oeasyJet is taking measures to contain costs, adjust capacity, and preserve cash to counterbalance the plunge in revenue, but these will be insufficient to offset the effects of the COVID-19 pandemic on its credit metrics in fiscal year (FY) 2020 (ending Sept. 30, 2020).
oUnder our revised base case, we expect easyJet will report a substantial operating cash flow (OCF) deficit in FY2020, due to our revised view of up to 70% decline in global air passenger traffic from COVID-19, steeper than we expected under our previous base case.
oHowever, assuming a vaccine or effective treatment for COVID-19 becomes widely available in the second half of 2021 and restores passenger confidence in flying, we expect easyJet's OCF will turn positive in FY2021.
oWe are affirming our 'BBB-' ratings on easyJet and its debt instruments and removing them from CreditWatch, where we placed them with negative implications on March 20, 2020.
oThe negative outlook reflects our view that easyJet's financial metrics will be under considerable pressure in the next few quarters, as well as the high uncertainty regarding the pandemic and economic recession and their impact on air traffic demand and the improvement of easyJet's financial position.
LONDON (S&P Global Ratings) -- S&P Global Ratings today took the rating actions listed above.
The airline is cutting its capacity and other operating costs, and benefitting from lower fuel expenses. However, we don't think these will be sufficient to counterbalance the collapse in revenue in FY2020. easyJet's passenger traffic has begun to recover after 11 weeks of grounding, albeit from a very low level of just over two million passengers in July.
Our base case now assumes that global air passenger traffic will be 60%-70% lower in 2020 than in 2019. This represents a steeper decline than the 50%-55% we estimated in our previous base case. In our view, there will be only a slow and bumpy recovery continuing into 2021, depending on local travel constraints, including quarantine rules or mandatory testing for COVID-19, particularly in easyJet's home market in the U.K. That said, easyJet focuses on European short-haul leisure travel, which should experience a faster recovery relative to airline peers with long-haul international exposure.
Although easyJet is cutting costs, executing operating-efficiency initiatives, and drastically reducing capacity, we think these factors will be insufficient to counterbalance the revenue collapse this year. easyJet has launched a major restructuring program that involves rightsizing the airline and reducing personnel by up to 30%. The airline has already furloughed its staff through government employee support schemes. Although the airline's steep cut in capacity will reduce its fuel bill, the demand plunge has also led to an overhedged fuel volume position this year. Combined with the sharp decline in fuel prices, easyJet therefore faces fuel hedging losses in FY2020, which we treat as an operating expense that in turn depresses EBITDA. We forecast that easyJet's S&P Global Ratings-adjusted EBITDA for FY2020 will be negative by about £500 million-£600 million, compared with its positive adjusted EBITDA of £984 million in FY2019.
The situation is likely to be aggravated by high working capital needs because of continued ticket refunds and sluggish bookings. As a result, operating cash flows are forecast to be significantly negative in FY2020 and debt will accumulate. We forecast adjusted debt will more than double, to £1.4 billion-£1.5 billion, by the end of FY2020 (as compared with about £480 million in FY2019) and remain elevated in FY2021.
The airline has reduced expected capex spend by about £1 billion over FY2021-FY2023, including its deferred delivery of 24 aircraft from Airbus beyond 2025, and reduced all non-critical expenditure. Combined with further flexibility to exit 24 aircraft operating leases, easyJet expects to reduce its fleet size to around 302 aircraft by Dec. 31, 2021, compared with 337 aircraft on March 31, 2020.
easyJet has raised over £2.4 billion additional financing since the pandemic began. This includes the £419 million equity placement, £600 million from the Bank of England's COVID Corporate Financing Facility (CCFF), £400 million equivalent secured term loans, £608 million equivalent sales and lease back proceeds from 23 aircraft, and £410 million full drawings in committed revolving credit facilities (RCFs). The airline has demonstrated its continued access to external funding, which is an important factor that supports our strong liquidity assessment.
We assume a strong rebound in air traffic in the second half of 2021, underpinned by our current view that a vaccine or effective treatment for COVID-19 will become widely available and restore passenger confidence in flying. That said, we still expect 2021 global air passenger traffic to be 30%-40% below the 2019 level, and we foresee a recovery to pre-COVID-19 levels only by 2024. We anticipate that easyJet's earnings will rebound considerably in FY2021, albeit at a slower pace than we projected in May, because of our revised air traffic assumptions. We now forecast adjusted EBITDA will rise to £400 million-£500 million and support adjusted funds from operations (FFO) to debt recovering to about 20%-30% in FY2021, but stay far below the 2019 level of 179%. That said, S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the pandemic, and how the resulting recessionary trends and impact on passenger volumes will affect our forecasts.
oHealth and safety
The negative outlook reflects our view that easyJet's financial metrics will remain under considerable pressure in the next few quarters. In addition, there is high uncertainty regarding the pandemic and economic recession and their impact on air traffic demand and the improvement of easyJet's financial position.
We would lower the rating if the recovery of passenger demand is delayed or appears to be structurally weaker than expected, placing further pressure on easyJet's credit metrics, and if we expect that weighted average adjusted FFO to debt won't recover to at least 23%. This could occur if the pandemic cannot be contained, resulting in prolonged lockdowns and travel restrictions, or if passengers remain reluctant to book flights.
We could also lower the rating if industry fundamentals weaken significantly and for a sustained period, impairing easyJet's competitive position and profitability.
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. Moreover, if external funding becomes unavailable for easyJet and management's proactive efforts to adjust operating costs and capital investments are insufficient to preserve at least adequate liquidity, such that sources of liquidity exceed uses by more than 1.2x in the coming 12 months, we could lower the rating.
To revise the outlook to stable, we would need to be confident that demand is normalizing and the recovery is robust enough to enable easyJet to partly restore its financial strength, such that weighted average adjusted FFO to debt increases sustainably to at least 23%, alongside a stable liquidity position. We would expect this to be further underpinned by prudent capital spending and shareholder returns.
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
oCriteria | Corporates | Industrials: Key Credit Factors For The Transportation Cyclical Industry, Feb. 12, 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
oSix European Airlines Downgraded As COVID-19 Impact Erodes Credit Metrics; Majority Still On Watch Negative, May 20, 2020
oRatings On European Airlines Lowered And Placed On CreditWatch Negative Due To Coronavirus Outbreak, March 20, 2020
S&P Global Ratings is the world's leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide.
S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spglobal.com/ratings.