Three South American Airlines Downgraded And Remain On CreditWatch Negative As COVID-19 Pandemic Escalates

  • The rapid spread of the coronavirus has significantly reduced the demand for global air travel for an unpredictable period. Most South American governments shut their borders and some have even suspended domestic traveling.
  • The South American airline sector is facing unprecedented drop in traffic and all airlines have announced large capacity cuts for the upcoming months,
  • We are therefore lowering our ratings on Latam Airlines Group S.A., Azul S.A., and Gol Linhas Aereas Inteligentes S.A. and maintaining them on the CreditWatch negative.
  • The CreditWatch negative listing reflects the potentially pernicious effect that a prolonged travel disruption could have on the companies' liquidity position and credit metrics. The listing also incorporates the uncertainty about when demand for passenger air travel will recover and to what extent.
SAO PAULO (S&P Global Ratings) March 27, 2020--S&P Global Ratings took rating actions described above. Most countries in South America (including Argentina, Chile, Colombia, Ecuador, and Perú) have closed their borders entirely, while Brazil closed most of its land borders, but has maintained airports and ports opened. Additionally, some countries like Argentina, Colombia, and Perú have even gone further, putting in place severe lockdowns that include suspension of domestic air traffic as well. Corporate and leisure travelers have suspended booked flights, while the booking curve has dramatically fallen and will likely be negligible at least for the next two months. We assume overall demand in the region will fall about 10% in the first quarter of the year, about 80% in the second quarter, given that we assume travel restrictions will remain in place for large part of the year and that we will see gradual recovery starting in July, mostly among corporate passengers.
All airlines are taking countercyclical initiatives to try to offset the revenue and margin decline. The companies announced capacity cuts, grounding of aircraft, reduced salaries or incentives for unpaid leave, postponements of retrofits, and all are in discussions to extend aircraft deliveries and lessors' payments. An additional alleviating factor are the much lower fuel prices, but most of the fuel needs for 2020 were already hedged, so the upside is limited for this year. In the current scenario, we expect the drop in EBITDA and cash flows to be even deeper than in revenues, given that 40%-50% of these companies' costs are fixed. This will erode credit metrics at least in 2020.
Leverage will spike, heightened by the impact of the local currencies' depreciation on dollar-denominated debts including airplane liabilities, particularly the Brazilian real, which is the companies' largest exposure.
While leverage continues to be a key component of credit ratings, we are more concerned in the very short term about how airlines will manage their liquidity positions, because we believe they will undergo substantial cash burns in the next couple of months, with very limited cash inflows. As we incorporate in our analysis cost reductions through the extensive wage and capex cuts, we still don't entirely consider the negotiations with lessors to postpone payments or new credit facilities under negotiations, given the uncertain timing and amounts. The Minister for Brazilian infrastructure has already announced specific measures to support the sector, including the postponement of airport fees and the extension of the ticket reimbursement period for up to 12 months. In addition, the Brazilian Development Bank (BNDES) is pondering a liquidity support program for the sector.
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