Fitch Affirms Con-way's IDR at 'BBB'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed the following ratings of Con-way Inc. (NYSE:CNW):

--Issuer Default Rating (IDR) 'BBB';

--Senior unsecured rating 'BBB';

--Unsecured bank facility rating 'BBB'.

The senior unsecured rating applies to approximately $574 million in outstanding debt obligations. The Rating Outlook for Con-way is Stable.

Con-way's ratings reflect the less-than-truckload (LTL) transportation and logistics company's strong liquidity and manageable debt load in the face of weakened trucking demand environment. Although trucking industry demand declined in the latter half of 2006, particularly in the fourth quarter when the normal shipping peak never materialized, Con-way's volumes also declined as a result of a pricing initiative implemented earlier in the year that resulted in a loss of some business. In the fourth quarter of 2006, average tonnage carried per day declined by 8% versus the fourth quarter of 2005; although, unit revenue excluding fuel surcharges increased by 3.5%. To revive tonnage growth, Con-way has realigned its sales and marketing programs, and volumes are expected to show positive growth in the second half of 2007. On the logistics side of the business, net revenue trends are positive, as Menlo Worldwide Logistics (MWL) maintains its focus on market verticals. In the fourth quarter, MWL's net revenue (which excludes pass-through purchased transportation revenue) increased 8.9% year-over-year, while the unit posted a solid 7.8% operating margin on net revenue.

Con-way's liquidity remains very strong relative to its peers, with $445 million in cash and marketable securities on hand at Dec. 31, 2006. The company also has access to a $400 million revolving credit facility that can be used for cash borrowing and to support letters of credit. Balance sheet debt stood at $576 million at year-end 2006, down from $597 million at the end of 2005, resulting in modest leverage improvement, with year-end 2006 debt/EBITDA of 1.1 times (x) versus 1.2x at Dec. 31, 2005. Over the same period, EBITDA interest coverage improved to 15.8x from 13.2x. Debt maturities of $19 million in 2007 and $23 million in 2008 and 2009 are relatively light, with no large maturities coming due until 2010, when $200 million in notes mature. With the exception of $2 million in mortgage notes, all of Con-way's debt is unsecured.

Looking ahead, trucking industry volumes are expected to show positive growth in the second half of 2007, as manufacturing output increases and the housing sector improves. In addition, Con-way's revised marketing initiatives should better align the company's revenue premium with its service offering, helping to return some lost tonnage to the network and possibly allowing the company to gain market share from other carriers. Free cash flow from MWL is also expected to grow, as the unit continues to add new business by leveraging its market vertical strategy. Although challenging business conditions in the first half of 2007 could result in somewhat weaker full-year operating cash flow, free cash flow will likely improve as capital spending is expected to be considerably lower than in 2006. Debt will decline modestly in 2007, as the company pays maturities with cash on hand. There is little likelihood of early debt retirement, however, due to financial penalties in Con-way's note agreements.

Concerns continue to center primarily on the cyclical nature of the trucking industry, as historically the industry's financial performance has been correlated with the relative strength of the U.S. economy. Consolidation within the LTL industry that has resulted in rational pricing and controlled capacity growth, combined with the flexibility of Con-way's non-union operation, could help mitigate the effects of an economic downturn. Also of concern is the potential risk to Con-way's credit profile if the company undertakes any significant near-term acquisitions, as it has stated an interest in doing. The potential for private investors to pursue a leveraged buy-out (LBO) of Con-way is another risk facing the company. The trucking and logistics sectors have experienced some LBO activity recently, and Con-way's strong liquidity and low leverage could draw the interest of potential buyers. In the event of an LBO financed with secured debt, some protection could be afforded to existing unsecured bondholders by provisions in the indenture covering the two primary sets of unsecured notes in Con-way's capital structure. The indenture includes a provision that could give unsecured bondholders an interest in collateral used to secure new debt.

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