London, 24 May 2019 -- Moody's Investors Service ("Moody's") has changed the outlook on British Airways, Plc's ("British Airways") issuer rating to positive from stable and affirmed the Baa3 Issuer rating. Moody's also affirmed the ratings of British Airways 2018-1 Pass Through Trusts (Class AA at Aa2, Class A at A3) and the Class B of its Speedbird 2013-1 at A3. However, it downgraded the rating on the Class A of the Speedbird 2013-1 transaction to A1 from Aa3. The outlook on both of these EETC transactions remains stable.
A full list of affected ratings and entities can be found at the end of this press release.
"The positive outlook on British Airways' Issuer rating reflects the recent significant strengthening in British Airways' key credit metrics, a consequence of the stronger underlying market fundamentals in 2018, combined with the company's concerted efforts over the past few years to structurally strengthen its cost base and capital structure" said Martin Hallmark a Moody's Senior Vice President and lead analyst for British Airways.
"However, signs of more challenging market conditions for European airlines going into 2019, including significant pricing pressure, could undermine British Airways' future progress. For further positive rating action therefore, more evidence is needed that British Airways will continue to perform in line with Moody's expectations through 2019" added Mr. Hallmark.
RATINGS RATIONALE
Moody's rating action follows a substantial improvement in British Airways' credit metrics and British Airways' strong business profile, which is underpinned by its strong brand and market positions. In 2018, Moody's adjusted operating profit margins improved towards 15%, in excess of Moody's 12.5% positive rating trigger for a Baa2, while Moody's gross adjusted leverage strengthened to 2.3x in 2018 (2017: 2.7x) below Moody's positive rating trigger of 2.5x.
Moody's expects that British Airways should be able to maintain key credit metrics at 2018 levels on a sustainable basis through 2021. This is based on the 2019 operating profit guidance announced by British Airways' owner - International Airlines Group's (IAG, Baa3 stable) -- which it forecasts will be in line with 2018 levels, and British Airways' commitment to pursuing conservative financial policies.
However, over the last three to six months there has been some notable deterioration in the market fundamentals for European airlines, including substantially weaker pricing due to market overcapacity, higher fuel costs and less favourable FX developments.The risk of flight disruption due to air traffic control issues in Europe also persists despite European airlines aiming to reduce this effect through buffers in flight scheduling, although British Airways is likely to be less affected than its peers.
Moody's considers that British Airways is less exposed to some of these risks than its European peers, as evidenced to some degree by IAG's (and Moody's assumes British Airways') still positive operating performance in Q1-19, which favourably compares to the operating losses generated by other European airlines -- also affected in some instances by the consolidation of loss-making operations these airlines acquired. British Airways has strong liquidity including sizeable cash on balance sheet to weather a modest downturn, and in the event of a "no-deal" Brexit on 30 October 2019, has operational and financial flexibility to sustain modest negative effects from a deterioration in the macroeconomic environment, including any unfavourable FX developments. Moody's expects British Airways will remain focused on cost reduction and will incur lower levels of restructuring costs.
For further positive rating action, Moody's expects to have greater evidence that British Airways' operating performance and cash flows will remain resilient over the next 12-18 months when faced with operational headwinds.
The rating affirmations of the company's British Airways 2018-1 Pass Through Trusts (Class AA at Aa2, Class A at A3) and the A3 Class B rating of its Speedbird 2013-1 consider the importance of the aircraft collateral of each transaction to the company's network and Moody's estimates of their peak loans-to-value. The downgrade of the Class A of the Speedbird transaction reflects the sharp decline in the value of B777-300ER aircraft relative to Moody's original expectations, which has reduced the equity cushion by about 10 points relative to Moody's prior expectations and Moody's view that values of this aircraft will not realize a positive inflection in the future.
The stable outlook for British Airways' Pass Through Trusts indicates that Moody's is unlikely to upgrade the ratings of the 2018-1 transaction or the 2013-1 transaction should it upgrade British Airways' corporate ratings. For Speedbird 2013-1, the current peak loans-to-value of about 66% and about 71% on the Class A and Class B, respectively are meaningfully higher than Moody's projections when it first rated the transaction in 2013. Weaker values of the B777-300ERs are the main driver of the smaller than expected equity cushion. For British Airways 2018-1 Pass Through Trusts, Moody's estimates the respective peak loans-to-value of the Class AA and Class A tranches at about 49% and about 73%. Maintaining the current Enhanced Equipment Trust Certificate (EETC) ratings should Moody's upgrade the Issuer rating would reflect a shift in the weighting between the corporate credit profile and its assessment of the importance of the aircraft and the equity cushion as corporate ratings move up and down the rating scale. Typically, the higher the corporate rating, the lower the rating notching of the EETC tranches, all else equal.
Any combination of future changes in the underlying credit quality or ratings of British Airways, unexpected changes in its fleet that de-emphasizes the models in this transaction or unexpected material changes in the market values of the aircraft could cause Moody's to change its ratings of the Certificates.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects British Airways' strong positioning within the Baa3 rating due to its stronger operating performance in 2018 and Moody's expectations that key credit metrics will remain robust through 2021. This includes gross adjusted leverage remaining below 2.5x on a sustainable basis.
WHAT COULD CHANGE THE RATING UP/DOWN
Positive rating pressure would likely develop for BA if:
• gross adjusted leverage is expected to sustainably be below 2.5x, and the company continues to have strong liquidity;
• the adjusted operating margin remains above 12.5%, indicating resilience to competitive pressures; and
• consistent cash flow generation, enabling ongoing investments in the renewal of the fleet and an ability to continue to support IAG's dividend payments.
In addition, Moody's will continue to assess the operating performance of other IAG airline subsidiaries. This is because a further improvement in their operating and financial performance would support British Airways' ratings, as debt and dividend service within the IAG group would be more equally balanced amongst IAG's airline subsidiaries. When analysing British Airways' debt capacity, Moody's will continue to consider the debt at the IAG holding level.
Moody's could downgrade British Airways if:
• gross adjusted leverage is expected to be sustainably above 2.5x;
• the adjusted operating margin falls below 12.5%, indicating growing competitive pressures;
• weakening cash flow generation due to ongoing investments in the renewal of the fleet and support for IAG's dividend payments; and
• there is a notable weakening in British Airways' liquidity.
In addition, a material increase in IAG's debt levels or the substantial deterioration of the operating performance of IAG's other airline subsidiaries could put negative pressure on British Airways' ratings.
PRINCIPAL METHODOLOGIES
The principal methodologies used were the Passenger Airline Industry methodology published in April 2018, and the Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
LIST OF AFFECTED RATINGS
..Issuer: British Airways, Plc
Affirmation:
.... LT Issuer Rating, Affirmed Baa3
Outlook Action:
....Outlook, Changed To Positive From Stable
Issuer: British Airways Pass Through Trust 2018-1A
..Affirmation:
....Senior Secured Enhanced Equipment Trust, Affirmed A3
..Outlook Action:
....Outlook, Remains Stable
Issuer: British Airways Pass Through Trust 2018-1AA
..Affirmation:
....Senior Secured Enhanced Equipment Trust, Affirmed Aa2
..Outlook Action:
....Outlook, Remains Stable
Issuer: Speedbird 2013 Limited
..Affirmation:
....Senior Secured Enhanced Equipment Trust, Affirmed A3
..Downgrade:
....Senior Secured Enhanced Equipment Trust, Downgraded to A1 from Aa3
..Outlook Action:
....Outlook, Remains Stable