The credit outlook for European airlines remains negative. The sector is among the worst hit by the pandemic and, though no carrier has escaped the severe downturn, there will be big winners and losers in the sector restructuring underway.
Scope Ratings says the economic shock from Covid-19 has been especially severe in Europe where airlines have for years struggled to generate sustainable cash flow amid overcapacity and fierce competition.
“The crisis has damaged the credit quality of the majority of airlines: every month that passes without a return to more normal operating conditions puts more carriers at higher risk of bankruptcy,” says Azza Chammem, analyst at Scope.
Latest signs of stress in the sector include Norwegian Air Shuttle’s decision to switch its strategy to short-haul from long-haul as it tries to restructure its debts to avoid collapse, and International Airline Group PLC’s acquisition of small Spanish carrier Air Europa for EUR 500m earlier this month, with the payment, half of the original sale price agreed in 2019, deferred for six years.
Short-haul travel will recover before long-haul, but airlines cannot expect a return to pre-pandemic traffic volumes before 2024. “We estimate that air traffic will return to 51% of pre-pandemic levels in 2021, up from 59% in 2020, before rising to 75% in 2022, 85% in 2023 and 99% in 2024,” says Chammem.
Airlines with the strongest balance sheets and best market positioning, led by Ryanair PLC, Wizz Air Holdings Plc. And easyJet Plc, will lead the sector’s recovery, reinforcing their competitive positions as rivals struggle. Government-backed airlines such as Deutsche Lufthansa AG (BBB-/Negative) and Air France-KLM SA will take longer to recover but do so faster than smaller rivals.
“Airline executives face a dilemma: to get back to break even, while selling fewer seats, they should increase fares, but that risks sacrificing their share of a shrunken air-travel market - particularly at important hubs and on more lucrative routes – given chronic overcapacity,” says Chammem.
Reducing costs and conserving cash remain priorities. With passenger traffic still at a low ebb, costs per available seat kilometre have risen steeply as latest results from Scandinavian carrier SAS and easyJet have shown. Airlines have torn up pre-pandemic growth strategies, delaying if not cancelling deliveries of new aircraft.
Conserving cash may require airlines to take on more debt and seek further government support – possibly forthcoming if the crisis extends to the second half of 2021 - with long-term consequences for credit ratings as airlines may remain heavily indebted for years.
Any additional state bailouts would face regulatory scrutiny. The entire aviation value chain, including previously more reliably profitable businesses such as regulated airports, is under extreme pressure, which is likely to lead to more intra-industry cooperation, says Chammem.