Fitch Ratings-London-29 August 2018: Fitch Ratings has affirmed Etihad Airways PJSC's Long-Term Issuer Default Rating (IDR) at 'A' with a Stable Outlook and senior unsecured rating at 'A'. The agency has also affirmed the senior unsecured ratings of 'A' for Etihad's EMTN programme and for Unity 1 Sukuk Limited's USD3 billion trust certificate issuance programme and trust certificates issued under the programme.
We rate Etihad based on Fitch's Government-Related Entities (GRE) Rating Criteria applying a top-down rating approach. The company's 'A' rating continues to be three notches below that of its indirect sole shareholder - the Emirate of Abu Dhabi (AA/Stable).
KEY RATING DRIVERS
'A' Rating Based on Shareholder Support: We continue to rate Etihad three notches below its ultimate sole shareholder Abu Dhabi, despite the change in criteria. We rate Etihad under Fitch's recently developed GRE criteria as opposed to the previously applied Parent and Subsidiary Rating Linkage criteria. This has not resulted in a change of the rating approach or Etihad's rating.
GRE Criteria Assessment: Under the GRE criteria we assess three factors as strong - status, ownership and control; support track record and expectations as well as socio-political implications of a hypothetical GRE's default - while we view the financial implications of a potential GRE's default factor as moderate. This assessment resulted in a score of 25 leading to a "top-down minus three" rating approach.
Support Track Record: The strong assessment of the support track record and expectations factor is driven by consistent, timely and large-scale tangible support provided by Abu Dhabi to Etihad in the form of direct equity injections, a shareholder loan and assets transfer. The government is committed to supporting the implementation of Etihad's revised business plan. Etihad has not historically paid and does not intend to pay any dividends.
Ownership: Our assessment of the status, ownership and control factor as strong is underpinned by the fact that Etihad is ultimately 100% owned by Abu Dhabi. Etihad was created by Amiri's (Royal) Decree in 2003 and according to Etihad's Articles of Association, the company shall be directly or indirectly owned by the Emirate of Abu Dhabi. This can be changed only by the Executive Council of the Emirate (eg its executive authority or government). Etihad's board is appointed by the chairman of the Executive Council of Abu Dhabi. The board determines the company's top management.
Implications of a Hypothetical Default: We assess the socio-political implications of Etihad's hypothetical default as strong, due to the company's vital importance for the implementation of the Emirate's 2030 Vision, which aims at development of the economy's non-oil sectors, including tourism, as well as for the development of the transportation hub at Abu Dhabi international airport. Etihad Aviation Group is also a large employer with 24,558 employees, which is around half of oil and gas sector employment in the Emirate. Almost half of the newly announced top management team are UAE nationals. Etihad is viewed as Abu Dhabi's brand.
We believe that Etihad's hypothetical default is likely to have a moderate impact on the availability and cost of finance of Abu Dhabi and other GREs in the Emirate.
Transformation Plan Underway: In 2017, Etihad embarked on the implementation of the comprehensive restructuring plan for 2017-2022. This focuses on the company's financial sustainability, while maintaining the balance between the improvement in its standalone financial profile and implementation of its mandate of Abu Dhabi's economic enabler and brand promoter. The revised strategy provides for capacity discipline, focus on cost efficiencies and unit revenue improvement as well as consolidation of the existing market position and focus on increasing point-to-point traffic. Etihad moderated capacity growth to just 1.0% in 2017 and plans a reduction by 2.4% in 2018.
High Execution Risk: While the shareholder has committed to support Etihad through the transformation process and the company started the implementation of the plan and managed to curb operating losses in 2017, the execution risk is still high. In addition, the marginal improvement in EBIT in 2017 was primarily driven by winding down of fuel hedging losses and the plan's track record has yet to be established. The medium-term implementation will depend on oil price dynamics and the sector's competitive environment.
Partners Cooperation on a Commercial Basis: Following the strategic review, each of the remaining airline partners, including Virgin Australia, Jet Airways, Air Serbia and Air Seychelles, is assessed on a standalone basis, taking into account its strategic and commercial importance to Etihad. This approach governs Etihad's decisions regarding financial support for equity airline partners. As part of Etihad Aviation Group's (EAG) reorganisation and streamlining of operations, equity airlines were transferred from Etihad Airways PJSC to its affiliates within EAG.
Restructuring Plan: Etihad's new business plan focuses on achievement of financial sustainability. Its corporate scorecard puts the improvement of free cash flow generation at the forefront. The shareholder is committed to supporting the company's transformation. In 2017 Etihad repaid its unsecured bank debt. The remaining unsecured debt comprises mostly capital market transactions.
Weak Financials: We expect Etihad to remain loss making over 2018-2022, despite the implementation of the revised strategy. However, we assess the trend in its performance rather than actual figures to see whether it remains on track with restructuring implementation. We are more cautious on yield improvement and cost reduction than the company. We expect the company to remain free cash flow negative due to loss making operations and high capex. We assess its standalone credit profile as much lower than the supported 'A' rating.
Despite the planned growth moderation, Etihad will maintain sizeable operations and network and remain the smallest among the three Middle Eastern carriers. It has a cost advantage compared with European airlines, including BA (BBB-/Stable), Lufthansa and Air France-KLM but its unit costs are largely comparable with those of Emirates and Qatar Airways. However, its unit revenue is lower than that of Emirates, BA and Lufthansa. Etihad's financials are very weak compared with Emirates and European peers. We rate it based on a top-down approach, three notches below that of Abu Dhabi, its indirect sole shareholder. The company's standalone profile is well below its 'A' supported rating.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- shareholder support in line with the company's expectations;
- capex in line with the company's plans;
- ASK growth at 2% CAGR over 2018-2022;
- oil price of USD70/bbl for 2018, USD65/bbl for 2019 and USD57.5/bbl for 2020-2022;
- no dividend payments over 2018-2022;
- marginal increase in yields over 2018-2022.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- Financial guarantees by the sole indirect shareholder for a large portion of the company's debt or cross default provisions would be positive for the ratings, but are not considered likely by Fitch.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- Weakening of the creditworthiness of the sole indirect shareholder Abu Dhabi could be negative for Etihad's ratings, unless we view the links with the parent as stronger
- Evidence of weaker ties with Abu Dhabi
- Significant underperformance under the new business plan on a sustained basis, requiring much higher than planned support from the shareholder, could cause the re-assessment of the linkage
- Evidence of unremedied liquidity challenges, such as the inability to cover the upcoming 12 months' financial obligations from cash and committed facilities.
Tight Liquidity: Etihad's liquidity position is tight but manageable on the back of shareholder support. Its unrestricted cash position was USD990 million at end-2017, which along with committed credit facilities of USD633 million was sufficient to cover short-term debt of USD1.1 billion. The company plans to replace these facilities with new USD946 million facilities, which will include USD600 million of 30 month committed revolving credit facility from six local and international banks and USD346 million of uncommitted invoice and overdraft financing facilities.
FX Exposure: Most of Etihad's debt is denominated in dollars or dollar-pegged currencies (88% in 2017). The company uses both FX and interest-rate hedging. FX risk management policy at Etihad focuses on the forecast net cash-flow position in each currency over time.
Senior Unsecured Rating: The senior unsecured rating is aligned with the company's Long-Term IDR as the ratio of unencumbered assets to unsecured debt stood at 2x in 2017. The unencumbered assets were USD5.1 billion in 2017, which provides an additional source of liquidity.