17th Mar 2020 15:40
(Alliance News) - Moody's Investor Service on Tuesday signalled a series of downgrades for European airlines as they struggle to combat the spread of Covid-19.
The credit ratings agency has downgraded easyJet PLC to Baa2 from Baa1 and Deutsche Lufthansa AG to Ba1 from Baa3, with Lufthansa on review for another downgrade. Moody's has placed all ratings from both airlines on review for downgrade.
Additionally, the investors service has placed International Consolidated Airlines Group SA's ratings on review for downgrade.
"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," Moody's said.
It continued: "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."
Moody's said its action reflects the harm the coronavirus will have on easyJet, Lufthansa and IAG.
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, Moody's said, of more challenging downside scenarios and the severity and duration of the pandemic and travel restrictions is uncertain.
"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," the ratings agency said.
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, ending 30 September 2020, through swaps at a jet fuel price of USD655 per metric tonne, compared to the current price of around USD420 per metric tonne.
With significant cancellations and capacity cuts easyJet is likely to be fully or over-hedged in the next quarter.
Turning to Lufthansa, Moody's is worried about the weaknesses in its credit profile, leaving it "vulnerable" to the outbreak continuing to spread.
"Lufthansa has felt the negative impact from declining passenger traffic earlier than other European competitors due its strong long haul network to China and the APAC region," Moody's said.
The spreading of the virus beyond APAC has dented traffic on most of Lufthansa's network forcing the issuer to announce capacity cuts of up to 25% on February 29 and up to 50% on March 6 to react to sharply declining revenue passenger kilometres and forward bookings for the next few weeks.
Moody's added: "The sharp decline in demand comes at a time when Lufthansa has no headroom under its current rating category."
Moody's expects the Lufthansa's adjusted gross debt/Ebitda to be around 3.5x at fiscal year-end 2019, offering "no breathing space" against a downgrade trigger of 3.5x.
"As a consequence of the negative free cash flow generation, leverage metrics will be materially below the requirements for the previous rating category going forward at least in 2020," Moody's said.
Moody's noted Lufthansa is currently focusing on managing its way through this very volatile market environment by reducing costs as much as possible and by shoring up its liquidity profile.
As for IAG, Moody's assumes around a 50% reduction in the British Airways-parent passenger traffic in the second quarter and an 18% fall for the full year, whilst also modelling significantly deeper downside cases including a full fleet grounding during the course of the second quarter.
"IAG has responded rapidly to the crisis by cancelling flights to China, other Asian routes, Italy, the US and other regions and instigated cost and cash preservation measures. The travel ban announced by the US on non-US citizens from 26 European nations will further affect many of IAG's routes.," Moody's said.
Moody's expects travel restrictions to deepen and the extension of the travel ban to journeys from the UK to the US will severely affect routes of British Airways - which is also under review for a downgrade - which represented around 68% of IAG's adjusted operating profit in 2019.
Similar to easyJet, Moody's does not expect IAG to benefit materially in 2020 from the lower oil price.
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.
An extension of slot alleviation beyond the current provisions to June 2020 in Europe is also likely to be important, Moody's added.
Shares in easyJet were trading 8.1% lower in London on Tuesday afternoon at 579.80 pence each. IAG was 4.3% lower at 244.70p. In Frankfurt, Lufthansa was 5.1% higher at EUR9.04.
By Paul McGowan; [email protected]
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