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Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still on Watch Negative

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Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still on Watch Negative Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative May 20, 2020 - We now believe that travel and other restrictions due to COVID-19 could result in global air PRIMARY CREDIT ANALYSTS passenger traffic dropping by up to 50% in 2020, which is a steeper decline than we Izabela Listowska anticipated, with the recovery taking longer, possibly stretching into 2023. Frankfurt (49) 69-33-999-127 - The massive revenue shortfall at major airlines will only be partly offset by strict cost-cutting izabela.listowska and cash-conservation measures, so we forecast significantly weaker credit metrics in 2020 @spglobal.com and 2021 than in our previous base case, with liquidity remaining under pressure. Frank Siu, CFA - Furthermore, high uncertainty regarding the severity and duration of the COVID-19 pandemic London and global recession could lead us to revise down our forecasts in the future, implying risks for + 44 20 7176 3670 Frank.Siu the ratings. @spglobal.com - We are therefore lowering by two notches our ratings on IAG and British Airways and assigning Aliaksandra Vashkevich negative outlooks. We are downgrading Air Baltic, Lufthansa, easyJet, and TAP Air Portugal by Frankfurt one notch, and keeping those ratings, along with our ratings on Ryanair and SAS on + 49 693 399 9178 CreditWatch negative. We are affirming our rating on Turkish Airlines and assigning a negative Aliaksandra.Vashkevich @spglobal.com outlook. SECONDARY CONTACTS - We will continue monitoring the impact of the pandemic and resulting recession on each Rachel J Gerrish, CA company's credit metrics and liquidity, and take rating actions as necessary within the next London 3-12 months, depending on implications for the airline industry and measures airlines may take (44) 20-7176-6680 to mitigate them. rachel.gerrish @spglobal.com FRANKFURT (S&P Global Ratings) May 20, 2020--S&P Global Ratings today lowered its ratings on Stuart M Clements six European airlines following previous downgrades and CreditWatch placements in the industry London on March 20, 2020. (44) 20-7176-7012 stuart.clements More specifically, we lowered to 'BB' from 'BBB-' and assigned negative outlooks to our long-term @spglobal.com ratings on: ADDITIONAL CONTACT - International Consolidated Airlines Group, S.A. (IAG). We also lowered our issue rating on IAG's Industrial Ratings Europe unsecured debt to 'BB' from 'BBB-' and assigned a '3' recovery rating (rounded recovery Corporate_Admin_London @spglobal.com estimate: 65%). - British Airways PLC (BA). We have also lowered our issue ratings on BA's 2019-1 Class AA enhanced equipment trust certificates (EETCs) to 'A+' from 'AA-' and our ratings on the 2019-1 Class A EETCs to 'BBB' from 'BBB+'. We have affirmed our issue ratings on BA's 2013-1 Class A and Class B EETCs at 'A' and 'A-, respectively. www.spglobal.com/ratingsdirect May 20, 2020 1 Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative We lowered by one notch our long-term ratings on: - Air Baltic Corp. AS and its unsecured debt to 'B' from 'B+'. - Deutsche Lufthansa AG to 'BB+' from 'BBB-'. Additionally, we lowered our short-term rating to 'B' from 'A-3' to bring it in line with the long-term rating and remove it from CreditWatch negative. We assigned a 'BB+' issue rating and '3' recovery rating (rounded recovery estimate of 65%) to Lufthansa's senior unsecured debt. At the same time, we lowered our issue rating on its junior subordinated debt (hybrid bond) to 'B' from 'BB'. - easyJet PLC and its unsecured debt to 'BBB-' from 'BBB'. - Transportes Aereos Portugueses, SGPS, S.A. (TAP Air Portugal) and its core operating subsidiary Transportes Aereos Portugueses, S.A. to 'B-' from 'B'. We also lowered our issue rating on the airline's unsecured debt to 'B-' from 'B'. The recovery rating remains at '4' (rounded recovery estimate of 45%). Our long-term issuer credit and issue ratings on these four airlines remain on CreditWatch with negative implications. We have affirmed our 'B' long-term ratings on Turk Hava Yollari A.O. (Turkish Airlines) and assigned a negative outlook. We have also lowered our issue rating on THY's 2015-1 Class A EETCs to 'BB-' from 'BB'. At the same time, we have kept on CreditWatch negative all our ratings on: - Ryanair Holdings PLC (BBB/Watch Neg/--) - SAS AB (B/Watch Neg/--) The COVID-19 pandemic is still threatening the credit quality of European airlines, posing serious challenges for the global aviation industry as a whole. Actions to contain the pandemic, including government-imposed social-distancing measures, travel restrictions, and stay-at-home orders, have suddenly and sharply reduced global demand for air travel. We think global air passenger traffic could drop by 50% in 2020, and by 55% in Europe, which is approximately in line with the most recent forecasts by the International Air Transport Association (IATA). For 2021, we believe passenger volumes could remain up to 30% below 2019 levels, both globally and in Europe, and we don't expect air traffic to rebound to pre-pandemic levels before 2023. Recovery will also be influenced by how airlines restructure and downsize their fleets to meet lower demand. Although a vaccine may ultimately protect populations, the risk of renewed outbreaks over the next 12-18 months is real and will likely make governments hesitant about lifting international travel restrictions. China, for instance, has prohibited the re-entry of foreigners and requires mandatory quarantine measures for Beijing. Air traffic across Europe has been at unprecedented lows over the past two months, and the macroeconomic outlook has further deteriorated. We now forecast a global recession this year, with GDP growth falling 2.4% in 2020 before rebounding to 5.9% in 2021, with the eurozone contracting 7.3% and recovering with 5.6% growth. Most European airlines have temporarily grounded almost all of their aircraft until at least the end of June 2020, although some have announced it will take longer for their operations to begin in earnest. We think domestic travel will increase before international travel, since international borders will take longer to open up. The revenue shortfall and fixed operating costs, only partly offset by strict cost-cutting measures and deferral or suspension of discretionary spending, will compress earnings and cash flows, resulting in weaker credit metrics for European airlines we rate in 2020 and 2021 than we previously www.spglobal.com/ratingsdirect May 20, 2020 2 Six European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative forecast. Airlines that can radically cut costs and investments, minimize negative free cash flow, retain uninterrupted excess to external funding, or benefit from government support are more likely to survive. We believe airlines that were not previously lean from a cost perspective may be overwhelmed by the challenges of COVID-19. Several weaker airlines may not be able to cope with the consequences and follow Flybe, Virgin Australia, and most recently Avianca, which all collapsed in recent months. Most European airlines report that 40%-50% of their operating costs are fixed. Clearly, fuel costs have dropped significantly since the COVID-19 outbreak and are typically considered 100% variable. However, unlike most (but not all) of their U.S. peers, the majority of European airlines have extensive hedging programs and, depending on the types of hedges used, settling existing fuel hedges at pre-agreed terms could be extremely expensive. Many players have reported large ineffective fuel hedge losses, which we include as an operating cost in our calculation of EBITDA. Landing fees and enroute charges are typically 100% variable, while 60%-80% of handling/catering, maintenance, repair, and overhaul or engineering expenses are flexible. Staff costs have shown somewhat more flexibility than we previously anticipated, thanks to governments' employee furlough schemes; airlines have also recently announced redundancies. The expected decline in cash flow generation will weigh on liquidity profiles. Furthermore, unearned revenue liabilities are typically high for airlines because they sell tickets in advance. A high proportion of cash refunds being paid out in a matter of months would strain liquidity. We understand that many customers have opted for re-bookings or vouchers, so cash refunds have been fairly modest since the coronavirus outbreak began. Nevertheless, the risk that refund requests accelerate remains, in particular as long as fleets are grounded. Since national airlines remain important for a country's global connectivity, tourism, employment, and business development, European governments have granted support to domestic airlines or are currently negotiating various potential support measures to help them through this difficult period. These include employee-furlough schemes through state-backed loans that will boost liquidity but result in higher leverage and weaker ratios, as well as equity participations or capital injections. We note that EU rules typically restrict such state support because it distorts market competition. However, a temporary framework has been put in place to accommodate measures to counteract the economic effects of this serious disruption. Long-term prospects for the European airline industry remain bleak. The marked deterioration in Europe's macroeconomic outlook, and the likelihood that social distancing measures will continue for a sustained period, mean that a complete recovery of the airline industry is highly uncertain. There has been much industry speculation regarding structural changes to the industry that may occur as a result of the COVID-19 pandemic: - Social distancing may require less crowded security checks, shorter queues, and changes to aircraft seating configuration, together with heightened health and sanitation measures. - Airlines have dramatically deferred the purchase of new aircraft and we will see reduced fleet sizes. - Industry consolidation is likely in the medium term as weaker airlines fail.
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