Moody's: European airlines could face severe credit impact from 'no-deal' Brexit scenario

Editor -

Frankfurt am Main, September 27, 2018 -- The UK's withdrawal from the European Union without a deal to substantially replicate existing aviation agreements would be significantly credit negative for European airlines, Moody's Investors Service said in a report today.

Moody's central view is that the UK and the EU will reach a deal, minimizing the impact on European airlines' business profiles and financial metrics. However, a 'no-deal' scenario remains a threat to the aviation industry as the Brexit deadline approaches and until a withdrawal agreement with transition arrangements is reached.

"A no-deal Brexit could be significantly credit negative for European airlines," said Jeanine Arnold, a Moody's Vice President -- Senior Credit Officer and author of the report. "It could compound an airline's ability to increase yields, raise load factors and generate cost efficiencies in what is still a competitive market environment in Europe. Ultimately it could lead to cash flow and liquidity pressures."

Moody's has identified five main risks to EU airlines from a 'no-deal' outcome:

  • A loss of traffic rights between the UK and the European Common Aviation Area (ECAA)

  • A loss of traffic rights between the UK and other third countries that have aviation agreements with the EU (including the US)

  • Meeting ownership and control conditions to retain valid operating licences (for UK and EU-27 countries)

  • The UK's continued membership in the European Aviation Safety Agency (EASA) and certifying compliance with internationally recognised safety requirements

  • Weaker macro economic conditions.

The probability of these risks occurring in a no-deal scenario and their effect on credit quality will differ depending on the political willingness and economic incentives to separate a no-deal Brexit from aviation agreements, as well as contingency plans and past exceptions to rules or regulations.

If risks materialise, financial implications could be severe in the short term, but modest in the long term because more time should allow comprehensive agreements to be reached and airlines to adjust their operations.

Even in a no-deal scenario, agreements are imperative because the airline industry lacks fallback legislation comparable to World Trade Organization (WTO) rules, which would apply for other industries.

Some of the airlines most exposed to a no-deal Brexit include: British Airways Plc (Baa3 stable), easyJet Plc (Baa1 stable), Ryanair Holdings Plc (unrated), Thomas Cook Group Plc (B1 stable), TUI AG (Ba2 positive) and Virgin Atlantic (unrated).

Broadly, an airline will be less exposed if it has a more flexible operating model and cost structure, greater network diversification and scale, and has begun to implement contingency measures. The strong liquidity of British Airways, easyJet and Ryanair should enable them to weather the financial impact of a no-deal Brexit, even if flights are disrupted for an extended period. However, for airlines negatively affected by a no-deal Brexit, a sustained deterioration in liquidity and key credit metrics such as gross leverage or cash flow coverage could lead to negative rating actions.

Norwegian Air Shuttle ASA (unrated) is less exposed to the risks Moody's has identified, but its very weak liquidity leaves it more sensitive to flight disruption or macroeconomic factors.

The report, "Airlines -- Europe, Credit impact of 'no-deal' Brexit potentially severe in near term, modest over long term", is available on www.moodys.com. Moody's subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

Subscribers can access this report via this link: http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1135827