its ratings on Southwest Airlines Co., including the 'BBB+' long-term corporate credit rating, on CreditWatch with negative implications.

"The CreditWatch placement is based on the company's weaker–than-expected revenue and earnings outlook," said Standard & Poor's credit analyst Betsy Snyder. "Southwest reported a small first-quarter loss and said that it expected revenue weakness to continue at least into the second quarter. The company's financial profile will be affected also by increased levels of secured debt and leases arranged since late 2008 to maintain adequate cash balances," the analyst continued. As a result, we expect the company's 2009 credit metrics to be below our previous expectations.

Southwest reported a first-quarter 2009 loss of $20 million (excluding special items) compared with a profit of $43 million in the prior-year period. Revenues declined by 6.8%, due primarily to a unit (available seat mile, "ASM") revenue decline of 2.9%, a trend not expected to improve in the second quarter of 2009. In addition, the company has added a significant amount of debt since late 2008 (over $700 million), which has added to its interest expense. As a result, the company's 2009 earnings and cash flow will likely come in below our previous expectations and its debt level above our previous expectations, and we no longer anticipate the company will achieve our expected funds from operations (FFO) to debt target of 30% for 2009.

While Southwest ended the quarter with cash and short-term investments of $2.1 billion, the current market value (at April 14, 2009) of its fuel hedging contracts was a net liability of $950 million, for which the company had posted collateral to its fuel hedge counterparties consisting of $425 million of cash and approximately $350 million of aircraft collateral.

We will assess Southwest's expected financial performance in light of expected ongoing pressure on revenues from weak demand and pricing, and higher debt and interest expense, to resolve the CreditWatch.