Moody's takes ratings action on European carriers as virus outbreak scuppers air travel demand

Credit rating agency downgrades Lufthansa and EasyJet, puts British Airways and IAG on review

British Airways livery sits on the tail fins of passenger aircraft operated by British Airways, a unit of International Consolidated Airlines Group SA (IAG), sitting on the tarmac at London Heathrow Airport, London, U.K. on Monday, March 16, 2020. Airlines worldwide will shrink operations to only a trickle of flights, severing global links and putting hundreds of thousands of jobs at risk as they fight to preserve cash and survive the coronavirus pandemic. Photographer: Jason Alden/Bloomberg

Moody's Investors Services downgraded the credit ratings of Deutsche Lufthansa and EasyJet, while placing British Airways and its parent company IAG on review for downgrade as the novel coronavirus outbreak pummels the global aviation industry.

The agency downgraded Lufthansa's senior unsecured ratings to Ba1 from Baa3 and placed it on review for another downgrade, while also downgrading EasyJet's issuer rating to Baa2 from Baa1, Moody's said in a March 17 report.

"The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets," Moody's said. "The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment.”

Industry body International Air Transport Association (Iata) estimates that airlines around the world will need between $150 billion to $200bn in government aid and financial measures to survive the crisis. This came after trade group Airlines for America called on the US government to provide $58bn in grants, loans and tax relief to US airlines.

Airlines worldwide slashed capacity and axed jobs in efforts to preserve cash as the pandemic continues to spread in more than 125 countries, forcing governments to shut borders and tighten travel bans.

Lufthansa's downgrade was prompted by the "very sharp decline" in passenger traffic since the outbreak of coronavirus started in January 2020, which will result in a "significant" negative free cash flow in 2020, a weakening liquidity profile and a significantly higher leverage, Moody's said.

EasyJet's downgrade reflects the airline's exposure to the early stages of the coronavirus outbreak in Europe due to its exposure to Italy, which represented around 20 per cent of passenger volumes in 2019, the agency said. Moody's expects travel restrictions to worsen globally over the coming weeks leading to full or partial groundings across the company's network.

For IAG, Moody's analysis assumes around a 50 per cent reduction in the group's passenger traffic in the second quarter and an 18 per cent fall for the full year, while also modelling significantly deeper downside cases including a full fleet grounding during the course of the second quarter.

Overall, Moody's base case assumptions are that the novel coronavirus pandemic will lead to a period of "severe" cuts in passenger traffic over at least the next three months with partial or full flight cancellations and aircraft groundings, with all regions affected globally, it said.

The agency expects the global airline industry will require "continued and further support" from regulators, national governments and labour representatives to alleviate pressures on slot allocations, provide indirect or direct financial support and manage airlines' cost bases. An extension of slot alleviation beyond the current provisions to June 2020 in Europe is also likely to be important.