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Federal Aid For U.S. Airlines Provides Liquidity Amid A Grim Revenue Outlook; Ratings On CreditWatch Negative

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Federal Aid For U.S. Airlines Provides Liquidity Amid A Grim Revenue Outlook; Ratings On CreditWatch Negative

The series of agreements announced by the Treasury Department and various U.S. airlines to provide grants and loans to keep employees on the payroll through at least Sept. 30, 2020, provides welcome and much-needed near-term liquidity. The terms were less generous than expected, comprising 70% grants and 30% loans, even though this funding comes from the $25 billion allocated under a provision in the legislation to passenger airlines as grants (there is another $25 billion in potential loans, though the availability is subject to more conditions). Still, the amounts are material. For example, American Airlines Group Inc., parent of the world's largest airline, said that it would receive $5.8 billion, of which $1.7 billion is a senior unsecured 10-year term loan. The $5.8 billion compares with $7.3 billion of liquidity (cash and committed borrowing capacity) the company disclosed as of March 9, 2020. American disclosed on April 14 that it also intends to apply for a secured loan under the second $25 billion part of the aid package, estimating that it may be able to borrow $4.75 billion.

The aid comes amid a worsening outlook for global air traffic and revenues. The International Air Transport Association (IATA), a global trade group, on April 14 increased its estimate of this year's decline in air traffic and revenues to 55% globally, compared with a 38% decline forecast only three weeks earlier. IATA's estimate for North America was a 36% decline, compared with a previous 27% drop. This reflected a deeper-than-previously-expected global recession and the continuing spread of COVID-19 and measures to contain it. IATA anticipates domestic markets will open in the third quarter, with a much longer recovery on international routes. S&P Global Ratings believes the relatively lesser decline in North America is mostly a function of the larger proportion of domestic traffic and the related necessity of air travel in large, geographically spread-out countries.

These revenue declines are translating into heavy cash outflow for U.S. airlines. Airlines For America, a U.S. industry trade group, welcomed the federal aid but noted that its members collectively were consuming an estimated $10 billion-$12 billion a month. This alarming total, which could imply that the initial $25 billion of grants and loans would last less than three months, should be considered with caveats. First, the cash burn refers to current conditions, likely to be the worst period in the crisis, as airlines process refunds to passengers for canceled flights. The refunds will slow as an increasing proportion of total trips booked but not yet flown are settled. Second, remaining capital expenditure commitments are also rapidly trending downwards. Still, the estimate shows the scale of the challenge facing U.S. airlines.

Our ratings on nine U.S. airlines, all lowered by one or two notches since the beginning of the COVID-19 pandemic, remain on CreditWatch with negative implications (see Table). Upcoming first-quarter earnings announcements and updated outlooks from the airlines will be helpful in judging their liquidity outlook and expectations for revenues and cash flow. Still, given the high degree of uncertainty and downside risk, we may not be in a position to resolve the CreditWatch reviews after the earnings announcements.

U.S. Airlines Rated By S&P Global Ratings
Airline Rating

Alaska Air Group Inc.

BB/Watch Neg/--

Allegiant Travel Co.

B+/Watch Neg/--

American Airlines Group Inc.

B/Watch Neg/--

Delta Air Lines Inc.

BB/Watch Neg/--

Hawaiian Holdings Inc.

B/Watch Neg/--

JetBlue Airways Corp.

BB-/Watch Neg/--

Southwest Airlines Co.

BBB/Watch Neg/--

Spirit Airlines Inc.

B+/Watch Neg/--

United Airlines Holdings Inc.

BB-/Watch Neg/--
As of April 15, 2020

*COVID-19 Updated Impact Assessment, April 14, 2020. https://www.iata.org/en/iata-repository/publications/economic-reports/covid-fourth-impact-assessment/

This report does not constitute a rating action.

Primary Credit Analyst:Philip A Baggaley, CFA, New York (1) 212-438-7683;
philip.baggaley@spglobal.com
Secondary Contact:Betsy R Snyder, CFA, New York (1) 212-438-7811;
betsy.snyder@spglobal.com

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