London, 17 March 2020 -- Moody's Investors Service, ("Moody's") has downgraded easyJet Plc's (easyJet or the company) issuer rating to Baa2 from Baa1. Moody's has also downgraded the provisional senior unsecured rating of easyJet's GBP3.0 billion EMTN programme to (P)Baa2 from (P)Baa1 and the ratings of its €1.5 billion senior unsecured bonds due in 2023 and 2025 to Baa2 from Baa1. All ratings of easyJet are placed on review for downgrade.
A full list of affected ratings and entities can be found at the end of this press release.
RATINGS RATIONALE
The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Today's action reflects the impact on easyJet of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.
The rating action was prompted by the very sharp decline in passenger traffic since the outbreak of coronavirus started during January 2020, which will result in a significant negative free cash flow in 2020, a weakening liquidity profile and a significantly higher leverage. From a regionally contained outbreak the virus has rapidly spread to many different regions severely denting air travel. The International Air Travel Association's (IATA) latest scenario analysis forecasts a decline in passenger numbers of between 11% and 19% for the full year 2020.
Moody's base case assumptions are that the coronavirus pandemic will lead to a period of severe cuts in passenger traffic over at least the next three months with partial or full flight cancellations and aircraft groundings, with all regions affected globally. The base case assumes there is a gradual recovery in passenger volumes starting in the third quarter. However there are high risks of more challenging downside scenarios and the severity and duration of the pandemic and travel restrictions is uncertain. Moody's analysis assumes around a 50% reduction in easyJet's passenger traffic in the second quarter and an 21% fall for the full year, whilst also modelling significantly deeper downside cases including a full fleet grounding during the course of Q2 and a more extended period of severely depressed volumes.
easyJet has been particularly exposed to the early stages of the coronavirus outbreak in Europe due to its exposure to Italy, which represented around 20% of passenger volumes in 2019. Moody's expects travel restrictions to worsen globally over the coming weeks leading to full or partial groundings across the company's network.
Moody's does not expect easyJet to benefit materially in 2020 from the lower oil price because it has hedged around 68% of its expected fuel costs for fiscal 2020, ended 30 September 2020, through swaps at a jet fuel price of $655 per metric tonne, compared to the current price of around $420 per metric tonne. With significant cancellations and capacity cuts easyJet is likely to be fully or overhedged in the next quarter. Whilst its hedging policy is relatively common across European airlines easyJet does not benefit from material fuel price alleviation available to its US airline peers. Moody's considers that further actions will be required to reduce the cost base, with staff layoffs, voluntary and mandatory unpaid leave and deferrals of aircraft pre-delivery payments and deliveries to support the company through the crisis.
Moody's also anticipates that the airline industry will require continued and further support from regulators, national governments and labour representatives to alleviate pressures on slot allocations, provide indirect or direct financial support and manage airlines' cost bases. Whilst easyJet's strong balance sheet means it is in less need of such support, ready access to financial markets may be required in downside scenarios particularly to enable monetisation of its unencumbered fleet. An extension of slot alleviation beyond the current provisions to June 2020 in Europe is also likely to be important.
LIQUIDITY
easyJet currently has significant levels of liquidity of GBP2.0 billion, comprising cash of GBP1.6 billion and a committed and undrawn syndicated credit facility of $500 million. With total available funds representing around 31% of fiscal 2019 revenues easyJet's liquidity is in the upper tier of global airlines. Under normal market conditions this would be adequate and Moody's considers easyJet's current liquidity capable of supporting the company for a period of partial or total aircraft grounding in line with base case assumptions. However a more severe downside with extended groundings into Q3 would likely start to pressurise the company's current resources.
In this context Moody's expects easyJet to take further actions to strengthen its liquidity. Of critical importance is the company's fleet flexibility, with 232 owned aircraft out of a total of 331 as at 30 September 2019. The company's high proportion of unencumbered fleet valued at in excess of GBP4 billion should provide the company with access to substantial additional sources of liquidity. It also means its fixed costs are lower than most airlines due to limited leasing expenses which will be critical in managing liquidity during a period of substantial aircraft groundings.
The profile and financial metrics of easyJet in a post-crisis environment are subject to high uncertainty but Moody's expects that the company would ultimately be in a position to gain share and recover its financial metrics over time, depending on the severity of the current crisis.
The review process will be focusing on (i) the current market situation with a review of current passenger traffic conditions and pre-booking trends for the next few weeks, (ii) the liquidity measures taken by the company and their impact on the company's balance sheet, (iii) other measures being taken by the company to alleviate balance sheet and credit metrics stress.
WHAT COULD CHANGE THE RATING UP / DOWN
The ratings are unlikely to be upgraded in the short term. Positive rating pressure would not arise until the coronavirus outbreak is brought under control, travel restrictions are lifted, and passenger volumes return to more normal levels. At this point Moody's would evaluate the balance sheet and liquidity strength of the company and positive rating pressure would require evidence that the company is capable of substantially recovering its financial metrics and restoring liquidity headroom within a 1-2 year time horizon.
Moody's could downgrade easyJet if:
• there are expectations of deeper and longer declines in passenger volumes including a material extension into Q3 2020 as a result of the coronavirus outbreak, particularly if not matched by additional sources of liquidity
• failure of the company to secure additional material liquidity or a weakness in the market for aircraft financing restricting easyJet's ability to utilise its unencumbered fleet to generate additional funds
• wider liquidity concerns increase, for instance due to cost inflexibility or restrictions on cash bookings receipts from credit card providers
• there are clear expectations that the company will not be able to maintain financial metrics compatible with a Baa2 rating following the coronavirus outbreak, in particular if:
- gross adjusted leverage is expected to be sustainably above 3x
- retained cash flow / debt is expected to be sustainably below 25%
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
easyJet complied with the applicable 2016 UK Corporate Governance Code throughout fiscal 2019.
easyJet has committed to net-zero carbon dioxide emissions on all flights across its network through the purchase of carbon offsets since November 2019.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Passenger Airline Industry published in April 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Established in 1995, easyJet Plc is one of the largest low-cost airlines in Europe, with around 96 million passengers, sales of GBP6.4 billion and Moody's-adjusted EBIT of GBP490 million in fiscal 2019. easyJet is listed on the London Stock Exchange, and the family of the founder, Sir Stelios Haji-Ioannou, remains the largest shareholder of the group, with a stake of 33.7%.
AFFECTED RATINGS
Downgrades:
..Issuer: easyJet Plc
.... Issuer Rating, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade
....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review for further Downgrade
....Senior Unsecured Regular Bond/Debenture, Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade
Outlook Actions:
..Issuer: easyJet Plc
....Outlook, Changed To Rating Under Review From Stable