British Airways has its debt rating cut to ‘junk’ status by Fitch

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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.

British Airways parent has its debt rating cut to 'Junk' status

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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Comments

  1. Funtime says:

    Credit rating agencies, much like weather forecasters, keep their jobs when factually incorrect so many times

    2007 anyone?

    • Kev 85 says:

      A weather forecast can’t be “factually” incorrect, given that it’s a forecast

    • Mr(s) Entitled says:

      Credit ratings are much worse than that. If you want to use 2007/8 as an example then the pertinent point is the gross conflict of interest on being paid to rate sub prime.

      It’s a lot like the audit industry. Both highly dubious and I would argue, or little worth.

      Those that understand credit trade it. They might even create it. They don’t rate it.

      • Spaghetti Town says:

        If the audit industry didn’t exist you would see FAR more Enron and Carillions around.

        • Mr(s) Entitled says:

          Or Tesco’s. Or Patisserie Valerie. Or many, many others.

          Often it’s not even fraud. It is just an inability to audit correctly. Maybe the concern is to protect the large fees gained from such accounts.

          • Spaghetti Town says:

            Perhaps i’m biased then as i work at a Big 4 accountant…

        • NMC Health, Finablr, Patisserie Valerie …..

        • Would we really see far more fraud? I suspect frauds take place regardless of the annual external audit. We just might not hear about as many of them.

          Many more frauds are self-reported as a result of internal audits and the stock exchange requirement to flag up material changes in finances or future prospects.

          The biggest downside to external auditing is that it is a once a year event albeit often dragged out over several months but it is concentrating on past events as of a chosen year end date.

          The annual financial statements are more often than not 9 months out of date by the time they are publically available at Companies House. A week is a long time in politics, it’s even longer in a financial perspective.

          Please don’t take the above as a sign of me wishing to see the end of the auditing profession, audits are necessary and still have a very important place and role to play.

    • Lord Flyer says:

      As far as I’m concerned I really hope BA do go bankrupt.
      The way they have handled the refund issue is diabolical.
      I know the staff will suffer but maybe out of the ashes
      another airline will emerge.

  2. Seppy says:

    So they are downgrading the BA rating (not IAGs) in the basis of orders made by IAG….

    • Spaghetti Town says:

      These aircraft will be on 20 maybe even 25 year finance deals.

  3. Alex W says:

    Why does BA have so much debt if they have at the same time huge cash reserves?

    • Opuada says:

      because no company pays all their debt at once, you service it over a long period of time. Their assets outweigh their debts significantly. anyway they are not highly leveraged which is where you want to be

    • TGLoyalty says:

      IAGs cash isn’t BA’s but also it’s like asking anyone why their mortgage is so high when they’ve got savings. You want a diversified portfolio of borrowing for different scenarios mortgages, credit cards, savings, investments, bank of mum and dad (IAG) etc

      You need cash to manage your day to day (month to month / year to year) operations so why pay back cheaper debt to end up having to take expensive short term debt when you’re desperate.

    • You can have both. You can see now why a big cash buffer is important, because no-one will give you cash when you really need it.

      The key point – I am guessing – is that IAG would never let BA fail unless there was absolutely no alternative. Technically BA can default on this debt and go into receivership and IAG can walk away unharmed. As this is legally possible, Fitch have to assume it will happen. In reality, IAG would plug in cash (as long as it had some).

      • IAG isn’t much without BA though and presumably BA account for most of its revenue? On the subject of IAG will the Air Europa takeover still happen?

        • IAG is in discussions with a small Spanish airline about effectively paying it to scale up and provide competition domestically. Still ticking along.

  4. Stu R says:

    Meanwhile, more flights cancelled today, only option to ‘refund’ easily is a credit voucher, and any recent workarounds by disabling JavaScript have been disabled. BA really are a bunch of tunnocks 🙄

    • Lady London says:

      I would like to see some of the shine taken out of BA’s ar$e – they’ve been mooning at us – for the dirty tricks they did, then did again on their website expressly to deny customers the refunds they were legally obliged to give them. Despite public reminders by the EC and the US DoT.

      A nice class action that for once doesn’t get settled out of court and imposes huge penalties that are a drag on profits for 3 years would cheer me up.

      • Are we absolutely positive that there was a method of applying for a refund online when BA cancelled a flight?

        I’m of the opinion that the functionality was, primarily, to enable people to request a voucher under the Book With Confidence measures they introduced, and introduced VERY quickly, all things considered

        • Lol, yes absolutely positive. Seen with my own eyes, as have many others.

          • That seems peculiar… prior to the pandemic, if BA cancelled your flight, why would you *need* to go online and request a refund? What else could have been the outcome?

    • See my post on the general chat thread about being texted by BA this evening and having a voucher thrust upon me!

    • My BA Holidays for May was cancelled on Tuesday and I received an automatic cash refund today. No need to ask

      • Even BA is scared of ATOL and what would happen if they didn’t pay out in cash within 14 days of cancellation on a holidays booking.

  5. Spaghetti Town says:

    Watch the film “the big short” (Brad Pitt, Christian Bale, Steve Carell) shows the caper these rating agencies can get up to.

    Sub prime mortgages anyone?

  6. Not sure that this is a big issue for BA long term, however it will cause it issues securing new credit. However, if you’re still invested in commercial bonds I would suggest you get out/limit your exposure as this Covid business is likely to cause major casualties which has not yet been reflected in the bond market as of yet. If you want bonds, as any balanced investor does, I suggest you move it all to government bonds (although pick your country wisely.)

    • Lady London says:

      I’ve just stopped talking to an investment company because this was their approach in the past and they seemed to have no understanding of what’s going on now and why their approach needs to change at least for a chunk of time now.

      Not that any of us knows what’s going to happen, but people who tick only compliance boxes and don’t seem to have any real ability to work things out on the own scare me.

      It helps to be old sometimes. You remember previous cycles.

  7. mr_jetlag says:

    ah Fitch, the “You have won second place in a beauty contest” of ratings agencies.

  8. ChrisBCN says:

    I find it hard to believe the 2023 date for recovery, or ‘years’ as Lufthansa said. Give it a year from now and travel will be pretty much back on trend. Even if it takes 18 months, that’s still recovery by end of 2021. Where on earth do they get 2023 from?

    • Well since nobody actually knows err on the side of caution, nothing to lose from playing down expectations (especially when you’re asking the government for money).

      • You are assuming countries throw open borders with no checks and no quarantine and that insurers start to cover CV. Both seem unlikely.

        • ChrisBCN says:

          A year from now I believe most borders will be open as traditional (there might be some hold outs in poorer countries that got hit the latest, like much of Africa).

          Most of the economy would have rebounded and people will travel like before, with some business travel growing slower, long term increase in leisure travel continuing.

          • Alexander says:

            Why are you so sure that the many people who have / will lose their jobs will get another one within a year? It will likely take several years for economic activity to return to previous levels, it’s not an instantaneous switch.

          • Callum says:

            Based on what?

            Don’t tell me you’re dismissing calculated forecasts by the people actually directly involved because you have a random feeling that everything will be fine in a year!?

          • ChrisBCN says:

            Random feeling? No. Take a look at as a rounded a view as you can my friend.

    • Ever tried restarting a blast furnace?

      No one knows where we’ll end up but you might draw some pessimistic assumptions as
      – Global travel restrictions until Vaccine / eradication causing significant shutdown of airlines measured in years not months
      – As a result of extended restrictions mass unemployment meaning little disposable income.
      – Large scale debt defaults both personal and corporate resulting in credit supply issues and higher interest rates / run on government bonds.

      We’ve entered this with the highest peacetime debt to GDP ever as a world. If the result of this is higher interest rates (and you can make a rational argument for inflation if we continue to “print” money) then we are stuffed. The only option will be to inflate global currencies to devalue existing debt but although that sounds like an easy way out inflation is the enemy of economic growth in all but the very short term.

      I actually think banks and stockbrokers are suffering from a lack of experience prior to the last 20 years. The Dow closed today at the same price as a non corona January 2019. I find that impossible to believe. They’re certainly seeing risk very differently to a lot of other people.

      There are likely significant quantities of companies in leading global indices that will have a zero value reasonably soon.

      • ChrisBCN says:

        I’m not sure where the blast furnace comes in!

        – Borders can be opened very quickly (in days) so not a concern.
        – Airlines can take several weeks to start up (getting staff back to work and retrained, bringing airplanes back etc..) but certainly not more than a couple of months
        – traditionally there is a V shape to the economy around an event like this, so a fast recovery means disposable income will soon come back (admittedly this is the biggest unknown, there are no guarantees here)

        I don’t see much that means things wouldn’t be back to normal in 12-18 months, and certainly well before 2023!

        • I think you have misunderstood what I was trying to articulate, the blast furnace was just a analogy – the longer you close something down, the harder it is to bring it back the way it was before.

          You can physically open a border very quickly yes, pretty much instantly if you want but if doing so means you open your population and other populations up to the uncontrolled spread of SARS2 then you might think twice before doing so. Likewise airlines, it’s not a physical problem of getting staff to turn up and put fuel in them but rather where are they going to be allowed to fly? Who is going to be allowed to fly? Who will be able to afford to fly? and do they even own any planes or slots any more or did they go bankrupt?

          I’m also not sure where this idea of a V shaped recovery has come from, there is no historical precedence for this at all.

          The reality right now is that there are already people and businesses defaulting on debt payments, the BofE is embarking on a process of creating money to pay people to sit at home producing nothing and there is no road map for returning to normality.

          What I will say is this, if we get away with 3 months of 9 million (and counting) people furloughed then we should do it every year. Would be fantastic for quality of life.

          • ChrisBCN says:

            There’s more historical precedence for a V shaped recession than any other. It’s debatable if we will see a V or another type of course, we won’t know until after it happens.

          • Callum says:

            ChrisBCN – And there is the flaw in your entire argument. This is not remotely similar to any recession that the world has EVER faced. The immediate impact seems worse than the Great Depression and while I’m not an economics expert, I’m fairly certain that was incredibly far from being a V shape recovery.

          • Erico1875 says:

            I would be happy with that, but only with freedom of movement.

          • ChrisBCN says:

            In what way do you think the shape of this recession won’t be similar to other recessions?

            I seem to remember receiving disbelief some months ago when I said people wouldn’t be travelling for a while!

          • The Savage Squirrel says:

            ChrisBCN the weekly new jobless claims in the USA give an example of why you can throw away history.

            The weekly claims (the rate of jobs loss) are 10x the worst level of the Great Depression, and 20x anything we’ve seen in the living memory of working people – even 2008 or the late 70s. In economic terms this is a unique event. The travel restrictions are also quite a unique aspect – 9/11 seemed cataclysmic and shut down US airspace, but reaal travel disruption between commercial centres only lasted around 7 days. Just compare that to now…

            Does this mean the recovery will be faster/slower than previous recoveries? I’ve no idea and neither does anyone else if they’re honest. The joy of Covid19 being fought off may produce a surprisingly quick recovery due to the psychological aspects of returned freedom or they may not, but it’s certain that this situation is unique – previous events will provide only a very rough guide to what comes in future.

          • ChrisBCN says:

            Savage squirrel – I won’t deny this is going to be an incredibly deep recession, I doubt anyone would dispute that!

            But – why should the shape of this be different to previous recessions? I’m sticking by my 12-18 month timeframe for recovery of air travel!

  9. It’s all good. The Fed has announced they will buy recently downgraded debt, so more central banks will follow suit. So these poorly managed, low margin, poor customer service, fat cat sponsored, share buy back companies will survive. Hooray. The rich get richer and the poor get poorer. Hyperinflation and social instability to follow. Ho hum. Thank god for my 10 square meter garden to grow my food in

  10. southlondonphil says:

    Fitch’s commentary on BA’s Rating is here:

    https://www.fitchratings.com/research/corporate-finance/fitch-downgrades-british-airways-to-bb-maintains-negative-outlook-09-04-2020

    It’s slightly more detailed than the Bloomberg report and provides some insight into their thinking re: expected capacity and load factors going forward. The point about 2023 is that Fitch forecasts that it will take until then for BA to be operating the same level of flight capacity (measured in seat-kilometres) as it did at the end of 2019

  11. When health returns, the natural instinct is to tread carefully, having experienced the result of such a pandemic. People are NOT going to rush back to “normality” they will tread carefully – and financially, very very carefully. Disposable income will be a novelty anyway due to loss of income and jobs. Many will save for the next rainy day.
    Will airlines try to suck in leisure travellers by slashing fares? I doubt it very much. It still costs $x per mile to keep a plane functional. Yes there will be some comparatively good deals I’m certain of that but there wont be giveaway fares by any means. It doesn’t make financial survival sense.
    Finally watch out for loyalty schemes; they may well be suspended or vastly devalued to save money. That makes financial sense.
    Personally, we will resume our travelling as soon as we can.

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