British Airways has become the first major European airline to have its debt rating cut to ‘junk’.
Fitch, the ratings agency, cut BA’s rating from BBB- to BB+ today.
(For clarity, this downgrade is specifically for British Airways and not for its parent, International Consolidated Airlines Group. This is because the debt which has been downgraded is ringfenced against the BA operation.)
You can see a summary of Fitch’s reasoning here.
Fitch believes that British Airways will not be operating a schedule as large as it did in 2019 until 2023, and that even by 2023 aircraft will be emptier than they were in 2019.
To be precise, it is expecting BA to operate 22% fewer seats in 2021 than it did in 2019, and 5% fewer in 2022. Even though it will be operating a comparable schedule in 2023, Fitch is still assuming that it sells fewer seats per flight (80% vs 84%) than it did in 2019. It is also expecting a single-digit decline in average ticket prices.
The airline is still expected to deliver positive operating cash flow in 2021 but this will not cover its debt and capital expenditure requirements. 90% of IAG fuel requirements are hedged for 2020 so there is minimal benefit from the current low oil price.
As well as cutting the rating to ‘junk’, British Airways debt has been put on ‘negative outlook’. This means that Fitch believes that it is more likely to be downgraded further rather than given back its investment grade rating.
Part of the reason for the negative outlook, apart from uncertainty over the speed of demand recovery, is the current, expensive, aircraft order book for British Airways.
Last year, it placed a firm order with Boeing for 18 x Boeing 777-9 aircraft (pictured below). These have a list price – admittedly before a substantial discount which BA will have negotiated – of $442 million each.
As of February 2019, British Airways was also committed to 12 x Boeing 787s, four 777-300ERs and 18 x Airbus A350, albeit some of these are already delivered.
It is worth noting that S&P and Moody’s still retain an investment grade credit rating on British Airways, albeit with a negative outlook. This is important as many funds will be forced to sell their BA debt when two of the three rating agencies move it to ‘junk’ status.
One upside is that Fitch does believe that British Airways has enough liquidity to fund itself during Quarter 2, with recovery beginning from July. It believes that the culture of cost-cutting and its strong position on valuable North American routes will provide strong support.
You can read more on the Fitch website here.
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