Moody’s downgrades IAG and BA debt as Willie Walsh declares he likes state aid

Willie Walsh stood down as CEO of IAG, the British Airways parent company, yesterday. He had delayed his retirement in order to steer the airline through coronavirus. As of today, Luis Gallego – formerly CEO of Iberia – is in charge.

Moody’s downgrades IAG and BA debt

As an unwelcome leaving gift, credit rating agency Moody’s downgraded the debt of both British Airways plc and International Consolidated Airlines Group SA.

British Airways has been downgraded from Ba1 to Ba2. (Link may not work on mobile.)

Moody’s continues to be concerned by:

BA’s disproportionate exposure to transatlantic and corporate travel

An increasing debt burden with little opportunity to pay it down over the next 2-3 years

‘Execution risks’ in the restructuring and cost reduction programmes

Moody’s believes that BA can survive for approximately 450 days based on current travel patterns and liquidity which is a weaker position than its peers.

IAG has had an identical debt downgrade from Ba1 to Ba2 (again, link may not work on mobile). IAG’s survival is predicted at 500 days, slightly longer than British Airways.

What did Willie Walsh say to CNN about state aid?

Before he departed IAG, Walsh gave an interview to CNN. In this he makes a remarkable (by Walsh standards) turnaround on his views on state aid for airlines.

Many in the industry believe that British Airways has been deliberately holding off requests for state aid until Virgin Atlantic has gone bankrupt. Once that had happened, it was expected to follow the path of Lufthansa and Air France KLM, both of whom have received €10 billion bailouts.

You may or may not believe this. It is worth noting that it was just days after Virgin Atlantic secured its medium term future via a refinancing that Walsh was on TV supporting state aid.

Here is a transcript sourced from London Air Travel. I have not been able to verify this independently but I respect the reputation of the original source enough to use it. (EDIT: a reader has posted a link to a YouTube video of the interview in the comments below)

Willie Walsh was talking to Richard Quest:

I have changed my views a little bit because as you know I’m strongly opposed to state aid, and I’ve always defined state aid or a bailout as something to help a company or in this case an airline that has failed or is failing. I think in this situation, many of the airlines that have received state aid were in good financial shape before this crisis and deserve to be helped.

The thing that we have to focus on, Richard, is a lot of this state aid has come in the form of debt. So the balance sheet of all of these airlines will be severely stressed as a result of this.

Now we’ve taken the view that before you can ask for help, you’ve got to help yourself, you’ve got to do everything you can within your own power to as best you can address the challenges you face and that’s what we’ve been doing. So, I don’t believe we need state aid, I can’t rule it out so obviously I’m finishing up next Tuesday. My successor Luis Gallego will have to make these decisions going forward.

What you need to understand with Willie Walsh is that he is used to planting the seed to steer opinion. It was not a coincidence that, in an analyst call a few months ago, he spoke positively about Mastercard and his budding relationship with the CEO. Fast forward a few weeks and American Express paid £750 million in advance to guarantee an extension of its British Airways credit card contract.

IAG is, of course, already taking state aid at subsidiary level via soft loans or loan guarantees. €1 billion has been taken by Iberia and Vueling from the Spanish Government and the £300 million taken by BA from the UK Government.

Walsh isn’t stupid. He sees Lufthansa and Air France KLM with €10 billion in fresh equity and soft loans in their back pockets, ready to lead the charge as aviation begins to pick up.

At IAG, British Airways is seeing – according to reports I hear – disastrous September bookings. Pilots are already drawing up plans for how a second wave of redundancies would be implemented, and other areas of the business are likely to be hit in the same way. Virgin Atlantic has now lost almost 50% of its employees this year, whilst British Airways is only at 25%.

Over at Aer Lingus, there are rumours in the press that the bases at Shannon and Cork may close entirely. We have already covered the plans to move part of the long-haul A321LR fleet to the UK to run direct UK-US flights from regional airports. It wouldn’t surprise me if the bulk of the 14-strong A321LR fleet ends up operating from the UK.

I’m not on top of the situation with Iberia and Vueling. Given the sharp rise in coronavirus cases in Spain, it is difficult to imagine the situation there as anything but desperate.

Whilst the IAG rights issue will inject €2.75 billion into the balance sheet in the coming weeks, it is unlikely to be enough.

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