Airline sector unlikely to fully recover before 2023, faces deep structural change

United States, June 04, 2020

• Air passenger demand will remain severely depressed in 2021, will not see a substantial recovery before 2023. Health concerns, changes in corporate travel policies, potential restrictions on international arrivals, and lower discretionary spending because of weaker GDP and higher unemployment will constrain air passenger demand into 2022. Demand in 2023 could approach that of 2019, but the uncertain timing of the coronavirus receding on a more permanent basis makes forecasting a challenge.
• Many airlines have improved liquidity, but at the cost of rising debt burdens. Stronger and state-supported airlines have significantly improved liquidity since March. Rated airlines have sufficient liquidity to survive on average for about 450 days at current low activity levels. For weaker airlines, this may be insufficient if groundings persist into 2021.
• We model two scenarios assuming a recovery by 2023 or later years. Most airlines will carry substantially more debt
  in 2023. Our faster and slower recovery cases assume 2023 passenger volumes recover to around 95% and 85% of 2019 levels, 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 ratings for 22 airlines on review for downgrade in March. The sufficiency of liquidity, and the potential for individual companies to retire the debt incurred to restore credit metrics through 2023 were key considerations in resolving the reviews.
• The industry will undergo substantial permanent structural changes. Potential for failures of weaker airlines and government intervention to leave fewer, larger companies, polarised between more efficient operators and strategic state-supported airlines. Health screening and risks of denied boarding will affect travelers potentially beyond the pandemic. Corporate travel is likely to be impaired into 2023. Governments may require deeper carbon emissions reductions from airlines.
• There will be deep repercussions across related sectors, particularlycommercial aerospace manufacturers and suppliers, airports, travel distributors and airline service companies. Providers of jet fuel and aircraft lessors will also be deeply affected. By contrast, carbon dioxide emissions will reduce by 750-900 million tonnes over 2020-21.

Credit Outlook: 8 June 2020. Pg. 35
Moodys