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Rating Action:

Moody's downgrades British Airways to Ba1 from Baa3; outlook negative

28 May 2020

London, 28 May 2020 -- Moody's Investors Service, ("Moody's") has today downgraded British Airways, Plc (British Airways or the company): the rating agency has assigned a Ba1 corporate family rating and withdrawn the Baa3 issuer rating of British Airways, Plc. Concurrently Moody's has downgraded the ratings of British Airways Pass Through Trust 2019-1AA (Class AA) to A1 from Aa3, British Airways Pass Through Trust 2019-1A (Class A) to Baa1 from A3, British Airways Pass Through Trust 2018-1AA (Class AA) to A1 from Aa3, British Airways Pass Through Trust 2018-1A (Class A) to Baa1 from A3, Speedbird 2013 Limited transaction (Class A) to Baa1 from A3 and Speedbird 2013 Limited transaction (Class B) to Baa2 from Baa1. The outlook on British Airways and on all of the above EETC transactions has been changed to negative from ratings under review. This concludes the review for downgrade initiated by Moody's on 17 March 2020.

Today's rating actions reflect:

• The increasing duration and severity of the coronavirus outbreak

• Moody's expectation that the airline industry will remain deeply constrained in 2020 and 2021 and will not recover 2019 passenger volumes until 2023 at the earliest

• Despite current substantial liquidity, risks that financial resources could be under pressure from further coronavirus outbreaks and extended restrictions on air travel

• The likelihood that the company will incur substantially increased debt during the coronavirus pandemic, and faces challenges to recover its balance sheet in the next two to three years

• The company's strong market position, high profitability, strategic importance to the United Kingdom economy and expectation of its continuing industry leadership

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL424928 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The passenger airline sector has been one of the sectors most significantly affected by the shock given its exposure to travel restrictions and sensitivity to consumer demand and sentiment. Today's action reflects the impact on British Airways of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

British Airways was initially impacted by the coronavirus outbreak in February and early March 2020 with restrictions on flights to and from China, the United States, Italy and other regions. As the outbreak spread British Airways' parent, International Consolidated Airlines Group, S.A. (IAG -- Ba1, negative) reduced its capacity by 94% in April and May, and has announced that it could see capacity reductions of 50% for 2020.

Moody's expects flight activity to resume over Q3 and Q4 of 2020, but remaining severely depressed, with domestic flights recovering earlier and a slower return for international and long haul flights. With around 80% of capacity outside Europe and a high exposure to business travel and premium leisure, Moody's expects that as flights resume British Airways will see a slower recovery profile than the industry as a whole. The United Kingdom's current plans to quarantine international air passengers arriving from outside Ireland are also likely to affect British Airways' ability to resume meaningful volumes in 2020.

The International Air Transport Association (IATA) currently forecasts that 2020 global passenger numbers will be 48% down year-on-year, with 2021 volumes around 30% below 2019, and only recovering to 2019 levels by 2023[1]. Given high levels of uncertainty of the trajectory of the pandemic there are a wide range of possible outcomes and Moody's credit assessment considers deeper downside scenarios incorporating the risks of a slower recovery. In particular Moody's considers that 2021 is likely to remain a severely depressed year for the industry, with continued travel restrictions, health screening and social distancing, consumer concerns over travel, a weak economic environment and threats of further coronavirus outbreaks. This is likely to be partially mitigated by better preparedness by governments and healthcare systems, international coordination, pent-up consumer demand and the economic importance of resuming air travel. The timing and profile of a recovery beyond 2021 also remains highly uncertain.

In response to the crisis British Airways has secured substantial levels of liquidity and reduced costs and cash outflows. The company has furloughed around 22,600 staff under the UK's job retention scheme, which runs until October 2020. It has also launched a restructuring and redundancy programme, affecting up to 12,000 staff, subject to ongoing consultation with labour representatives.

As at 31 December 2019 British Airways had total liquidity of GBP4.2 billion, comprising cash and short-term deposits of GBP2.6 billion as well as undrawn credit lines of around GBP1.6 billion. The company has since taken further steps to improve liquidity including drawing GBP300 million under the UK's Covid Commercial Financing Facility and extending its $1.46 billion Revolving Credit Facility for one year from 23 June 2020 to 23 June 2021. The company also has substantial levels of unencumbered aircraft fleet and has the potential to monetise its air miles loyalty scheme which could be used to further enhance liquidity. Moody's estimates that the company has liquidity to support around one year of groundings before additional funds are raised, although this remains subject to some uncertainty particularly in relation to the level of potential customer refunds for cancelled flights.

IAG has hedged around 90% of its expected fuel burn for 2020 and has reported a mark-to-market loss of around €1.5 billion [2] which is expected to be incurred in cash during the year. Moody's estimates that British Airways' share of this cost in the range GBP600-700 million. The company will incur additional cash outflows from its planned restructuring and redundancy programme, in addition to its cash burn during period of groundings or low activity.

Moody's expects that British Airways will incur substantial additional debt to support its liquidity and cash consumption during the coronavirus outbreak, and that cash generation is unlikely to be sufficient thereafter to restore balance sheet metrics by 2023.

At the same time the rating reflects Moody's expectation that British Airways will remain a leading operator in the industry and that it is likely to gain market share and improve operational efficiencies after the crisis. This is supported by its position as the UK's leading international scheduled airline, with a strong premium brand and competitive positions on key routes and airports including at London Heathrow Airport. It also reflects the company's high operating margins, its extensive global network, further supported by its membership in the one-world alliance and its position within IAG, and its strategic importance to the UK's economy and connectivity.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

British Airways' parent company IAG complied with all the applicable recommendations of the Spanish Corporate Governance Code and 2018 UK Corporate Governance Code, with minor exceptions as detailed in IAG's 2019 annual report.

The company's commitments to reduce its carbon dioxide emissions are aligned with those of its parent company, which is targeting a 10 per cent improvement in fuel efficiency between 2020 and 2025, a 20 per cent reduction in net CO2 emissions by 2030, and net zero CO2 emissions by 2050.

OUTLOOK

The negative outlook reflects the continued uncertain prospects for the airline industry, with risks of extended disruption to travel causing further strain on the company's balance sheet and liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings are unlikely to be upgraded in the short term. Positive rating pressure would not arise until the coronavirus outbreak is brought under control, travel restrictions are lifted, and passenger volumes return to more normal levels. At this point Moody's would evaluate the balance sheet and liquidity strength of the company and positive rating pressure would require evidence that the company is capable of substantially recovering its financial metrics and restoring liquidity headroom within a 1-2 year time horizon.

In addition, Moody's will continue to assess the operating performance of other IAG airline subsidiaries. This is because the operating and financial performance of IAG airline subsidiaries determines that balance of contribution to servicing IAG's holding company debt and informs British Airways' debt capacity and financial policy.

Moody's could downgrade British Airways if:

• There are expectations of deeper and longer declines in passenger volumes extending materially into 2021

• There are concerns over the adequacy of liquidity driven by extended groundings in 2021

• There are clear expectations that the company will not be able to maintain financial metrics compatible with a Ba1 rating following the coronavirus outbreak, in particular if:

- Gross adjusted leverage is expected to be sustainably above 4x

- Reported operating profit margin were to fall substantially below 10%

- Retained cash flow to debt reduces towards 15%

In addition, a material increase in IAG's debt levels or the substantial deterioration of the operating performance of IAG's other airline subsidiaries could put negative pressure on BA's ratings.

Changes in EETC ratings can result from any combination of changes in the underlying credit quality or ratings of the company, Moody's opinion of the importance of the aircraft collateral to the operations and/or its estimates of current and projected aircraft market values, which will affect estimates of loan-to-value.

PRINCIPAL METHODOLOGY

The principal methodology used in rating British Airways, Plc was Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. The principal methodologies used in rating British Airways Pass Through Trust 2018-1A, British Airways Pass Through Trust 2018-1AA, British Airways Pass Through Trust 2019-1A, British Airways Pass Through Trust 2019-1AA, and Speedbird 2013 Limited was Enhanced Equipment Trust and Equipment Trust Certificates published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1125852, and Passenger Airline Industry published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1091811. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

COMPANY PROFILE

British Airways is the UK's largest international scheduled airline and Europe's third-largest airline carrier in terms of revenues. Following the merger with Iberia S.A. (Iberia) in January 2011, British Airways reports as part of IAG, which is incorporated as a Spanish company, with its shares trading on the London Stock Exchange and the Spanish Stock Exchanges. 2019 revenues and Moody's adjusted EBIT were GBP13.3 billion and GBP1.8 billion respectively.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL424928 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Endorsement

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 rating analyst and the Moody's legal entity that has issued the ratings.

The person who approved British Airways, Plc credit ratings is Richard Etheridge, Associate Managing Director, Corporate Finance Group , JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454.The person who approved Speedbird 2013 Limited, British Airways Pass Through Trust 2018-1A, British Airways Pass Through Trust 2018-1AA, British Airways Pass Through Trust 2019-1A and British Airways Pass Through Trust 2019-1AA credit ratings is Russell Solomon, Associate Managing Director, 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.

REFERENCES/CITATIONS

[1] IATA publication, "Covid-19: outlook for air travel in the next 5 years", dated 13 May 2020: https://www.iata.org/en/iata-repository/publications/economic-reports/covid-19-outlook-for-air-travel-in-the-next-5-years/

[2] IAG Q1 2020 results presentation, dated 7 May 2020: https://www.iairgroup.com/~/media/Files/I/IAG/documents/q1-20-results-presentation.pdf

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.

Martin Robert Hallmark
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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