Global ratings agency Fitch has revised its outlook of Aeroflot’s long-term Issuer Default Rating (IDR) to ‘negative’ from ‘stable’ and at the same time has affirmed the airline’s IDR at ‘BB’. But the group has lower exposure to COVID-19 disruptions compared with some European peers due to a significant share of revenue generated in the domestic market – and its inclusion in the government-backed list of Russia’s strategically important enterprises.
The negative outlook reflects the impact of the coronavirus disruption on Russia’s major carrier’s operations. Fitch expects that the company’s credit metrics will deteriorate substantially in 2020, an assessment that is consistent with a similar or more pronounced deterioration for other airlines. Harsher travel restrictions and reduced air passenger confidence for a protracted period, coupled with the company’s failure to effectively implement mitigation measures, would lead to a downgrade.
The agency has continued to apply a two-notch uplift to Aeroflot’s Standalone Credit Profile (SCP) of ‘b+’ under Fitch’s government-related entities (GRE) rating criteria. The group is majority state-owned and, based on the overall support and the rating differential between Aeroflot’s SCP and the Russian Federation (BBB/Stable), the group’s rating is capped at three notches below that of the sovereign.
The rating case assumptions were revised down and forecast Aeroflot’s revenue passenger kilometres (RPKs) may fall by 100 per cent in April-May 2020 and 80 per cent in June, versus Fitch’s previous expectations, before starting to gradually recover so that the annual decline could be about 40 per cent for 2020 compared with previous estimates. As a result, the RPK reduction will be 34 per cent year-on-year in 2020, with the load factor declining to below 70 per cent in the year, from the 82 per cent figure achieved last year.
It is currently assumed that the impact of the outbreak will be temporary and the agency anticipates that RPKs and available seat kilometres (ASKs) will gradually recover.
At the end-2019, Aeroflot’s had cash and short-term deposits of 26 billion roubles which, together with available credit facilities of 101 billion roubles, provides a sufficient buffer against the expected cash burn brought about by reduced revenue in 2020. The company has already started to reduce its operating expenses and manage its working capital outflows.
Aeroflot has a lower exposure to COVID-19 disruptions than some European counterparts, due to its significant – about 40 per cent – share of revenue generated in the domestic market, in which coronavirus is currently having less of an impact. The group strengthened its market position to about a 41 per cent share in 2019 on both international and domestic routes from close to 31 per cent in 2014.
At the same time, Aeroflot continues to be exposed to foreign exchange fluctuations as some 90 per cent of debt and aircraft leases are denominated in foreign currencies, mainly US dollars. This is partially mitigated by more than half of its revenue being generated in US dollars or euros, or linked to euros, although revenue from international flights is under pressure due to disruptions from COVID-19. Aeroflot will also benefit from the decline in fuel prices, as the company is not using fuel hedging.
The Russian Federation is the majority shareholder of Aeroflot Group, with 51.2 per cent direct ownership. Fitch therefore views status, ownership and control as well as support track record and expectations as strong, in accordance with the GRE Rating Criteria, which also reflects Aeroflot’s inclusion in the nation’s list of strategically important enterprises. Tangible state support for Aeroflot Group will be forthcoming, if needed.
Meanwhile, Fitch views the socio-political implications of Aeroflot Group’s default as moderate, since the airline is strategically important for developing connectivity among various regions in Russia.
Andrey Chikhanchin, Aeroflot’s deputy chief executive for commerce and finance, reflects: “We welcome Fitch’s decision to affirm Aeroflot’s long-term credit rating, especially in the face of increased turbulence in the aviation industry. COVID-19 has put unprecedented pressure on the sector, and there is hardly an airline in the world that has not felt the impact. We are focused on maintaining liquidity and reducing costs in order to preserve all the resources that we will need when the market begins to recover.”
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