Moody’s: Airlines’ credit quality weakens as Covid-19 causes unprecedented stress

KUALA LUMPUR: The passenger airline sector is one of the most adversely affected industries as Covid-19 widens and deepens, given its exposure to travel restrictions and sensitivity of consumer demand and sentiment, says Moody’s Investors Service.

In a statement, Moody’s said the breadth and severity of the initial shock, the expected ensuing deterioration in credit quality and the significance of lingering uncertainties have intensified the risk that the passenger airline sector faces due to the pandemic.

Moody’s senior vice-president Jonathan Root believed that capacity would be cut by 40% to 60% or more for the second quarter of 2020, and in some instances, more than 75% compared with the second quarter of 2019.

“On a full-year basis, we expect global industry capacity to fall 25% to 35%, assuming the spread of the virus slows by the end of June and, subsequently, passenger demand returns,” he added.

Meanwhile, Moody’s senior vice-president Martin Hallmark said the key drivers of how significantly credit quality would ultimately be affected are the duration of the demand trough and whether airlines have sufficient liquidity to cope until schedules start to return to normal.

While weaker airlines might be pushed to default, he said even the strongest companies would not likely emerge unscathed, notwithstanding the fact that many of its rated airline companies entered the crisis with reasonably strong liquidity buffers.

After first revising its outlook for the global airline industry to negative in early March, Moody’s reassessed the evolving risk profile of its rated issuers and, beginning earlier this week, initiated reviews for downgrades of its ratings for most of the airline companies that it rates.

Moody’s said its preliminary assessment is that the large airlines have adequate liquidity to manage through a fairly significant short-term disruption through June, and a continuing but more moderate disruption through the third quarter.

However, it expects more modest-sized and/or less liquid airlines to be more exposed, noting the potential for some airlines to collapse within a short period without additional support from shareholders and/or central governments.

“Finally, Moody’s noted that the extent of government intervention is critical. The rating agency believes that many airlines will require financial support from federal and state governments, particularly if more aggressive measures to contain the spread of the virus are implemented.

“Indeed, globally, various regulatory relief measures are either already in process or under consideration to cushion the ensuing economic consequences of an abrupt industry downturn that is now well underway,” it added. – March 23, 2020, Bernama

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