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(Alliance News) - Moody's Investors Service late Monday downgraded its rating for International Consolidated Airlines Group SA to Ba2 from Ba1, and also kept its outlook negative.
At the same time, Moody's also downgraded the rating on IAG's British Airways PLC to Ba2 from Ba1.
The credit agency said its rating downgrade reflected the slow pace of passenger demand recovery in Europe since the quarantine measures and travel restrictions imposed in the first quarter of 2020.
Moody's noted the International Air Transport Association's report that European air passenger volume, which is measured by revenue passenger kilometres, fell in June and July by 94% and 81% respectively.
For the same months, international travel dropped by 97% and 87% respectively, as the weak recovery in demand was largely limited to domestic travel. Looking ahead, IATA does not expect air passenger volume to recover to 2019 volumes until 2024.
The agency said that IAG has a large exposure to long haul, cross border and corporate travel, which is set to remain weaker than the industry as a whole.
The group has taken several steps to boost its liquidity, including the proposal of an equity rights issue in September, and had received GBP750 million in proceeds from American Express Co. There is also an irrevocable commitment to the issue from 25% shareholder Qatar Airways.
"Moody's anticipates that pro forma for the rights issue and American Express proceeds, IAG's liquidity will support the company to operate for around 500 days if demand does not improve from estimated levels in the third quarter of 2020. There is a high degree of uncertainty in this estimate, however Moody's considers that the company's liquidity is weaker compared than similarly Ba-rated airlines. Nevertheless, the company has further levers to generate additional liquidity including through its remaining unencumbered aircraft fleet," the agency stated.
From the end of March to the end of June, IAG's liquidity position fell to around GBP10 billion to GBP8.1 billion, reflecting a near full grounding of the fleet over the second quarter, refunds of advance bookings and the overhedging of fuel.
In addition to financial challenges, there is also the uncertainty of its restructuring programme, that places up to 13,000 staff within subsidiary British Airways at risk, not to mention headcount reductions in other airlines across the group.
"As part of its cost reduction programme British Airways is also planning to amend contract terms for certain existing staff which could lead to industrial unrest. IAG may potentially also need to re-orientate its business towards leisure and away from corporate travel which is typically a highly profitable segment of the airline industry and it may face challenges to return to prior levels of
profitability as a result," Moody's added.
By Dayo Laniyan; dayolaniyan@alliancenews.com
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