Sector In-Depth - Passenger-Airlines-Global - 04jun20

CORPORATES
SECTOR IN-DEPTH Passenger Airlines – Global

4 June 2020
Airline sector unlikely to fully recover
before 2023, faces deep structural change
TABLE OF CONTENTS » Air passenger demand will remain severely depressed in 2021, will not see a
Air passenger demand will remain substantial recovery before 2023. Health concerns, changes in corporate travel
severely depressed in 2021, no
significant recovery before 2023 2 policies, potential restrictions on international arrivals, and lower discretionary spending
Many airlines have improved liquidity, because of weaker GDP and higher unemployment will constrain air passenger demand
but at the cost of rising debt burdens 4 into 2022. Demand in 2023 could approach that of 2019, but the uncertain timing of the
We model two scenarios assuming coronavirus receding on a more permanent basis makes forecasting a challenge.
a significant recovery by 2023;
aggregate funded debt will be $35
billion-$55 billion higher than 2019 5
» Many airlines have improved liquidity, but at the cost of rising debt burdens.
Weaker liquidity cushions and limited Stronger and state-supported airlines have significantly improved liquidity since March.
prospects for material debt reduction Rated airlines have sufficient liquidity to survive on average for about 450 days at current
led to 13 airline downgrades 7
low activity levels. For weaker airlines, this may be insufficient if groundings persist into
The industry will undergo substantial
structural changes 8 2021.
Depressed airline industry will have
wide-ranging effects across related » We model two scenarios assuming a recovery by 2023 or later years. Most
sectors 9 airlines will carry substantially more debt in 2023. Our faster and slower recovery
Appendix 10 cases assume 2023 passenger volumes recover to around 95% and 85% of 2019 levels,
Moody’s related publications 12 respectively. The airlines we rate will carry on average 20%-30% more debt in 2023
compared with 2019, with leverage on average 0.5x-1.5x higher.
» We have downgraded 13 airlines since 25 May 2020, and confirmed six. We placed
Contacts
ratings for 22 airlines on review for downgrade in March. The sufficiency of liquidity, and
Martin Hallmark +44.20.7772.1953 the potential for individual companies to retire the debt incurred to restore credit metrics
Senior Vice President
martin.hallmark@moodys.com through 2023 were key considerations in resolving the reviews.
Richard Etheridge +44.20.7772.1035 » The industry will undergo substantial permanent structural changes. Potential for
Associate Managing Director
failures of weaker airlines and government intervention to leave fewer, larger companies,
richard.etheridge@moodys.com
polarised between more efficient operators and strategic state-supported airlines.
Jonathan Root, CFA +1.212.553.1672
Health screening and risks of denied boarding will affect travelers potentially beyond the
jonathan.root@moodys.com pandemic. Corporate travel is likely to be impaired into 2023. Governments may require
deeper carbon emissions reductions from airlines.
Stanislas Duquesnoy +49.69.70730.781
» There will be deep repercussions across related sectors, particularly commercial
stanislas.duquesnoy@moodys.com
aerospace manufacturers and suppliers, airports, travel distributors and airline service
Russell Solomon +1.212.553.4301
Associate Managing Director
companies. Providers of jet fuel and aircraft lessors will also be deeply affected. By
russell.solomon@moodys.com contrast, carbon dioxide emissions will reduce by around 750 million-900 million tonnes
» Contacts continued on last page
over 2020-21.
MOODY'S INVESTORS SERVICE CORPORATES
Air passenger demand will remain severely depressed in 2021, no significant recovery before 2023
Since March, the outlook for the airline sector has worsened, reflecting the greater severity and duration of the coronavirus outbreak
than we first expected. The International Air Transport Association (IATA) downgraded its forecasts for 2020 on 14 April and projected
that global revenue passenger kilometers (RPKs) in 2020 would be 50% below those of 2019. We believe the outcome could be worse,
with RPKs falling by 65%-75% year-on-year in 2020.
We expect domestic air traffic markets to reopen first, in the third quarter of 2020, with a slower re-opening of international markets.
This will mainly benefit North America, China and Australia. Currently, world-wide passenger volumes are around 80%-90% below
prior-year levels. This is illustrated in IATA's regional forecasts for 2020 RPKs (Exhibit 1). We concur with IATA's assessment of regional
variations although we think that volumes are likely to be somewhat lower.
Exhibit 1
Earlier re-opening of domestic markets will primarily benefit North American carriers, Qantas and Air New Zealand
IATA's projected reduction in 2020 passenger revenue and numbers by region
2020 Passenger revenue decline (vs 2019) - LHS 2020 RPKs (vs 2019) - RHS
0 0%
-20 -10%
-40 -20%
$ billion
-60 -30%
-80 -40%
-100 -50%
-120 -60%
Asia-Pacific North America Europe Middle East Africa Latin America
Source: IATA
IATA forecasts that passenger air travel will not fully recover to 2019's level until 2023, which is in line with recent commentary from
many airlines. The IATA forecast assumes that 2021 volumes will lag 2019 by around 25%-30%, which is likely to be driven by the
continued presence of the coronavirus, potential renewed outbreaks and lockdowns, travel restrictions and consumers' health concerns,
as well as the macroeconomic effects of depressed GDP and higher unemployment levels.
We assume 2021 passenger volumes will be 35%-55% below 2019. We model two principal scenarios that have slower recovery
profiles than the IATA forecasts (Exhibit 2), further details of which are described below.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2 4 June 2020 Passenger Airlines – Global: Airline sector unlikely to fully recover before 2023, faces deep structural change
Exhibit 2
Passenger volumes in 2021 will remain depressed; at least three years to recover back to 2019 levels
Our and IATA's projections of passenger volumes compared with 2019 (2019 = 100)
2019 level IATA Forecast Global RPKs Moody's Faster Recovery Scenario Moody's Slower Recovery Scenario
110
100
90
Index, 100 in 2019
80
70
60
50
40
30
20
2016 2017 2018 2019 2020E 2021E 2022E 2023E
Sources: Moody's Investors Service, IATA, Tourism Economics, Air Passenger Forecasts, April 2020
Airlines moved swiftly to cut costs and lobby for government support as the demand outlook plummeted
Airlines have responded to the crisis rapidly by cutting non-essential costs and cash outflows, grounding fleet, deferring aircraft
purchases and furloughing staff – behaviors that we expect will be heightened in the second half of 2020 and persist for some time.
Airlines have sought to shore up liquidity, minimize cash burn and borrow against unencumbered assets – notably aircraft, slots
and potentially also air miles schemes. They have also taken advantage of government support arrangements. These include the
aviation industry elements of the US Coronavirus Aid, Relief, and Economic Security (CARES) Act; outside the US, programs generally
available to corporates such as staff furlough support in the UK, Spain, Germany and France; and direct financing either available to all
corporates or to investment-grade issuers.
The airline industry package in the CARES Act provides about $50 billion of support to US airlines. The Payroll Support Program of the
CARES Act — about half of the total package — covers US airlines’ payroll costs through 30 September 2020. Seventy percent of the
payroll program is a grant, while the remaining 30% is a 10-year unsecured loan. The straight loan program — secured obligations with
five-year terms — will be available for drawing through 30 September 2020.
Governments have provided or offered bespoke support to strategically important airlines, including Singapore Airlines, Deutsche
Lufthansa Aktiengesellschaft (Ba1 review for downgrade) and Air New Zealand Limited (Baa2 stable). Other airlines that have weaker
credit profiles or are less strategically important are finding it more difficult to access support – for instance, Norwegian Air Shuttle and
Virgin Atlantic Airways. The former received loan guarantees from the Norwegian government subject to existing creditors effectively
exchanging their debt investments for equity, leading to defaults across the capital structure. Airline bankruptcies and insolvencies have
also commenced, notably LATAM Airlines Group S.A., Virgin Australia Holdings Limited (Ca developing), Colombia's Avianca, the UK's
Flybe and US regional airline operator Trans States Airlines.
Latin American airlines are particularly exposed to the depreciation of their local currencies, which in most cases account for the
majority of these companies' revenues, creating a mismatch with costs and indebtedness that are largely concentrated in US dollars.
This effect is only partially mitigated by the reduction in fuel prices. We anticipate that the local airline industry will require support
from governments. Although there is nothing concrete yet, the Brazilian government announced that it is considering supporting
the airlines operating in the country through long-term credit lines that could be extended by development bank BNDES (Banco
Nacional de Desenvolvimento Economico e Social - Ba1 stable). The Mexican government will not likely provide bailouts and no
specific measures have been announced.
Airlines will size their fleets to the level of demand through the multi-year recovery period, returning parked aircraft to service in a
measured manner through 2023. The majority of the world's airlines parked around 60% of their fleets by mid-April and cut capacity
by more than 80% as demand fell by over 90% across the globe. Early retirements of the oldest, out-of-production airliners have
accelerated because of the current market conditions. Reducing the number of different types of aircraft in a fleet will drive efficiencies
across an airline's operations, leveraging scale economies in spare parts, maintenance, and pilot staffing and training and lowering
aggregate operating expenses, all else equal. Voluntary furlough programs were adopted quickly by many airlines and will migrate, if
they have not already, to involuntary programs. In the US, the terms of the CARES Act prohibit involuntary reductions of the workforce
through 30 September. We expect each of the US carriers to reduce labor expenses relative to demand, starting 1 October. Many non-
US airlines have announced restructuring and redundancy schemes. Airlines are also likely to take the opportunity to remove some of
the more generous pay deals on offer to crews and cut less profitable routes.
Continued travel restrictions and health-related modifications to airport and airline operations will also affect the industry unless
a vaccine is developed or effective treatment becomes available. There is a debate on social distancing within aircraft, which, if
implemented, would reduce load factors and seriously constrain airline profitability, absent material increases in fares. For example,
flying with four passengers a row across narrowbody aircraft like the Airbus A320 family or Boeing 737 family models, with empty
middle seats, would reduce load factors by 33%. The average fare on such flights would need to increase by 50% to break even
compared with pre-virus booking patterns. Under these conditions, profit contribution from flights would increase versus pre-
coronavirus levels as the lower passenger counts would require at least one less flight attendant on board. Trip fuel costs would also
be lower given the lighter weight of the aircraft. We expect that airlines will not refrain from selling the middle seat on aircraft for any
material amount of time because the price elasticity of demand, particularly leisure demand which will represent a greater proportion
of travelers through the demand recovery period, will prevent strong increases in fares. The practices incorporated in operating
routines, including temperature checks, aircraft disinfection routines, masks and aircraft air circulation and filtering systems, could
mitigate concerns about infection transmission as the summer months progress. However, reduced demand may translate into limited
utilization of middle seats and load factors will remain well below normal through at least 2021.
Many airlines have improved liquidity, but at the cost of rising debt burdens
Airlines with strong credit profiles or that have received government support, or both, have significantly improved their liquidity in
the last two months. Government support, via grants and or financing, has been made available to all airlines within certain markets
such as the US, to those with stronger credit profiles and to those that were deemed strategic to their home country. Airlines have
also reduced cash burn by cutting or deferring as much of their aggregate obligations as possible, working closely with vendors to
obtain relaxed payment terms, by delaying aircraft and other investments and by reducing labor expenses, whether via voluntary or
involuntary programs.
As a result of future government loans and grants, plus expected new capital raising and potential liquidity from unencumbered assets
(Exhibit 3), we estimate that on average, the airlines we rate will be able to cover about 450 days of cash burn. Coverage ranges
from about 150 days for Azul S.A. (Caa1 negative) and Gol Linhas Aereas Inteligentes S.A. (Caa1 negative), which have not received
government support, to more than 700 days for Southwest Airlines Co. (Baa1 negative), Air New Zealand, Qantas Airways Limited
(Baa2 negative) and Delta Air Lines, Inc. (Baa3 negative). We also assumed little improvement in ticket revenues compared to April and
May 2020 levels in these estimates.
Exhibit 3
Government support and unencumbered assets are significantly enhancing liquidity
Total current liquidity and total expected future funding sources for rated airlines
250
8
200
13
200
56
USD Billions
150
21
15
87
100
50
0
Current liquidity Government Grants Government Loans Unencumbered Assets Capital Raises Other Pro Forma Liquidity
Total relates to 21 rated airlines excluding Air New Zealand, TAP and Virgin Australia
Current liquidity represents actual or estimated liquidity as at 30 April 2020
Unencumbered assets based on potential secured financing based on a 60% loan-to-value ratio
Sources: Moody's Investors Service estimates, company reports
Average liquidity represents around 575 days of groundings for Baa-rated companies; 500 days for Ba-rated companies, 300 days for B-
rated companies, and 150 days for companies rated Caa1 or lower.
Liquidity may, however, be insufficient for many airlines, particularly lower-rated companies, if lengthy groundings recur in 2021 or
travel demand remains depressed thereafter. Increased liquidity and extended periods of cash outflows will result in substantially higher
debt burdens.
Holding sufficient liquidity to operate through a substantial grounding period may not be sufficient for airlines to avoid a financial
restructuring. Of particular note is the potential for airlines to restructure debt on a pre-emptive basis, rather than make use of current
excess liquidity and/or incur additional debt. For instance, LATAM filed for Chapter 11 bankruptcy protection in the US on 26 May 2020
despite holding liquidity capable of supporting a grounding through to around September 2020.
Broad-based restructuring risks are higher among airlines whose operations or corporate structures allow access to more debtor-
supportive bankruptcy regimes such as US Chapter 11 or the German “Schirmschutzverfahren” code. We note the rising risk of other
South American airlines strategically following LATAM's pre-emptive action to file for bankruptcy protection (albeit only in certain
jurisdictions), given liquidity constraints and escalating debt. In particular, this informs our ratings for Azul and Gol.
We model two scenarios assuming a significant recovery by 2023; aggregate funded debt will be $35
billion-$55 billion higher than 2019
We have modeled two principal scenarios, reflecting the continued uncertainty over the severity and duration of the coronavirus
outbreak. In our faster recovery scenario, we assume that in 2023 passenger volumes recover on average to about 95% of 2019 levels.
Under our slower recovery scenario, passenger volumes only get back to about 85% of 2019 levels in 2023, with a longer trough
through 2021 but a steeper recovery starting in 2022. Mainly as a result of lower fuel expenses compared with 2019, we expect airlines'
2023 EBITDA to grow to about 105% of 2019 levels on average in our faster recovery scenario and 80% in our slower case. Further
details of our assumptions are shown in the appendix.
We expect airlines to burn cash and increase debt in 2020, and in many cases also in 2021, as a result of broadly depressed passenger
volumes. We project total debt of our globally rated airlines to increase by around $60 billion in 2020, representing on average around
1x 2019 EBITDA. This is split between an increase of $40 billion across seven rated US airlines; $13 billion for six rated European airlines
(excluding Transportes Aereos Portugueses, S.A. (Caa1 negative), which was not part of our latest rating review process); and $8 billion
for the rest of the world.
Compared with 2019, airlines will reduce capital spending, cut dividends and other shareholder distributions, and will benefit from
lower fuel prices. This will enable many airlines to generate free cash flow to repay in part the debt incurred during the pandemic once
air travel starts to return to some semblance of normalcy. We believe that many airlines will make their operations more efficient
because of lessons learned from managing their businesses during the acute period of demand stress in the second quarter of 2020,
leading to stronger operating margins. However, financial leverage will be higher for a number of airlines, mostly outside the US,
because these companies will carry more debt in 2023 compared to 2019 (Exhibit 4). In particular, European airlines have over-hedged
fuel, which will result in additional outflows of cash in 2020 and 2021 that would otherwise have been available for debt reduction, all
else equal.
Exhibit 4
Most airlines will be unable to reduce debt to pre-pandemic levels by 2023
Debt in 2019 and as projected in 2023 under faster and slower recovery cases, and % changes
2019 Faster Recovery Slower Recovery
50,000 16% 20%
45,000
40,000
35,000
USD millions
51% 24%
30,000 16% 16% 34%
25,000 34%45% -10%
6% 30%
20,000
51% 52% -4% 21%
15,000 148% 2% 64%
-5% 55% 11% 55% 22%
10,000 29% 29% -9% 89% 57% 57% 43% 37% 33% 33% -2% 11%
5,000
-10% -2% -13%-14%-2% 2%
0
Amounts represent our estimates and are stated on a Moody's-adjusted basis, incorporating standard adjustments (capitalization of rent and pension underfunding)
Data stated at companies' financial year ends
LATAM Airlines Group rating now withdrawn; rating shown immediately prior to withdrawal
Source: Moody's Investors Service
As a result, we expect most airlines' 2023 leverage to exceed the 2019 level. Airlines with stronger cash flow profiles and recovery
prospects are most likely to recover their balance sheets, including Southwest, Air New Zealand, Qantas, Delta, Wizz Air Holdings plc
(Baa3 negative), United Airlines Holdings, Inc. (Ba2 negative) and Allegiant Travel Company (Ba3 negative).
The lower debt increases in the slower recovery case for JetBlue Airways Corp. (Ba2 negative) and Allegiant Travel reflect our
assumptions of lower investment in new aircraft, which we model as debt funded. The lower leverage in the slower recovery cases for
these companies and American Airlines Group Inc. (B2 negative) in Exhibit 5 reflect lower capital investment in aircraft coupled with
differentials in the timing of costs related to capacity growth between the two scenarios.
Exhibit 5
We project leverage on average will be 0.5x to 1.5x higher in 2023 compared to 2019
Moody's-adjusted leverage, 2019 and 2023E in faster and slower recovery cases
2019 Faster Recovery Slower Recovery
14.0x
Moody's-adjusted debt / EBITDA
12.0x
10.0x
8.0x
6.0x
4.0x
2.0x
0.0x
Amounts represent Moody's estimates and are stated on a Moody's-adjusted basis

Data stated at companies' financial year ends
Air New Zealand and Qantas slower recovery cases not separately calculated
LATAM Airlines Group rating now withdrawn; rating shown immediately prior to withdrawal
The recovery prospects for Qantas and Air New Zealand are supported by an early ramp up in domestic travel. Their home countries,
Australia and New Zealand, have benefitted from early border closures and compulsory 14-day quarantine periods for international
travelers, and in some cases, interstate travelers too. This has enabled them to reduce active cases to under 500 in Australia and just
one case in New Zealand. With flying being the only viable means of transport between geographically distant cities, the domestic
markets in these countries are ramping up capacity from July.
Weaker liquidity cushions and limited prospects for material debt reduction led to 13 airline
downgrades
We placed 22 airline ratings under review for downgrade in March 2020. We downgraded 13 of these companies and concluded the
rating reviews for 19 airlines by the week of 1 June (Exhibit 6).
Exhibit 6
We have downgraded airlines across the ratings scale, with particular focus on lower-rated credits
Summary of rating actions 1 March - 4 June 2020
Feb-20 Mar-20 June-20 to date Ratings

changes since
Rating Outlook Rating Outlook Rating Outlook February
Southwest Airlines A3 Stable Baa1 Review for downgrade Baa1 Negative -1
easyJet Baa1 Stable Baa2 Review for downgrade Baa3 Negative -2
Air New Zealand Baa2 Stable Baa2 Stable Baa2 Stable 0
Qantas Airways Baa2 Stable Baa2 Review for downgrade Baa2 Negative 0
Delta Air Lines Baa3 Positive Baa3 Review for downgrade Baa3 Negative 0
Wizz Air Baa3 Stable Baa3 Review for downgrade Baa3 Negative 0
British Airways Baa3 Positive Baa3 Review for downgrade Ba1 Negative -1
International Airlines Group Baa3 Stable Baa3 Review for downgrade Ba1 Negative -1
Lufthansa Baa3 Stable Ba1 Review for downgrade Ba1 Review for downgrade -1
JetBlue Airways Ba1 Stable Ba1 Review for downgrade Ba2 Negative -1
Air Canada Ba1 Stable Ba1 Review for downgrade Ba2 Negative -1
United Airlines Ba2 Positive Ba2 Review for downgrade Ba2 Negative 0
Allegiant Travel Company Ba3 Stable Ba3 Review for downgrade Ba3 Negative 0
Hawaiian Ba3 Stable Ba3 Review for downgrade B1 Negative -1
WestJet Ba3 Stable Ba3 Review for downgrade B3 Negative -3
American Airlines Ba3 Stable Ba3 Review for downgrade B2 Negative -2
Azul Ba3 Stable B1 Review for downgrade Caa1 Negative -4
LATAM Airlines Group Ba3 Stable B1 Review for downgrade Ca Negative -7
Gol Linhas Aereas Inteligentes B1 Stable B1 Review for downgrade Caa1 Negative -3
Turkish Airlines B1 Negative B2 Review for downgrade B2 Review for downgrade -1
Grupo Aeromexico B1 Stable B2 Review for downgrade Caa1 Negative -3
SAS B1 Stable B2 Review for downgrade Caa1 Review for downgrade -3
Virgin Australia B2 Stable B2 Review for downgrade Ca Developing -5
Transportes Aereos Portugueses B2 Stable Caa1 Negative Caa1 Negative -2
Red = ratings downgraded; yellow = ratings confirmed

LATAM Airlines Group rating now withdrawn; rating shown above prior to withdrawal
Rating downgrades have been more prevalent and severe for lower-rated credits, as expected, reflecting their elevated risk profiles and
hence greater challenges in raising liquidity and repairing balance sheets. We confirmed six airlines' ratings in May – Southwest, Qantas,
Delta, Wizz, United and Allegiant. These companies retain more solid liquidity and hold stronger prospects for recovering their balance
sheets compared to the others in the airline rated universe.
Three airlines, Lufthansa, Turkish Airlines (Turk Hava Yollari Anonim Ortakligi - B2 review for downgrade), and SAS AB (Caa1 review
for downgrade) remain on review. On 2 June 2020, Lufthansa's board of directors and the European Commission agreed to terms of
the German government's €9 billion bailout package for Lufthansa, paving the way for a vote by shareholders. The vast majority of
airline outlooks remain negative, even after concluding the recent reviews, reflecting continued risks for the sector and the potential for
further downgrades should liquidity buffers or recovery prospects deteriorate, or both.
We have downgraded 10 airlines by multiple notches since February 2020, almost entirely among issuers previously rated Ba3 or
lower. Higher liquidity risks, uncertainties over the availability or terms of state support, and actual or heightened risk of pre-emptive
restructurings were the main drivers of these multi-notch downgrades. Amongst these issuers, two companies have defaulted: LATAM
filed for US Chapter 11 bankruptcy protection on 26 May and Virgin Australia entered voluntary administration on 21 April and missed a
coupon payment on 15 May.
The industry will undergo substantial structural changes

The consequences of the coronavirus are likely to reshape the global airline industry. In the first instance, this will be because of a
potential reduction in the amount of weaker airlines. A number of the rated airlines represent the strongest credits in the industry,
because they are larger companies and had stronger financial positions coming into 2020 than the overwhelming majority of the more
than 300 other airlines in the world. We expect the sector to bifurcate between larger, more efficient airlines with strong liquidity,
and those that have less efficient (even inefficient, in certain cases) business models but survive because their strategic importance
prompted their governments to provide support.
The European market entered the crisis with structural overcapacities and yield pressure, and material government support might
hamper a comprehensive restructuring of the industry. This could widen the divide in operating models between US and European
carriers, with the European market containing several national utility-like network carriers. Increased government participation in the
airline sector may also lead to increased pressure for airlines to reduce their carbon footprint, for instance through investments in
sustainable fuels. For example, as a condition of support from the French government, Air France/KLM committed to halve its carbon
emissions from aircraft operating in French airspace by 2024 and stop flights between cities where trains could provide a connection in
less than two-and-a-half hours.
Unlike in cyclical downturns, size and network diversification are not the credit strengths that we would have expected due to the
global nature of the outbreak. We may see easier exits from the crisis for point-to-point and domestic carriers compared with large
network carriers, thanks to greater operating flexibility and the faster recovery of domestic and short-haul flights.
For example, we expect Wizz Air to ramp up capacity much faster than European network carriers but on different routes than prior to
the outbreak. By contrast, Lufthansa will not have this flexibility and will operate with lower flight frequencies and without radically
changing its route network, although it will give up aircraft and landing and take off slots at Munich and Frankfurt airports as part of its
agreement with the EU Commission. We expect airlines to retool their operations, focusing on the most efficient routes, productivity
gains, and increasing automation, and to seek to reduce the more expensive pay packages among their crew.
During the coronavirus pandemic there will be extensive changes to the way people fly. These will include health screening, wearing
masks in airports and on aircraft, the potential for passengers to be denied boarding, and significantly longer queues prior to departure.
Much of these costs will be borne by airports but airlines will also incur greater costs which they will seek to pass on to consumers.
While some of these operational changes will fall away once the pandemic is over, some may also endure.
Corporate travel will reduce significantly, and perhaps permanently, as a result of changes in working patterns, use of technology and
companies’ focus on reducing costs. We expect that business travel will only recover slowly. Nevertheless, with the passage of time
through 2021 and into 2022, the value of face-to-face meetings and attendance or participation at trade shows and conferences will
prompt companies to allow their employees to return to the skies, particularly if the health risks of the coronavirus have faded.
Depressed airline industry will have wide-ranging effects across related sectors
A depressed airline industry through 2021 will have far-reaching effects across related sectors and the wider economy. Commercial
aerospace manufacturers and suppliers, airports, travel distributors, aircraft lessors and airline service companies such as caterers,
cleaners and baggage handlers are most directly affected: the global airline industry spends around $550 billion-$600 billion annually
in these segments, and around $900 billion of tourism spending is indirectly related to air travel. The industry is responsible directly for
around 1% of global GDP, and up to around 4% indirectly.
A cut in passenger volumes of around 40%-50% across 2020-21, in line with our scenario forecasts, would directly take around $650
billion-$800 billion out of the global economy, and multiple times more indirectly. We believe the most affected segments would be
the labor force, which directly and indirectly accounts for over 73 million jobs globally including supply chains; commercial aerospace,
through reduced deliveries of new aircraft through much of 2022 and flight activity; and airports. The impact on airports will, however,
vary, with regional differences likely depending on location, airline mix and type of traffic served. We also expect airline shareholders
to be deeply affected through dividend cuts and dilutions, while the absence of dividends and share repurchases will improve airlines'
free cash flow and ability to repay debt. By contrast, carbon dioxide emissions would reduce by around 750 million-900 million tonnes,
reducing annual global emissions by around 1%.
Appendix
Industry progression and key assumptions underpinning our scenario analysis 2020-23
Industry Airlines Faster Recovery Slower Recovery
Scenario Scenario
2020 • Extensive groundings and • Airlines act to shore up Available Seat ASK: Down
lockdowns throughout Q2 liquidity Kilometers (ASK): 55%-65% vs 2019
Down 50% vs 2019
• Q3 also likely to be weak, airlines' • Government support
RPK: Down 75% vs
attempts to restore flight schedules for labor costs, taxation RPK: Down 65% vs
2019
are limited by social distancing and etc. 2019
travel restrictions and potential
• Bespoke government
recurring coronavirus outbreaks
support for strategic
• Tentative recovery starts initially airlines
within domestic travel
• Bankruptcies of smaller,
• International and long-haul weaker non-strategic
remain highly depressed, limited airlines
inter-governmental coordination
• Airlines commence
exacerbates weakness
headcount reductions,
network restructuring
and cuts to capacity
2021 Still very weak demand compared • Depending on severity ASK: Down ASK: Down
with 2019 driven by: of trading environment, 15%-25% vs 2019 35%-40% vs 2019
further rounds of
RPK: Down 35% vs RPK: Down 55% vs
• risks of sustained groundings, liquidity raising,
2019 2019
lockdowns and travel restrictions government bespoke
support
• airport and airline measures
(screening, cleaning, social • Further possible airline
distancing) bankruptcies including
those with previously
• risk of further coronavirus stronger profiles
outbreaks
• health concerns driving consumer

reluctance to travel
• weaker GDP and higher

unemployment vs 2019
Some potential improvements over

2020 due to better preparedness,
inter-governmental coordination,
desire to reboot economies and
latent demand to travel.
Industry Airlines Faster Recovery Slower Recovery

Scenario Scenario
2022 • Recovery phase if virus has • Airlines position for ASK: Down 7%-10% ASK: Down 20% vs
receded recovery, returning vs 2019 2019
capacity and scale
• Lifting restrictions on human RPK: Down 15% vs RPK: Down 25% vs
contact / social distancing • Increased consolidation 2019 2019
and as larger airlines take
• Demand still affected by weak
share
GDP / higher unemployment;
embedded consumer behaviors • Market polarized
taking time to reverse; partially between most
offset by latent demand to return efficient operators and
to travel / take holidays strategically critical
airlines benefitting from
• Industry stimulus via pricing,
state support
marketing etc.
• Corporate travel remains weaker

and may be structurally impaired;
premium leisure travel particularly
impaired by economic weakness
2023 • Start of return to some form • Some structural ASK: Down 1-3% vs ASK: Down 10%-
and
of normality. Timing uncertain, changes will have 2019 15% vs 2019
beyond
still likely affected by economic occurred: fewer,
RPK: Down 5% vs RPK: Down 15% vs
pressures and structural changes larger airlines, weaker
2019 2019
balance sheets, greater
• Governments may extract greater
government ownership /
carbon emissions concessions from
participation
airlines as condition of support
• Airlines will have
• Corporate travel may be
restructured, efficiency
permanently reduced
gains from productivity,
reduced staff packages,
route rationalization,
automation /
digitalization
Moody’s related publications

» Passenger Airlines – Global: Airlines' credit quality weakens as coronavirus causes unprecedented stress, 20 March 2020
» Passenger Airlines – Global: Outlook revised to negative as coronavirus stresses passenger demand, 6 March 2020
» Aerospace & Defense – Global: MRO sector hit by groundings and a smaller,younger aircraft fleet when flights resume, 7 May 2020
» Aerospace and Defense — Global: Outlook negative as coronavirus-driven groundings set to hit aircraft deliveries, 23 March 2020
» Moody's: Lufthansa's Ba1 CFR remains under review for downgrade pending approval of government support package, 29 May 2020
Latest Rating Actions
» Moody's confirms Southwest Airlines' Baa1 senior unsecured and EETC ratings; outlook negative, 28 May 2020
» Moody's downgrades easyJet to Baa3 from Baa2; outlook negative, 28 May 2020
» Moody's affirms Air New Zealand's Baa2 issuer rating; outlook stable, 20 March 2020
» Moody's confirms Qantas' ratings; outlook negative, 29 May 2020
» Moody's confirms Delta Air Lines' Baa3 senior unsecured and all other ratings; outlook negative, 28 May 2020
» Moody's confirms Wizz Air's Baa3 LT Issuer rating; outlook negative, 28 May 2020
» Moody's downgrades British Airways to Ba1 from Baa3; outlook negative, 28 May 2020
» Moody's downgrades IAG to Ba1 from Baa3; outlook negative, 28 May 2020
» Moody's downgrades JetBlue Airways' corporate family rating to Ba2, senior secured rating to Ba1, confirms EETC ratings; outlook
negative, 28 May 2020
» Moody's downgrades Air Canada's CFR to Ba2; Outlook Negative, 28 May 2020
» Moody's confirms United Airlines Holdings' Ba2 corporate family rating and Ba3 senior unsecured, downgrades senior secured to
Ba1; outlook negative, 28 May 2020
» Moody's confirms Allegiant Travel's Ba3 corporate family and Ba3 senior secured ratings; outlook negative, 28 May 2020
» Moody's downgrades Hawaiian Holdings' corporate family rating to B1, EETCs to Ba2 and B1; outlook negative, 28 May 2020
» Moody's downgrades WestJet's CFR to B3; Outlook Negative, 28 May 2020
» Moody's downgrades all of its ratings of American Airlines Group, corporate family to B2; outlook negative, 28 May 2020
» Moody's downgrades Azul to Caa1 from B1; outlook negative, 2 June 2020
» Moody's downgrades LATAM Airlines CFR to Ca on filing for chapter 11; outlook negative, 26 May 2020
» Moody's downgrades Gol to Caa1 from B1; outlook negative, 2 June 2020
» Moody's downgrades Turkish Airlines' CFR to B2; ratings placed on review for further downgrade, 24 March 2020
» Moody's downgrades Aeroméxico's CFR to Caa1 from B2; negative outlook, 2 June 2020
» Moody's downgrades SAS' CFR to Caa1, ratings remain on review for downgrade, 25 May 2020
» Moody's downgrades Virgin Australia to Ca from Caa1 on missed coupon payment, 18 May 2020
» Moody's downgrades TAP's CFR to Caa1, outlook negative, 19 March 2020
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Contacts CLIENT SERVICES
Rehan Akbar, CFA +971.4.237.9565 Sandra Beltran +52.55.1253.5718 Americas 1-212-553-1653

VP-Sr Credit Officer VP-Senior Analyst
Asia Pacific 852-3551-3077
rehan.akbar@moodys.com sandra.beltran@moodys.com
Ian Chitterer +61.2.9270.1420 Jamie Koutsoukis +1.416.214.3845 Japan 81-3-5408-4100
VP-Sr Credit Officer VP-Senior Analyst EMEA 44-20-7772-5454
ian.chitterer@moodys.com jamie.koutsoukis@moodys.com
Nidhi Dhruv, CFA +65.6398.8315
VP-Senior Analyst
nidhi.dhruv@moodys.com

Sector In-Depth - Passenger-Airlines-Global - 04jun20

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CORPORATES

SECTOR IN-DEPTH Passenger Airlines – Global

Amounts represent Moody's estimates and are stated on a Moody's-adjusted basis

Feb-20 Mar-20 June-20 to date Ratings

Red = ratings downgraded; yellow = ratings confirmed

The industry will undergo substantial structural changes

• health concerns driving consumer

• weaker GDP and higher

Some potential improvements over

Industry Airlines Faster Recovery Slower Recovery

• Corporate travel remains weaker

Moody’s related publications

Latest Rating Actions

» Moody's confirms Qantas' ratings; outlook negative, 29 May 2020

» Moody's downgrades WestJet's CFR to B3; Outlook Negative, 28 May 2020

» Moody's downgrades TAP's CFR to Caa1, outlook negative, 19 March 2020

REPORT NUMBER 1229962

Contacts CLIENT SERVICES

Rehan Akbar, CFA +971.4.237.9565 Sandra Beltran +52.55.1253.5718 Americas 1-212-553-1653

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