Measures to contain the coronavirus pandemic have sharply curtailed demand for air travel, leading many airlines to temporarily ground large portions of their fleets. As a result, S&P Global Ratings has lowered all airline ratings globally by one to two notches over the last few weeks. Almost all of our ratings on airlines worldwide remain on CreditWatch with negative implications, pointing to further likely rating downside in the coming weeks and months, the extent of which we expect to be influenced by the nature and effectiveness of actions governments take to support the companies.
For international hub airports, downgrades were generally limited to one notch, reflecting their monopolistic nature as an essential provider of infrastructure. Many of the ratings remain on negative outlook or CreditWatch with negative implications signaling further downside if the decline in air traffic is more severe or prolonged than we expect. We have assigned negative outlooks on all of the ratings on U.S. and Canadian airports, bearing in mind they are publicly owned or government-related entities. Similarly, outlooks on airport-related special facilities such as consolidated rental car and aviation fuel facilities have also been revised to negative.
To discuss these developments, we hosted a global webcast on March 27, 2020, and answered questions from participants, which we summarize here.
Webcast And Slides
Listen to the webcast replay (registration may be necessary):
- View and download the slides from the webcast here. Also see link at end of article.
Frequently Asked Questions
Will European airlines benefit from government support?
Yes, up to and including equity injections, in our view. Some governments have announced they will cover a percentage of employee costs, if they would have otherwise been made redundant because of the pandemic. This will be a big help, as this is one of an airlines' biggest costs (second only to fuel in many cases). For example, the U.K. government has announced The Coronavirus Job Retention Scheme where employers can claim 80% of furloughed employees' usual monthly wage costs (up to a cap). The U.K. government reportedly has stated that at this stage, U.K.-based airlines and airports will not receive an industrywide bailout, but that it will discuss support with individual firms as a last resort.
In these exceptional circumstances, government support may be needed even for investment-grade companies, beyond liquidity or refinancing facilities or loan guarantees, up to and including direct purchases of equity stakes. We note the Italian government has now taken full control of Alitalia (unrated). The Danish and Swedish governments have announced that they will provide $300 million in state-backed credit guarantees for SAS AB (in which each government has about a 15% equity stake). Although we view such support as positive to support immediate liquidity concerns, we note that taking on more debt to support negative operating cash flow will weaken credit metrics.
Finally, if we consider an airline to be a government-related entity (GRE), we may factor in some rating uplift to reflect extraordinary government support if likely (even if not announced). This is, for instance, already the case for speculative-grade entities such as Air Baltic, which is 80% government-owned by the Latvian government, and TAP, which is controlled by the Portuguese government. The ratings on both include two notches of ratings uplift from their stand-alone credit profile. Depending on the extent of government rescue packages, we could consider more airlines as GREs.
Will U.S. airlines benefit from government support?
Yes, to some extent. Recently enacted U.S. federal aid legislation includes potentially material help for airlines. This includes $25 billion of grants for paying employees and avoiding layoffs or pay cuts and $25 billion of potential loans or loan guarantees for passenger airlines. The former should provide a much-needed boost to liquidity over the next six months, which is likely to cover the most severe impact from COVID-19 in the U.S. We believe this aid will significantly reduce, though not necessarily eliminate, the risk of near-term insolvencies. Airlines may not be as willing or able to apply for the loans, since these are subject to a number of conditions, including demonstrating that the airline does not have access to alternative sources of capital. Even with these forms of support, along with some others in the legislation (including relief from certain excise taxes collected from airlines), we anticipate that U.S. airlines will report weak credit measures this year and next, reflecting a substantial loss of revenue and added debt incurred to maintain their operations.
Will you further lower S&P Global Ratings' air traffic assumptions?
Yes, it's likely we'll revisit downward the assumptions that we published on March 17 "The Coronavirus Pandemic Could Reduce Global Air Passengers By Up To 30% In 2020." The International Air Transport Association, IATA, for instance, published a more severe downside scenario. IATA now projects that European air traffic could fall 46% in 2020 compared with 2019, assuming a very strict three-month lockdown, while we have assumed a drop in the range of 25%-35% .
We'll consider the outlook for the severity and duration of the coronavirus outbreak, which differs country by country and changes daily. However, we believe the U.S. decline should be less severe than the drop in Europe, based on IATA estimates for capacity in the second quarter of -50% in the U.S. and -90% in Europe, although this could change as the pandemic develops. It could be that domestic air travel in the U.S. is more indispensable than in Europe, where more air travel crosses international borders and as such could be subject to prolonged restrictions as countries try to contain the virus within their jurisdictions. Furthermore, the U.S. government may end up imposing fewer restrictions domestically than Europe does, which would better sustain U.S. capacity given its high share of domestic flights--two-thirds of revenue for the big airlines and more than 90% for low-cost airlines.
|Latest Air Traffic Forecast For 2020 By The International Air Transport Association|
|As of March 24, 2020|
|Region of airline registration||Revenue passenger kilometers, % year-on-year change|
|Source: The International Air Transport Association.|
How long will air traffic need to recover?
We currently assume a recovery in air traffic close to pre-coronavirus levels within about 24 months. This is because restrictions are likely to be lifted only gradually and region by region. Furthermore, air passenger travel has historically been correlated with economic activity, so a recovery depends on the length and depth of not only the pandemic but also of the global recession and how much discretionary income consumers will have to spend on travel. We will monitor whether changes in customer behavior will durably lower the 4%-5% annual growth in passengers that has been the long-term trend. For example, U.S. air passenger numbers were down 10% on average in the 12 months after 9/11, and took over four years to recover to pre-2011 norms. What's more, businesses might adapt so well to remote work that they decide to reduce travel or employees reduce discretionary trips. As for leisure traffic, there may be pent-up demand from those who delayed their holidays, while others may remain cautious about international travel.
For these reasons, our assumed path to recovery contrasts strongly with past crises, when traffic rebounded more swiftly. The 2003 SARS outbreak saw a 35% rebound in Hong Kong air traffic in year two after an initial 20% decline. Similarly, European air passenger numbers recovered 8% over 2010-2011, but even then that was lower than the 10% decline during the 2008-2009 financial crisis.
How will airlines reduce their costs to cope with "hibernation"?
We believe airlines have several ways to reduce expenses and are closely following their efforts to drastically lower operating costs and preserve liquidity, whilst their operations are significantly reduced or in some cases completely suspended for a temporary period (as if in hibernation). Most European airlines say that about one-half of their operating costs are fixed. Clearly, fuel costs have dropped significantly in recent weeks. However, unlike most (but not all) of their U.S. peers, most European airlines have extensive hedging programs that have locked them into prices for a year or two, which means they will not benefit immediately from lower fuel costs. Depending on the type of hedge, settling existing fuel hedges could be expensive. Staff costs are somewhat flexible, particularly since airlines have announced redundancies and thanks to government pledges to cover a proportion of wages in certain countries and circumstances.
Why are liquidity concerns so critical for some airlines?
Many airlines have built up significant cash balances and bank lines, but these can bridge only a limited period given the drop in cash flow as air traffic plummets. Potential swings in working capital are also important in this respect. Airlines collect cash from passengers buying tickets for future travel, in most cases processed through credit card vendors. The purchase appears on their balance sheets as a current liability for deferred revenue/income (sometimes called "air traffic liability"). If the passenger cancels their reservation, airlines will generally offer credit for a future flight, though this varies with the type of ticket purchased and other considerations. However, airlines may be required to offer cash refunds when they are cancelling flights, as they are doing now, and may face significant cash outflow. Yet, we understand that instead of refunds, some customers have agreed to defer flights at present. A large amount of refunds therefore imply an additional near-term liquidity risk that may not be fully apparent when forecasting an airline's performance over a full year.
How do you assess EETC ratings? Are they rated independently from the parent?
Our ratings on enhanced equipment trust certificates (EETCs) are notched up from an airline's issuer credit rating, based on our view of:
- The likelihood the airline would reorganize successfully if it entered bankruptcy and keep paying on the EETCs to maintain use of the aircraft that collateralize them, and
- The likelihood that repossession and sale of the aircraft collateral would realize sufficient proceeds to pay principal and accrued interest (including any draws on liquidity facilities that support the EETC).
Therefore, an upgrade or downgrade of an airline will in most cases lead to a similar movement in the ratings on its EETCs. However, there are certain cases where the rating on an EETC may not move in tandem with the airline's ICR, such as when we believe that collateral coverage has deteriorated materially (in which case we could lower the rating on the EETC below the ratings on the parent).
Do you rate airlines and airports through the cycle?
S&P Global Ratings does not and cannot aim to "rate through the cycle," that is, based on particular judgments about a normal credit cycle. Cycles (economic, business, and industry-specific) do greatly influence our observed default rates and, consequently, ratings. We want our ratings to express our current opinion of an issue's or an issuer's creditworthiness at all times. Our ratings are forward looking and, depending on industry volatility and earnings and cash flow visibility, we will alter our forecast horizon. For airlines we typically base our analysis on credit metrics we project for the current year and the one after that, while for airports we have a longer perspective over the current and next two years.
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak about midyear, and we are using this assumption in assessing the economic and credit implications. We believe the measures adopted to contain COVID-19 have pushed the global economy into recession (see our macroeconomic and credit updates here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Related Criteria And Research
- S&P Global Ratings Definitions, Sept. 18, 2019
- Corporate Methodology, July 1, 2019
- Negative Rating Actions Taken On European Airports Due To COVID-19 Restrictions, March 26 2020
- Ratings Outlooks On U.S. Transportation Infrastructure Issuers Revised To Negative Due To COVID-19 Pandemic, March 26, 2020
- Aircraft Lessors, Hit By Coronavirus Fallout, Should Fare Better Than Their Airline Customers, March 25, 2020
- Ratings On European Airlines Lowered And Placed On CreditWatch Negative Due To Coronavirus Outbreak, March 20, 2020
|Please read this S&P Global Ratings' report:|
|SLIDES: Airlines And Airports Confront Unprecedented Plunge In Traffic And Uncertain Recovery|
This report does not constitute a rating action.
|Primary Credit Analysts:||Rachel J Gerrish, CA, London (44) 20-7176-6680;|
|Philip A Baggaley, CFA, New York (1) 212-438-7683;|
|Izabela Listowska, Frankfurt (49) 69-33-999-127;|
|Tania Tsoneva, CFA, Dublin +353 1 568 0611;|
|Kurt E Forsgren, Boston (1) 617-530-8308;|
|Karl Nietvelt, Paris (33) 1-4420-6751;|
|Secondary Credit Analysts:||Betsy R Snyder, CFA, New York (1) 212-438-7811;|
|Julyana Yokota, Sao Paulo + 55 11 3039 9731;|
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: firstname.lastname@example.org.