oGovernments across Europe are finding it more difficult to control the pandemic, as numerous new virus variants have emerged which appear more transmissible and have led to concerns over vaccine efficacy. This has prompted a new round of lockdowns and tighter travel restrictions and continues to weigh on passenger demand and confidence.

oAs such, we expect the rebound of European air traffic to be weaker than we previously foresaw, particularly in the critical summer months this year, fuelling further cash burn and debt accumulation for easyJet PLC.

oThe rollout of several vaccines has created an encouraging path back to more normal levels of social and economic activity. Assuming widespread immunization across Europe happens by third-quarter-end of calendar 2021, we expect easyJet's operating cash flow (OCF) will turn positive in its financial year (FY) ending Sept. 30, 2022 and credit metrics will recover to a level consistent with the ratings.

oWe are affirming our 'BBB-' ratings on easyJet PLC, easyJet Airline Co. Ltd, and the group's rated debt, but see diminished headroom on the investment-grade rating for operational setbacks.

oThe negative outlook reflects our view that easyJet's financial metrics will remain under considerable stress in the next few quarters.

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

The pandemic-related lockdowns, travel restrictions, and virus variants continue to weigh on easyJet's prospects.

Governments across Europe are finding it more difficult to control the pandemic, as numerous new virus variants have emerged which appear more transmissible and have led to concerns over vaccine efficacy (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 has prompted a new round of lockdowns and tighter travel restrictions and continues to weigh on passenger demand and confidence. That said, the rollout of several vaccines has created an encouraging path back to more normal levels of social and economic activity. However, although the U.K.'s vaccination rollout has quickly gathered pace, the EU's program started more slowly, and there remains considerable uncertainty regarding the outlook for air travel. We have recently revised downward our forecasts and now believe that European air passenger traffic (measured by revenue passenger kilometers or revenue passenger miles) and revenue in 2021 will be 30%-50% 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. This estimate incorporates our assumptions that that vaccine production will ramp up, rollouts will gather pace, and widespread immunization across Europe will be achieved by the end of third-quarter calendar 2021.

We expect FY2021 to be another extremely challenging year for easyJet.

We estimate that passenger numbers will only recover to about 50% of FY2019 levels this summer. This, combined with only 13% of passenger numbers recovered in easyJet's first financial quarter (October-December 2020), extensive European lockdowns and travel restrictions in the second quarter (January-March 2021), and our expectations of only a gradual recovery in the spring, translate to our overall estimate of 25%-30% of FY2019 passengers in FY2021. We anticipate FY2021 to be a weaker year than FY2020, when easyJet saw a 50% drop in passenger numbers from FY2019 levels. This is due to the timing of easyJet's FY2020 (which started Oct. 1, 2019), with several months of strong trading performance before COVID-19 emerged in Europe in early 2020.

We expect easyJet's credit metrics to remain under considerable stress, particularly over the next few quarters.

The airline is further adjusting capacity and cutting operating costs, having furloughed staff through the U.K. government employee support scheme. Management is also implementing an operational restructuring program that will reduce its workforce by up to 30%. easyJet should benefit from a lower fuel bill, which we forecast to be £550 million-£600 million in FY2021 (about 40% of the £1.4 billion in FY2019). Nevertheless, our weaker air traffic recovery assumption leads us to extend our forecasts for significantly negative adjusted EBITDA to FY2021 (at negative £500 million-£700 million). We forecast easyJet's S&P Global Ratings-adjusted debt could further accumulate and exceed £2.0 billion in FY2021, compared with £1.5 billion in FY2020 and £500 million in FY2019. While we recognize significant pent-up demand for holiday travel, the airline's cash flow restoration is pending recovery in passenger traffic and new bookings, which are in turn contingent on governments easing travel and quarantine restrictions in easyJet's major markets, such as the U.K., France, Germany, Italy, the Netherlands, Portugal, and Spain.

easyJet's minimized capital expenditure (capex) in FY2021 will help moderate debt accumulation.

We estimate that capex, excluding finance lease payments, will fall to £100 million-£200 million in FY2021 (about 10%-20% of almost £1 billion spent in FY2019). This is in line with easyJet's plan to reduce capex by about £1 billion over FY2021-FY2023, having deferred the delivery of 22 Airbus aircraft to FY2027-FY2028, and eliminating all noncritical expenditure. Combined with further flexibility to end 24 aircraft operating leases, easyJet expects to reduce its fleet size to around 302 aircraft in FY2021, an overall 10% smaller fleet than at the beginning of the pandemic. We also recognize that easyJet has further flexibility to adjust capex in FY2022 and beyond if air traffic does not recover as expected.

We see diminished headroom on the investment-grade rating for operational setbacks.

Still, easyJet's efforts to contain costs and safeguard cash should contribute to the airline's financial recovery commencing in FY2022 (provided passengers return to flying) and help maintain the rating. easyJet had about £2.5 billion of liquidity sources as of Jan. 25, 2021. Management estimates that total cash burn, excluding working capital changes, in a fully grounded scenario has fallen to about £40 million per week. As lockdowns and travel restrictions remain across Europe, we expect cash burn to continue and estimate that easyJet's liquidity sources could fall to £1.5 billion-£2.0 billion, absent further mitigating measures.

We expect easyJet's credit metrics to recover significantly in FY2022 and FY2023.

We now see adjusted EBITDA rising to £500 million-£700 million in FY2022 (about 65% of FY2019 levels) and £700 million-£850 million in FY2023 (about 80%). We assume a significant rebound in air traffic starting in late 2021 (versus by the middle of 2021, as we forecast previously). This is underpinned by our view that widespread immunization looks to be achievable by most developed economies by the end of third-quarter calendar 2021. Consequently, we believe that the recovery in easyJet's credit measures will be delayed, with diminished headroom under the investment-grade rating for operational setbacks, particularly in the near term. We forecast that adjusted funds from operations (FFO) to debt will rebound to 20%-30% in FY2022, and over 30% in FY2023. However, low visibility regarding the pandemic and recessionary trends--and their impact on passenger volumes--adds significant uncertainty to our forecasts.

easyJet's continued access to external funding is an important factor that support our ratings.

The airline has obtained over £4.5 billion of additional financing since the pandemic began. This includes the £600 million from the Bank of England's COVID-19 Corporate Financing Facility (CCFF), the £419 million equity placement, about £1.4 billion equivalent of sale and leaseback proceeds from 55 aircraft, and about £1.4 billion equivalent of secured term loan facilities partially guaranteed by UK Export Finance (UKEF). The latter was used to repay two debt instruments early--£400 million equivalent of secured term loans and about £400 million equivalent of fully drawn committed revolving credit facilities.

The negative outlook reflects our view that easyJet's financial metrics will remain under considerable stress in the next few quarters. In addition, there is also high uncertainty regarding the pandemic and related recession, and how they will affect air traffic demand and the expected improvement in the airline's financial position.

We would lower the ratings if passenger demand falls short of our expectations of a significant recovery from late 2021, hindering the turnaround in easyJet's cash flow generation. We could also downgrade the company if we expect that weighted-average adjusted FFO to debt will not recover to at least 23%. This could occur if the pandemic cannot be contained, resulting in prolonged lockdowns and travel restrictions, and passengers remain reluctant to fly. We could also lower the ratings if adjusted debt increases beyond our expectations and management does not take sufficient and timely measures to restore its debt leverage profile.

We could also lower the rating if industry fundamentals weaken structurally and passenger demand appears to be consistently lower than before, impairing easyJet's competitive position and profitability.

To revise the outlook to stable, we would need to be confident that demand conditions are normalizing and the recovery is robust enough to enable easyJet to partly restore its debt leverage profile, such as adjusted FFO to debt increases sustainably to at least 23%, alongside a stable and sustainable liquidity position. We would expect this to be further underpinned by prudent capex and shareholder returns.

Related Criteria

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 | General: Corporate Methodology, Nov. 19, 2013

oGeneral Criteria: Country Risk Assessment Methodology And Assumptions, 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

Related Research

oEurope's 2021 Air Passenger Traffic Likely To Stall At 30%-50% Of 2019 Level, Feb. 18, 2021

oEU Could Meet 70% Vaccination Target By Late July If Production Steps Up, Feb. 11, 2021

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