oWe now believe that travel and other restrictions due to COVID-19 could result in global air passenger traffic dropping by about 50% in 2020, which is a steeper decline than we anticipated, with the recovery taking longer, possibly extending into 2023.
oThis revenue shortfall for Amadeus will only be partly offset by material cost-cutting and cash-conservation initiatives implemented by the company, so we forecast materially weaker credit metrics in 2020 and 2021 than in our previous base case.
oWe note that Amadeus has strengthened its liquidity position in the past couple of months, and we believe that the company is now better positioned from a liquidity and funding perspective to support a prolonged air traffic deterioration.
oWe are therefore lowering our ratings on
oThe negative outlook reflects our view that Amadeus' financial metrics will be under considerable pressure in the next few quarters in the current difficult operating environment. We could lower the ratings if we expected our four-year (including 2018, 2019, 2020, and 2021) weighted average S&P Global Ratings-adjusted leverage to exceed 3x or if we believed that the industry fundamentals or Amadeus' competitive position had weakened durably.
We note that, in the past couple of months, Amadeus was able to successfully issue a
The marked deterioration in the global macroeconomic outlook, and the likelihood that social distancing measures will continue for a sustained period, mean that a complete recovery of air traffic is highly uncertain. There has been much industry speculation regarding structural changes to the industry that might occur as a result of the COVID-19 pandemic:
oSocial distancing might require less crowded security checks, shorter queues, and changes to aircraft seating configurations, together with heightened health and sanitation measures.
oAirlines have dramatically deferred the purchase of new aircraft, and we will see reduced fleet sizes.
oIndustry consolidation is likely in the medium term as weaker airlines fail.
oThe mix of business and leisure travellers could change. More lucrative business travel might decline if employees get used to remote working and working habits evolve.
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.
The negative outlook reflects our view that Amadeus' leverage metrics will be under considerable pressure over the next few quarters given the impact of lockdown and distancing measures. It also reflects high uncertainty regarding the pace and degree of any business recovery.
A downgrade would be likely over the next few weeks if we saw a deterioration of our weighted average adjusted leverage above 3x. This could occur if the pandemic couldn't be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remained reluctant to book flights. We could also lower the rating if we assessed a weakening of Amadeus' business strength, led by either a lasting deterioration of industry fundamentals, for example, because demand levels did not recover to historical levels, or if Amadeus' competitive position became more vulnerable, for example, due to a deterioration of the creditworthiness of the airlines that form its client base.
We could revise the outlook to stable if we believed that demand conditions would normalize in line with our base case and that the recovery would be robust enough to enable Amadeus to partly restore its financial strength, such as adjusted leverage decreasing sustainably below 3x, alongside strong FOCF generation and an adequate liquidity position. We would expect this to be further underpinned by prudent capital spending and shareholder returns.
Environmental, social, and governance (ESG) factors relevant to the rating action:
oSocial; health and safety
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oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings,
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