oSince November 2020, governments across Europe have found it more difficult to control the pandemic amid rising cases and new COVID-19 variants, prompting a new round of lockdowns and tighter travel restrictions that continue to weigh on passenger confidence and demand.
oVaccine approvals have created a path to more normal social and economic activity, but rollouts across the EU are slower than expected, leading us to assume a weaker rebound in European air traffic than we previously forecast--particularly in the critical summer months--leading International Consolidated Airlines Group S.A. (IAG) to burn cash and accumulate debt in 2021.
oAssuming widespread immunization across Europe and most other developed economies by the end of third-quarter 2021, we expect IAG's operating cash flow (OCF) will turn positive and credit metrics will improve to rating-consistent levels in 2022, which is a few quarters later than our previous forecast, although financial leeway for operational setbacks under our current base case and the rating has further diminished.
oWe are affirming our 'BB' ratings on IAG and its existing unsecured debt and assigning our 'BB' issue and '3' recovery ratings to the company's proposed about EUR500 million senior unsecured notes due 2025 and about EUR500 million senior unsecured notes due 2029.
oThe negative outlook reflects our view that the group's financial metrics will remain under considerable pressure in the next few quarters and that there is high uncertainty regarding the pandemic and its effects on air traffic demand, as well as IAG's financial position and liquidity.
FRANKFURT (S&P Global Ratings) --S&P Global Ratings today took the rating actions listed above.
Pandemic-related lockdown measures and travel restrictions, as well the emergence of new virus variants, continue to weigh on IAG's prospects.
The approval of several vaccines has created a path to more normal social and economic activity, but complex and slow rollouts across the EU will burden air traffic recovery while new variants appear more transmissible and have led to concerns over vaccine efficacy. There remains considerable uncertainty regarding the outlook for air travel. That said, we now believe that European air passenger traffic (measured by revenue passenger kilometers; RPK) and revenue in 2021 will be 30%-50% of 2019 levels. Our estimate for global traffic and revenue in 2021 is unchanged at 40%-60% of 2019 levels. We maintain our expectations for 2022 that traffic will reach 70%-80% of 2019 levels, with a recovery to 2019 levels by 2024 (for more information, see "Europe's 2021 Air Passenger Traffic Likely To Stall At 30%-50% Of 2019 Level," published Feb. 18, 2021, on RatingsDirect). This estimate incorporates our assumptions that vaccine production will ramp up, rollouts will gather pace, and widespread immunization across Europe and most other developed economies will be achieved by the end of third-quarter 2021.
We expect 2021 to be another very difficult year for IAG.
According to our base-case, IAG's 2021 revenue generation will recover slower than in our November 2020 forecast. Ongoing bumpy traffic conditions are likely in the coming months, depending on local travel constraints, including quarantine rules or mandatory testing for COVID-19, particularly in IAG's home markets. Furthermore, we anticipate a delayed and subdued recovery of business and corporate traffic, which typically is one of IAG's most profitable segments. Overall, we estimate that this year's passenger numbers for the group will rebound to about 40% of 2019 levels. This includes only up to 20% air traffic recovery in the first quarter because of continuing extensive lockdowns and travel restrictions, and our expectation of only a gradual recovery in the spring, translating to our overall estimate of up to 30% of pre-pandemic traffic volumes in first-half 2021. This compares with IAG's current passenger capacity plans in first-quarter 2021 for about 20% of 2019 capacity. We now anticipate a likely delay in a more meaningful recovery to after the crucial summer season and an acceleration in traffic more toward year-end. However, our forecast is subject to significant uncertainties and, most importantly, it hinges on vaccination progress.
We expect IAG will report a continuing substantial OCF (after lease payments) deficit and accumulate new debt in 2021, while its credit metrics remain under considerable pressure.
The group executed significant restructuring measures during 2020, among others, to downscale the workforce and aircraft fleet to expected capacity levels and reduce payments to suppliers. It should benefit from a lower fuel bill, which S&P Global Ratings forecasts at up to EUR2.2 billion (versus last year's EUR3.7 billion, including EUR1.7 billion of losses from ineffective fuel hedges). That said, these factors will be insufficient to counterbalance only gradual revenue recovery in 2021 to 50%-55% below 2019 levels, according to our base case. We estimate that IAG's adjusted EBITDA will turn positive this year to EUR0.7 billion-EUR1.0 billion from negative EUR4.47 billion in 2020, but it will be below our November 2020 forecast and far-off the strong EUR5.4 billion in 2019. This, aggravated by (i) working capital needs, which could be material because of potential ongoing ticket refunds and slow forward bookings (particularly in first-half 2021); (ii) the outstanding cash settlement of ineffective hedge losses (estimated by S&P Global Ratings at EUR500 million in 2021, after EUR1.2 billion paid by IAG in 2020); and (iii) cash outflows for restructuring, will result in continually negative OCF (after lease payments) and buildup of financial leverage in 2021. We forecast IAG's S&P Global Ratings-adjusted debt (including an EUR830 million upfront payment from American Express, which we view akin to factoring) will increase to EUR12.5 billion-EUR12.8 billion by year-end 2021 from EUR10.6 billion in 2020.
Financial flexibility for operational glitches under our base-case scenario and the 'BB' rating has diminished in the context of expected subdued air traffic.
Nevertheless, IAG's efforts to contain capital spending and safeguard cash should partly offset the slower rebound in passenger volumes, contribute to the group's financial recovery and help to preserve the rating. The accumulation of new debt will be hindered to some extent by deferrals or cuts to capital expenditure (capex) for new planes and other discretionary projects. IAG slashed its capex guidance further to EUR1.7 billion in 2021, from the previously communicated EUR1.9 billion and pre-pandemic target of EUR4.0 billion-EUR4.5 billion. Trimmed capex and a good grip on working capital control (more specifically, with regards to liabilities from deferred revenue on ticket sales and collection of receivables) meant new debt was close to EUR2 billion lower than we expected in 2020. Furthermore, we envisage passenger traffic and IAG's operating performance will start to improve meaningfully from late third-quarter 2021--after the crucial summer season--and strengthen in 2022, with adjusted EBITDA reaching up to EUR3.0 billion (below our November 2020 forecast of EUR3.6 billion-EUR3.7 billion). We assume that widespread immunization across Europe and most other developed economies will be achieved by the end of third-quarter 2021 and help to lessen or lift travel restrictions and restore passenger confidence in flying. Our revised base case supports our view that adjusted funds from operations (FFO) to debt will rebound to the rating-commensurate level of more than 12% only in 2022, which is about one year later than in our November 2020 review. That said, our forecast is subject to significant uncertainties and highly dependent on uninterrupted vaccine rollouts.
IAG started 2020 with more financial leeway and a larger liquidity buffer than that of many peers and has maintained strong liquidity so far.
We continue to view IAG as among the financially strongest groups in the airline industry, with total liquidity of EUR6.9 billion at Dec. 31, 2020, comprising EUR5.9 billion of cash and deposits and close to EUR1 billion of undrawn committed general and aircraft facilities maturing beyond 12 months, as adjusted by S&P Global Ratings. Liquidity received another boost from the £2.0 billion (EUR2.2 billion) five-year Export Development Guarantee term-loan underwritten by a syndicate of banks and partially guaranteed by U.K. Export Finance (UKEF; fully drawn in March 2021) to a pro-forma total liquidity position of about EUR9.1 billion. IAG demonstrates proactive treasury management, continued access to debt markets, and an ability to safeguard liquidity, underpinned by its October 2020 equity raise with EUR2.67 billion in net proceeds. We also acknowledge IAG's determination and flexibility to defer capex for new planes and suspend shareholder remuneration, with a focus on preserving cash and restoring its credit metrics.
The negative outlook reflects our view that the group's financial metrics will remain under considerable pressure in the next few quarters and that there is high uncertainty regarding the pandemic and its effects on air traffic demand, as well as IAG's financial position and liquidity.
We would lower the rating if passenger demand recovery is further delayed or appears to be structurally weaker than expected, placing additional pressure on IAG's credit metrics; and if we expect that adjusted FFO to debt won't recover to at least 12% by 2022. This could occur if the pandemic cannot be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remain reluctant to book flights.
Although we currently don't see liquidity as a near-term risk, we would lower the rating if air traffic does not recover in line with our expectations, external funding becomes unavailable for IAG, and management's proactive efforts to adjust operating costs and capex are insufficient to preserve at least adequate liquidity, such that sources exceed uses by more than 1.2x in the coming 12 months.
We could also lower the rating if industry fundamentals weaken significantly for a prolonged period, impairing IAG's competitive position and profitability.
To revise the outlook to stable, we would need to be more certain that demand is normalizing and the recovery is robust enough to enable IAG to partly restore its financial strength, such that adjusted FFO to debt increases sustainably to at least 12%, alongside a stable liquidity position. Prudent capital spending and shareholder returns are also necessary for a return to a stable outlook.
Related Criteria
oGeneral Criteria: Group Rating Methodology, July 1, 2019
oCriteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
oCriteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
oCriteria | Corporates | Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016
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
oGeneral Criteria: Methodology: Industry Risk, Nov. 19, 2013
oCriteria | Corporates | General: Corporate Methodology, 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
Related Research
oEurope's 2021 Air Passenger Traffic Likely To Stall At 30%-50% Of 2019 Level, Feb. 18, 2021
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