oAfter a weak first-half 2021, intra-European air passenger traffic, especially to leisure destinations, picked up in the summer, and we expect it to continue its recovery, albeit from very low levels in 2020.

oRyanair benefits from these demand trends given its intra-European route network and exposure to leisure travellers, and we expect its EBITDA and operating cash flow will turn positive in fiscal year ending March 31, 2022 (fiscal 2022).

oIn addition, we foresee much-improved financial results in fiscal 2023, translating into stronger credit ratios, although still well below pre-pandemic levels.

oWe are therefore revising our outlook to stable from negative and affirming our 'BBB' ratings on Ryanair Holdings PLC, Ryanair DAC, and the senior unsecured debt.

oThe stable outlook is based on an expected continued recovery in air traffic, allowing Ryanair to restore its credit ratios in line with the current ratings, and a markedly lower likelihood of a downgrade.

FRANKFURT (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.

Short-haul leisure travel is leading the traffic and revenue recovery and should accelerate in 2022.

After a sluggish first-half 2021, with air traffic (as measured in revenue passenger kilometers; RPK) in January-June weaker than our projections at a mere 22% of 2019 levels according to IATA data, demand rose in July and increased strongly in August and September, as vacationers again took to the skies. This coincided with a steady rise in vaccination rates and the EU's introduction of digital COVID-19 vaccination certificates, which made crossing borders smoother. Should this trend continue, S&P Global Ratings believes European air passenger traffic will recover to around 35% of the 2019 level, which is at the lower end of the 30%-50% range we forecast in February. Assuming no escalation of COVID-19-related restrictions or border closures, we forecast intra-European air traffic will further recover to 60%-75% of prepandemic levels in 2022 and 80%-90% in 2023, rising to 2019 levels only by 2024. We still expect short-haul leisure trips and visits to friends and family to buoy cross-Europe air passenger numbers. Ryanair benefits from these demand trends given its intra-European route network and exposure to leisure travelers.

Ryanair's operations will likely exceed our European air traffic forecast but at the expense of yields and profitability.

Eased travel restrictions and Ryanair's load factor active/yield passive recovery strategy (which means that it cuts fares as much as necessary to stimulate ticket sales) led to a surge in passenger volumes during July-October and strong customer pre-bookings for the Christmas break. Consequently, the airline now expects to fly more than 100 million passengers in fiscal 2022, compared with close to 150 million in fiscal 2020, thereby raising its previous guidance of 90 million-100 million. In fiscal 2023, passenger numbers will recover to above the pre-pandemic level, reaching 165 million, according to management, underpinned by market-share gains from competitors, which either cut capacities or ceased to fly. While we consider the competitive landscape to be generally supportive for Ryanair's growth, we believe the air traffic recovery ultimately hinges on how vaccination progresses and mobility restrictions evolve, so the way forward is prone to uncertainties. Accordingly, in our base-case scenario, we assume that the airline will fly 95 million-100 million passengers in fiscal 2022, expanding gradually to reach the pre-COVID volume of 150 million only in fiscal 2024.

Ryanair's EBITDA recovery lags our previous base case, but strong cash inflow from ticket sales will help it cut adjusted debt.

After incurring a EUR170 million reported EBITDA loss in the first quarter of fiscal 2022, Ryanair's EBITDA turned to positive EUR285 million for the first half, fueled by a spike in demand and cost-savings measures. Should this trend continue, we expect EBITDA for the full year to reach up to EUR500 million, which is below our February 2021 forecast of EUR800 million because of sluggish yields. That said, the strong customer pre-bookings will boost operating cash flows to a minimum of EUR1.5 billion, allowing Ryanair to generate excess cash flows after capital expenditures (capex) and reduce adjusted debt to EUR1.7 billion-EUR1.8 billion as of March 31, 2022, from EUR2.35 billion a year earlier.

Uninterrupted recovery of demand for vacations and visiting friends and relatives will help restore yields and contribute to the airline's financial recovery in fiscal 2023.

We anticipate that Ryanair's reported EBITDA will rebound to up to EUR1.2 billion in fiscal 2023, further improving toward the pre-pandemic level of EUR1.9 billion in fiscal 2024. However, uncertainty about the interplay between yields development, swings in oil prices, and potential inflationary pressure on consumer sentiment is only partly captured in our EBITDA forecasts and may exert additional pressure. According to our base-case scenario, Ryanair's S&P Global Ratings-adjusted funds from operations (FFO) to debt will rebound to close to 25% in fiscal 2022 and subsequently to at least 35% in fiscal 2023, which is commensurate with our rating threshold. Our forecast considers that the airline's large, committed orders for new planes, would likely result in a free operating cash flow deficit and accumulation of debt when capex peaks in fiscal 2023.

Ryanair's large order for new aircraft will reduce its fleet's running cost over time but also delay balance-sheet deleveraging.

On Sept. 30, 2021, Ryanair's fleet consisted of 438 Boeing 737 and 29 Airbus A320 aircraft, and the airline had 210 Boeing 737 MAX on order. The new planes are intended to accelerate growth, improve operating efficiency, and reduce the environmental impact. Ryanair's fleet expansion plan stands out from its competitors' (with many peers implementing structural capacity cuts) and should further lower the airline's industry-leading operating costs per passenger, widening the cost gap between Ryanair and peers over the medium term. That said, the new orders translate into significant capital spending, which will peak at EUR2.3 billion in fiscal 2023 before reducing to EUR2.0 billion in fiscal 2024 and decreasing gradually thereafter. This will delay Ryanair's deleveraging.

We continue to view Ryanair as one of the financially strongest airlines in the industry and therefore one of the best placed to recover from the downturn.

This is underpinned by Ryanair's EUR4.2 billion in cash on hand as of Sept. 30, 2021, industry leading unit costs, and a 90%-owned fleet, close to 90% of which is unencumbered (with a book value of EUR7.6 billion). Ryanair demonstrates its proactive treasury management, uninterrupted access to capital markets, and ability to safeguard liquidity, demonstrated by its equity raising and several unsecured bond issuances, all completed in 2020-2021. We also acknowledge Ryanair's determination and flexibility to defer capital investments for new planes and to suspend share buybacks, with a focus on preserving cash and restoring its credit measures. We expect Ryanair to maintain ample liquidity headroom for unforeseen setbacks or operational headwinds, as the traffic recovery unfolds.

The stable outlook reflects our expectation that the air passenger traffic recovery will continue. Consequently, we expect Ryanair's EBITDA to stay positive in the second half of fiscal 2022, increasing but remaining below pre-pandemic levels in fiscal 2023. This should translate into supportive credit ratios, with adjusted FFO to debt of at least 25% in fiscal 2022 and improving to more than 35% in fiscal 2023. Furthermore, we consider a sustained solid liquidity position, a critical and stabilizing rating factor.

We would lower the rating if passenger demand falls short of our expectations of uninterrupted recovery in the remainder of 2021 and in 2022, hindering a turnaround in Ryanair's cash flow; and if we expect that adjusted FFO to debt won't recover to at least 35% by fiscal 2023.

This could occur if the resurgence of COVID-19 cases prompts renewed prolonged lockdowns and a deterioration of consumer confidence. In this scenario, we might conclude that the industry's risk profile and fundamentals have structurally weakened, leading us to revise down our assessment of Ryanair's business risk profile.

We could raise ratings if we expect adjusted FFO to debt to improve and be consistently above 50%. This would most likely occur with continued earnings recovery and debt reduction. We would expect this to be further underpinned by a prudent financial policy that prioritizes stronger ratios over shareholder remuneration.

Environmental, social, and governance (ESG) credit factors for this change in credit rating/outlook and/or CreditWatch status:

oHealth and safety

Related Criteria

oGeneral Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021

oGeneral Criteria: Group Rating Methodology, July 1, 2019

oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019

oCriteria | Corporates | General: Reflecting Subordination Risk In Corporate Issue Ratings, March 28, 2018

oCriteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014

oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013

oCriteria | Corporates | General: Corporate Methodology, Nov. 19, 2013

oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013

oGeneral Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012

oGeneral Criteria: Principles Of Credit Ratings, Feb. 16, 2011

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