Fitch Ratings - London - 09 Apr 2020: Fitch Ratings has downgraded British Airways Plc's (BA) Long-Term Issuer Default Rating (IDR) to 'BB+' from 'BBB-'. The Outlook on the IDR is Negative.
The downgrade reflects our updated macroeconomic and global aviation industry expectations weakening BA's business and financial profile over the entire rating horizon. With a deep global recession in 2020 in Fitch's baseline forecast hitting air travel demand well beyond the ongoing restrictions related to the coronavirus pandemic, we now assume BA's capacity (available seat-kilometres) to recover to its end-2019 level only during 2023, leaving profit margins and credit metrics weak for the previous rating level.
The Negative Outlook reflects the uncertainty around the air travel restrictions and demand recovery as well as the heightened risk for BA to adjust its operational base, investment programme and capital structure in a fast-evolving environment. We estimate that liquidity will drain during 2020, but will remain sufficient to sustain remaining operations in 2Q20 and recovery from 2H20.
KEY RATING DRIVERS
Deep Global Recession Scenario: We assume that BA's capacity will fall 100% from April to end-June before recovering slowly in 2H20 and beyond. We expect annual capacity to be, respectively, 59%, 22% and 5% lower in 2020-2022 compared to 2019. Our updated rating case reflects our updated Global Economic Outlook published on 2 April 2020, in which we project a deep recession in 2020 and expect global GDP to remain below 2019 levels through 2021 and for airlines to experience a deeper hit due to the coronavirus pandemic.
Coronavirus to Hurt Airlines Beyond 2021: We expect the aviation industry to trail the broader economic recovery. With lockdown relaxation scenarios uncertain, we expect air travel restrictions, especially on international flights, to remain in place well beyond 2H20. This, together with the economic weakness, will affect the propensity to travel after 2021. We thus forecast weaker passenger load factors and yields for BA. We believe the recovery of different travel segments will vary, with discretionary travel remaining more vulnerable.
Defensive Measures Assumed: We assume BA will rebase its expenditure, including cutting staffing costs, deferral of non-essential and non-regulatory capex, and reduction in non-fleet-related expenditure. BA already said that around 34,000 staff (80% of total) will be furloughed in April and May. Lower oil prices will not benefit BA in 2020 due to it hedging a large portion of fuel (around 90% at International Consolidated Airlines Group, S.A. (IAG) level), but we assume savings beyond that. We also assume no dividend payments in 2020-2021.
Weaker Deleveraging Capacity: With our assumptions of cost-base cuts and working capital recovery following a significant reduction in 2020, we expect BA to be able to generate positive free cash flow from 2021, but for credit ratios to remain weak as debt repayment capacity declines on weaker EBITDA and FFO compared to pre-pandemic levels. We forecast BA's leverage to recover to the rating sensitivities in 2022.
BA's exposure to the crisis is similar to other major European network carriers, while its liquidity buffer is fairly strong and comparable to Ryanair Holdings plc and Wizz Air Holdings Plc. BA's rating benefits from its extensive, diversified route network, strong hub position at London Heathrow, strong position on traditionally cash-flow-generative routes to the US, and rigorous cost management.
Our assumptions include:
- Suspension of all flights from April to June with a gradual recovery from 2H20 and annual capacity reduction in 2020 of 59% compared to 2019; 22% in 2021; and 5% in 2022.
- Deterioration in load factor to 77% in 2020 (2019: 83.6%) and a gradual recovery to 80% by 2023.
- Low single-digit decline in yields, reflecting an expected more competitive market environment.
- Oil price of USD35/bbl in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and USD55/bbl thereafter.
- Capex around GBP2.9 billion during 2020-2023.
- No dividends during 2020 and 2021.
- Working capital outflow of more than GBP2 billion in 2020 followed by a similar inflow during 2021-2023.
Developments That May, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Upgrade: We do not anticipate an upgrade as reflected in the Negative Outlook.
- Stable Outlook: A quicker-than-assumed recovery from the market shock, supporting a sustained recovery in credit metrics to levels stronger than those outlined in the negative sensitivities below would allow us to revise the Outlook to Stable.
Developments That May, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- Failure to adapt to the changing market conditions with effective mitigation measures, prolonged economic crisis and air travel restrictions, weaker-than-expected yields, or more aggressive capex or dividend payments.
- FFO-adjusted gross leverage and total adjusted gross debt/EBITDAR above 4.0x, FFO adjusted net leverage above 3.0x.
BEST/WORST CASE RATING SCENARIO
Best/Worst Case Rating Scenarios Non-Financial Corporate:
Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
BA's early-April cash position of around GBP3.2 billion and committed undrawn credit facilities of GBP1.1 billion as of end-March 2019 are more than sufficient to cover debt maturities of GBP932 million in 2020. Its debt maturity profile is well-balanced. Its cash/revenue ratio of 20% at end-2019 compares well with that of its peers. We expect FCF to be negative in 2020 due to the halt in operations before returning to positive territory in 2021-2023.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.