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Rating Action:

Moody's changes outlook on BA's Ba2 rating to positive; affirms ratings

19 Nov 2015

London, 19 November 2015 -- Moody's Investors Service has today changed to positive from stable the outlook on British Airways, Plc's (BA) Ba2 corporate family rating (CFR) and Ba2-PD probability of default rating.

"Our positive outlook on BA's ratings reflects the company's strengthened competitive profile in the airline industry and our expectation for further improvement in the company's operating performance and credit metrics going into 2016," says Sven Reinke, a Moody's Vice President - Senior Credit Officer and lead analyst for BA.

Moody's has also changed to positive from stable the outlook on BA's Ba3 senior unsecured notes; its Ba3 backed Industrial Revenue Bonds issued through New York City Industrial Development Agency, NY; British Airways Finance (Jersey) L.P.'s B1 preference stock ratings; and the A2 and Baa2 Enhanced Equipment Trust Certificate's (EETC) senior secured ratings issued by Speedbird 2013 Limited. Concurrently, Moody's affirmed all of the aforementioned ratings.

RATINGS RATIONALE

-- OUTLOOK CHANGE TO POSITIVE FROM STABLE

Today's decision to change the outlook on BA's ratings to positive from stable considers the potential for further strengthening of BA's credit metrics on the back of its strong performance during the first three quarters of 2015, such that the company's financial profile could be supportive of a higher rating in the coming 12 to 18 months.

BA's operating profit rose to GBP945 million during the first nine months of 2015, up from GBP753 million for the same period in 2014. Lower non-fuel costs and a reduction in BA's fuel costs, more than offset revenue declines in the same period, resulting in rising year-on-year profitability in each of the first three quarters of FY 2015.

As a result, BA's Moody's-adjusted gross leverage improved to an estimated 3.6x for the 12-month period through H1 2015, from 3.9x at end-FY 2014. The ratio is close to Moody's guidance for gross leverage to fall below 3.5x for potential upward rating pressure.

The rating agency also expects that BA could further improve on its metrics for the first half of 2016 as a result of continued benefits from (i) IAG synergies, (ii) structural changes to the cost base that BA has undertaken, (iii) the seamless evolution towards a more efficient fleet, and (iv) savings from lower fuel prices.

Moody's expects that Brent fuel prices will remain fairly low over the next few years and materially below the peak of around USD110 per barrel seen prior to autumn 2014. Lower fuel costs will further support BA's profitability going forward because a large proportion of the fuel consumption for the first three quarters of 2015 was hedged at relatively high levels.

Moody's also notes the continued improvement in the operating performance of the other members of IAG, with Iberia, Vueling and the recently acquired Aer Lingus expected to make positive contributions to IAG's operating income in 2016. In this regard, the turnaround at Iberia is positive for BA's ratings. Iberia reported an operating profit of EUR196 million for the first three quarters of FY 2015, compared with an operating profit before exceptional items of EUR67 million for the same period in 2014. Additionally, Iberia's liquidity profile has improved notably and the previous negative free cash flow has reversed. While there are no cross guarantees between BA and IAG or any of the other IAG members, the BA ratings have historically given some consideration to the indirect links between the risk profiles of the various airlines in the IAG group.

Nevertheless, Moody's notes that the increased debt level at IAG following the acquisition of Aer Lingus could pose an ongoing need for funds to be upstreamed from BA (and other subsidiaries) to support parent debt service. For the time being, BA remains IAG's most important subsidiary - in the first three quarters of 2015, is contributed approximately 79% to IAG's operating profit, reflecting the improving but still relatively low operating profitability at Vueling and Iberia.

-- AFFIRMATION OF Ba2 RATING

Today's affirmation of BA's Ba2 CFR reflects its leading position at London Heathrow and its membership of the Oneworld alliance group, as well as its integration with Iberia, the Spanish low-cost airline, Vueling Airlines, S.A. (not rated), and Aer Lingus into IAG.

In Moody's view, being part of the IAG group has contributed substantially to the material improvement of BA's operating performance in recent years driven by growth opportunities and cost synergies. The most recent target that IAG has forecasted is to achieve annual synergies with a cumulative net impact on EBIT of EUR802 million by 2015, thereof around 2/3rd driven by higher revenues and around 1/3rd due to cost savings. According to IAG, the group already realised synergies of EUR633 million in 2014. In Moody's view, BA will continue to benefit from IAG synergies which will be further enhanced by the acquisition of Aer Lingus.

Moody's considers that BA has strong liquidity, with a balance of cash and equivalents as of September 2015 of EUR3.6 billion, and $1.75 billion of undrawn committed credit lines maturing in 2022 with no financial covenants. Against this, in H1 2015 the company reported GBP542 million in short-term debt, most of which is in the form of finance leases, and capex in FY 2014 of GBP1,494 million. Despite Moody's expectation of only modest capacity growth at BA, capital spending will likely be above the level of depreciation in coming years.

The positive outlook on the ratings of the company's enhanced equipment trust certificates (EETCs) reflects the potential to upgrade these instruments should Moody's upgrade BA's corporate family rating, notwithstanding some pressure on the values of Boeing B777 family of aircraft. Fourteen aircraft comprise the collateral for BA's EETC; six Airbus A320s, six Boeing B787-8s and two B777-300ERs. Moody's believes that each of the aircraft models in the transaction will remain relevant to BA's network over the remaining ten year term of the EETCs. The transaction is also cross-defaulted and cross-collateralized. These features make it less likely that BA would disaffirm any of these aircraft under an unlikely insolvency scenario. Finally , the value of the other 12 aircraft in the transaction should help mitigate potential pressure from lower than originally expected values for the B777-300ERs.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook on the ratings reflects Moody's view that BA is strongly positioned in the Ba2 rating category. The outlook also reflects Moody's expectation that BA will substantially increase its profitability in 2015 and could further improve its operating performance in 2016, supported by low fuel price forecasts over the next 12-18 months.

What could change the rating - up

Moody's notes that there could be positive rating pressure for BA if the company were to sustain:

1) gross adjusted leverage below 3.5x, with strong liquidity;

2) reported operating margin of at least 8%, indicating resilience to competitive pressures; and

3) consistent cashflow generation, enabling ongoing investments in the renewal of the fleet and to support IAG's announced dividend payment.

Moody's will continue to assess the operating performance of other IAG airline subsidiaries -- a further improvement of their performance would support BA's ratings as debt and dividend service within the IAG group would potentially be more equally balanced amongst IAG's airline subsidiaries. In addition, any potential upgrade would take into consideration IAG's debt levels.

What Could Change the Rating - Down

Negative pressure could be exerted on BA's ratings if:

1) gross adjusted leverage rises sustainably above 4.0x;

2) reported operating profit margin falls sustainably below 8%; and

3) cashflow generation is not sufficient to cover investments in the ongoing renewal of the fleet and to support IAG's dividend payments.

In addition, a material increase in IAG's debt levels beyond the additional debt assumed for the Aer Lingus acquisition, could put negative pressure on BA's ratings.

The principal methodologies used in rating British Airways, Plc, British Airways Finance (Jersey) L.P. and New York City Industrial Development Agcy, NY were Global Passenger Airlines published in May 2012. The principal methodologies used in rating Speedbird 2013 Limited were Global Passenger Airlines published in May 2012, and Enhanced Equipment Trust and Equipment Trust Certificates published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The person who approved British Airways, Plc, British Airways Finance (Jersey) L.P. and New York City Industrial Development Agcy, NY credit ratings is Michael Mulvaney, MD-Corporate Finance, Corporate Finance Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454. The person who approved Speedbird 2013 Limited credit ratings is Robert Jankowitz, MD-Corporate Finance, Corporate Finance Group, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454.

The relevant office for each credit rating is identified in "Debt/deal box" on the Ratings tab in the Debt/Deal List section of each issuer/entity page of the Website.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sven Reinke
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes outlook on BA's Ba2 rating to positive; affirms ratings
No Related Data.
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