Fitch Ratings - Warsaw - 10 Apr 2020: Fitch Ratings has downgraded Wizz Air Holdings Plc's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB-' from 'BBB'. The Rating Outlook on the Long-Term IDR is Negative. Fitch has also affirmed the airline's Short-Term IDR at 'F3'.
The downgrade reflects our updated macroeconomic and global aviation industry expectations weakening Wizz Air'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 Wizz Air's revenue to recover to its fiscal year to 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. It also incorporates the heightened risk for Wizz Air to adjust its operational base and investment programme in a fast-evolving environment. We estimate Wizz Air's strong liquidity to drain during FY21, but to remain sufficient assuming substantial measures to preserve cash.
KEY RATING DRIVERS
Deep Global Recession Scenario: We assume Wizz Air'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 available seat kilometres (ASK) of 56% in FY21, followed by a 4% growth in FY22 (compared to FY20) as the company plans to continue growing its fleet and keeps high level of capex in the next few years despite the coronavirus impact. Our updated rating case reflects Fitch's updated "Global Economic Outlook" published on 2 April 2020 in which we project a deep recession in 2020 and expect the global and European GDP to remain below 2019 levels through 2021 and the deeper hit to airlines from the coronavirus pandemic.
Coronavirus to Hurt Airlines Beyond 2021: We expect the aviation industry trail the broader economic recovery. With lockdown and social distancing relaxation scenarios uncertain we assume air travel restrictions, especially on international flights, to remain in place well beyond 2H20, hitting together with the economic weakness the propensity to travel beyond 2021. Therefore, we forecast weaker passenger load factors for Wizz Air. The recovery of different travel segments will vary with discretionary travel to remain more vulnerable in our view. We believe that Wizz Air's traffic may recover quicker than for some of other European airlines once travel restrictions are lifted, due to a large share of customers for which travel is essential (for instance, customers from central Europe working in western or northern Europe).
Defensive Measures Assumed: We assume Wizz Air to rebase its expenditures, including staff-cost reduction, and reduction in non-fleet related expenditure. The company has already implemented a number cost-reduction measures in third-party spending, overhead spending, discretionary spending and non-essential capital expenditure. The lower oil price environment will not substantially benefit Wizz Air in FY21 due to a large portion of fuel hedging in place (63% as of 27 January 2020). However, we assume savings beyond that. We also assume no dividends in FY21-FY23 in line with the company's policy to focus on growth.
Weaker Deleveraging Capacity: With the assumptions on cost base cuts and working capital recovery following a significant reduction in FY21, we expect Wizz Air to be able to substantially improve free cash flow from FY22, but for FFO adjusted net leverage to remain above negative sensitivity of 2x for the previous rating until FY23 (under our previous lease adjustment criteria) as debt repayment capacity reduces on weaker EBITDA and FFO compared to pre-pandemic levels.
Solid Position to Benefit from Sector Recovery: We believe Wizz Air is well placed to benefit from post-coronavirus sector recovery compared with most European peers. This is due to the company's solid financial profile at the outset of the crisis, its customer base and a low-cost base providing opportunity to grow, particularly as some financially weaker airlines are likely to cease operations as a result of the crisis.
Short-term Rating: The 'F3' rating reflects the airline's strong liquidity, but weak FFO fixed charge coverage and the less mature market environment in Central and Eastern Europe, which is Wizz Air's key region of operations.
DERIVATION SUMMARY
Wizz Air's exposure to the coronavirus pandemic is comparable to other European airlines while its liquidity buffer is one of the strongest among Fitch-rated airlines in Europe.
As an ultra-low cost carrier (ULCC), Wizz Air benefits from a very strong cost position comparable only to that of Ryanair Holdings Plc (BBB/Negative) among rated low-cost carriers. It has a strong market position in a growing central and eastern European market. It operates on a smaller scale than Ryanair and Southwest Airlines Co. (BBB+/Negative), but has developed a large footprint in the number of airports, countries and routes, which are on a par with its larger peers. The company also intends to maintain high growth through new aircraft deliveries. Wizz Air has business and financial profiles that are much stronger than Spirit Airlines, Inc.'s (BB-/Negative), but somewhat weaker than Ryanair's or Southwest's.
KEY ASSUMPTIONS
Fitch revised its rating case reflecting the fast-evolving situation 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 ASK of 56% in FY21, followed by a 4% growth in FY22 (compared to FY20) as the company plans to continue growing its fleet and keeps high level of capex in the next few years;
--Deterioration in load factor to 88% in FY21 (FY20: 94%) and a gradual recovery to 90% 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 fuel hedging for FY21;
--No changes to capex plan;
--No dividends;
--In projections starting from FY20 we use our new criteria for leases reported under IFRS 16 based on the Corporate Rating Criteria from 27 March 2020. Under the new lease criteria FFO adjusted net leverage is lower by 0.7x-0.9x in FY22-FY23 than under our previous criteria.
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: Quicker-than-assumed recovery from the market shock supporting 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:
--Failure to adapt to the changing market conditions with effective mitigation measures, 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 2x (under our new lease criteria) 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 visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Wizz Air has a strong liquidity position. Its large unrestricted cash position of EUR1.3 billion at year-end 2019 (equivalent to 40% to 50% of annual revenue before the coronavirus pandemic) provides sufficient buffer against the expected negative free cash flow in FY21, largely driven by the coronavirus impact but mitigated by substantial measures to preserve cash.
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.