Fitch Ratings - Warsaw - 10 Apr 2020: Fitch Ratings has downgraded Ryanair Holdings plc's (RYA) Long-Term Issuer Default Rating (IDR) and Ryanair DAC's senior unsecured rating to 'BBB' from 'BBB+'. The Outlook on the Long-Term IDR is Negative. Fitch has also affirmed RYA's Short-Term IDR at 'F2'.
The downgrade reflects our updated macroeconomic and global aviation industry expectations, weakening RYA's business and financial profile over the entire rating horizon. With a deep global recession in 2020 in Fitch's baseline forecast affecting air-travel demand well beyond the ongoing restrictions related to the coronavirus pandemic, we now assume RYA's revenue to recover close to its fiscal year to end-March 2020 (FY20) level only during FY23, leaving financial leverage weak for the previous rating level.
The Negative Outlook reflects the uncertainty around air travel and social-distancing restrictions and demand recovery, as well as RYA's large exposure to European countries that are considerably affected by the outbreak, particularly Italy and Spain. It also incorporates the heightened risk for RYA to adjust its operational base and investment programme in a fast-evolving environment. We estimate RYA's industry-leading liquidity to drain during FY21, but to remain sufficient assuming substantial measures to preserve cash.
KEY RATING DRIVERS
Deep Global Recession Scenario: We assume RYA's seat capacity to fall 100% from April to end-June before a slow recovery during 2H20 and beyond. As a result, we expect an annual decline in scheduled available seat miles compared to FY20 of 60% in FY21 and 13% in FY22, followed by 4% growth in FY23 (compared to FY20). Our updated rating case reflects Fitch's updated "Global Economic Outlook" published on 2 April 2020, in which Fitch projects a deep recession in 2020, global and European GDP to remain below 2019 levels through 2021, and a deeper impact on airlines (compared to many other sectors) from the coronavirus pandemic.
Coronavirus to Hurt Airlines Beyond 2021: We expect the recovery of the aviation industry to lag behind that of the broader economy. With lockdown and social-distancing relaxation scenarios uncertain, we assume air travel restrictions, especially on international flights, to remain in place well beyond 2H20. This will in turn, coupled with economic weakness, affect the propensity to travel beyond 2021. We therefore forecast weaker passenger load factors for RYA. The recovery of different travel segments will vary, with discretionary travel to remain more vulnerable in our view.
Defensive Measures Assumed: We assume RYA will rebase its expenditures, including staff-cost reduction, nonessential and non-regulatory capex deferral, and a reduction in non-fleet-related expenditure. The company has already implemented a number of measures, including deferring capex, suspending share buybacks, freezing recruitment and discretionary spending, and cutting all pay (including that of senior management) by 50% for April and May.
The lower oil-price environment will not benefit RYA in FY21 due to the large portion of fuel hedging in place (around 90%) leading to losses, due to the ineffectiveness of hedges given the substantially lower-than-planned fuel consumption in our rating-case scenario for the next 12 months. However, we assume savings beyond that. We also assume no share buy-backs in FY21-FY23.
Weaker Deleveraging Capacity: With our assumptions of cost-base cuts and a working-capital recovery following a significant reduction in FY21, we expect RYA to be able to generate positive free cash flow from FY22, but for funds from operations (FFO) adjusted net leverage to remain above the negative sensitivity of 1.5x for the previous rating as debt-repayment capacity reduces on weaker EBITDA and FFO compared to pre-pandemic levels.
Solid Position to Benefit from Sector Recovery: We believe that RYA is well-placed to benefit from a post-pandemic sector recovery compared with most European peers. This is due to the company's solid financial profile at the outset of the crisis and its low-cost base which provides an opportunity to grow, particularly as some financially weaker airlines are likely to cease operations as a result of the crisis.
Short-Term Rating: The 'F2' short-term IDR reflects the airline's conservative financial policy, strong liquidity and financial flexibility, given that 77% of the company's owned fleet is unencumbered and debt-free. We also expect RYA to have access to short-term funding schemes provided by European central banks.
DERIVATION SUMMARY
RYA's exposure to the coronavirus outbreak is comparable to that of other major European airlines, while its liquidity buffer is one of the strongest among Fitch-rated airlines in Europe.
RYA is one of the highest-rated airlines in Fitch's rated universe, together with Southwest Airlines Co. (BBB+/Negative). Southwest compares favourably against Ryanair because it has a longer record of profitability, higher revenues, less foreign-exchange exposure and a larger base of unencumbered assets. Ryanair has a larger cash-liquidity balance and similar operating margins.
KEY ASSUMPTIONS
Fitch revised its rating case to reflect the fast-evolving developments around the pandemic and our new macroeconomic scenario:
- Suspension on all flights from April to June with gradual recovery towards end-2020 and an annual decline in scheduled available seat miles compared to FY20 of 60% in FY21 and 13% in FY22, followed by 4% growth in FY23 (compared to FY20)
- Deterioration in load factor to 89% in FY21 (FY20: 96%) and a gradual recovery to 91% by FY23
- Oil price of USD35/bbl in 2020, USD45/bbl in 2021, USD53/bbl in 2022 and USD55/bbl thereafter
- Limited cost reduction from the recent oil-price fall due to RYA's fuel hedging for FY21
- Reduced capex in FY21 (EUR0.7 billion) recovering to EUR1.6 billion in FY22
- No share buybacks in FY21-FY23
- Working capital outflow of about EUR1.8 billion in FY21 followed by a comparable inflow in FY22-FY23 as revenue recovers
RATING SENSITIVITIES
Factors That Could, 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 credit-metrics recovery to levels stronger than outlined in the negative sensitivities below would allow us to review the Outlook to Stable
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
- A failure to adapt to the changing market conditions with effective mitigation measures, a significantly prolonged economic crisis and air-travel and social-distancing restrictions, with considerably weaker liquidity, weaker-than-expected yields or more aggressive capex or shareholder distributions
- Negative free cash flow (FCF) through the cycle and FFO adjusted net leverage above 2.5x on a sustained basis
BEST/WORST CASE RATING SCENARIO
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
RYA's large cash position of about EUR3.8 billion at end-March 2020 (equivalent to 40%-50% of annual revenue before the pandemic) provides a sufficient buffer against the negative FCF we expect in FY21, largely driven by the impact of the coronavirus outbreak but mitigated by substantial measures to preserve cash.
RYA has manageable debt maturities, with EUR255 million of current maturities as of end-2019. The first year of larger debt repayments is FY22 when EUR1 billion of debt, including EUR850 million bonds, matures.
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 CONSIDERATIONS
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.