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Rating Action:

Moody's upgrades British Airways' rating to Ba3; stable outlook

09 May 2014

Senior unsecured ratings upgraded to B1 from B2 and preference stock ratings upgraded to B2 from B3

London, 09 May 2014 -- Moody's Investors Service has today upgraded to Ba3 from B1 the corporate family rating (CFR) and to Ba3-PD from B1-PD the probability of default rating (PDR) of British Airways Plc (BA). Concurrently, Moody's has upgraded the company's senior unsecured notes and the company's backed Industrial Revenue Bonds issued through New York City Industrial Development Agcy, NY to B1 from B2, and British Airways Finance (Jersey) L.P.'s preference stock ratings to B2 from B3. The outlook on all ratings is stable. The Enhanced Equipment Trust Certificate's ("EETC") senior secured ratings issued by Speedbird 2013 Limited have been upgraded to A3 and Baa3 from Baa1 and Ba1 respectively.

"We are upgrading BA's ratings mainly because of materially improved earnings in 2013 as well as our expectation of further improvements over the next two years," says Sven Reinke, a Moody's Vice President - Senior Analyst and lead analyst for BA. "While we continue to assess BA on a standalone basis, we nevertheless take into consideration the weaker operating performance at Iberia compared with BA's performance. While we recognize the legal separation of the two entities, we will continue to assess the ongoing restructuring initiatives at Iberia and the extent to which these could, over time, impact BA's own financial profile, if at all."

RATINGS RATIONALE

Today's rating action reflects BA's strong performance in 2013 that resulted in credit metrics for fiscal year ended 31 December 2013 (FYE2013) that were well within our previous guidance for positive rating pressure. Moody's also expects that BA could further improve on its FYE2013 metrics if it achieves its public target of an operating profit of GBP1.3 billion by 2015. At the same time, Moody's will continue to assess what impact the difficulties at Iberia, Lineas Aereas de Espana, S.A. (Iberia, not rated) will have, if any, on the financial profiles of BA, as well as its owner, International Consolidated Airlines Group S.A. (IAG, not rated), going forward.

Driven by a strong short-haul performance, BA's revenues in 2013 rose 5.5% to GBP11.4 billion. This rise included a 6.6% increase in passenger revenues owing to improvements in both volumes (RPK increased by 3.9%) and yields (passenger revenue per RPK rose by 2.7%). Higher revenues as well as strong cost discipline resulted in a significant increase in operating profit before exceptional items to GBP651 million from GBP274 million in 2012. Additionally, BA's operating performance was supported by slightly lower average fuel prices and an improved passenger load factor of 81.3% compared with 79.9% in 2012 as capacity increase (ASK +2.0% in 2013) was notably below the growth in volume.

As of FYE2013, BA's Moody's-adjusted gross leverage was 4.4x, which is within Moody's previous guidance for gross leverage remaining sustainably below 6.0x for potential upward pressure on the rating.

Moody's also expects Brent fuel prices to remain fairly stable over the next one to two years. This expectation coincides with IAG's own guidance of a fairly stable fuel bill based on a spot price of about $1,000 per ton and a 64% fuel hedging position for 2014. Separately, Moody's also notes that BA's pension deficit has been subject to significant volatility in the past, such that a large shift in assets or obligations could potentially affect the rating agency's rating assessment going forward.

BA's Ba3 CFR reflects its leading position at Heathrow and its membership of the oneworld alliance group, as well as its integration with Iberia into IAG. We view the merger as a positive development, for BA and Iberia as it significantly enhances IAG's network in terms of aircraft and destinations. In particular, it combines BA's leading position in London Heathrow and strength in the North Atlantic segment with Iberia's leading position in travel to Latin American destinations. The most recent target forecast by IAG is to achieve annual synergies with a cumulative impact on EBIT of EUR650 million by 2015, driven by EUR350 million higher revenues and EUR300 million in cost savings. According to IAG, the group already realised synergies of EUR460 million in 2013.

At the same time, however, Moody's notes that the overall level of operating profit (before exceptional items) of IAG in 2013 was similar to BA on a standalone basis, reflecting operating losses at Iberia and operating profits at Vueling airlines that largely offset each other. Although Iberia's operating losses (before exceptional items) reduced in recent quarters, its liquidity profile has deteriorated in the past two years as a result of ongoing cash burn. Nevertheless, Moody's notes that Iberia expects to fund its current restructuring programme entirely using internal resources. One key factor underlying Moody's rating and outlook for BA is that there are currently no cross guarantees or cross default provisions between itself and Iberia, or its owner, IAG.

Moody's considers that BA has maintained solid liquidity, with a balance of cash and equivalents as of FYE2013 of GBP1.85 billion, and GBP2.2 billion of undrawn committed credit lines maturing between 2014 and 2021, most of which are dedicated capex facilities, with no financial covenants. Against this, in 2013 the company reported GBP365 million in short-term debt, most of which is in the form of finance leases, and capex of GBP1,378 million. Moody's notes a recent step-up in aircraft orders by IAG to re-fleet both BA and Iberia, and, as such, Moody's expects BA's own capital spending to increase in coming years.

The upgrades of the ratings assigned to the company's Enhanced Equipment Trust Certificates maintain the notching above the CFR that was assigned when this financing came to market in June 2013. The A3 rating assigned to the A tranche is six notches above the CFR; the Baa3 rating on the B tranche is three notches above the CFR. The EETCs, issued by Speedbird 2013 Limited, finance some of the youngest aircraft in BA's fleet that will service its long haul routes for years to come. Sufficient over-collateralization, the importance of the collateral, particularly the B777-300ER and B787-8 aircraft to the company's operations, the characteristics of EETCs, including the cross-default and cross-collateralization features and the improvement in the corporate credit profile support the upgrade of the ratings. Moody's forecasts the loan-to-values of the A and B tranches at about 57% and 73%, respectively, through at least 2016.

Moody's believes that an administration of BA is an unlikely event. However, should an administration of BA commence, it would be highly likely that the administrator would retain the aircraft and thus continue to pay the rents due on the operating leases. Alternatively, the aircraft in the transaction, including the six A320s, would be attractive to other operators in the event these aircraft unexpectedly came on the market under an insolvency scenario. This supports Moody's opinion of a significantly lower probability of a default on the EETCs under a corporate default of BA. The rating of the B tranche also recognizes that the projected equity cushion grows more quickly than in numerous of the EETCs issued by U.S. airlines because of rent payments that are larger than the debt amortization in those mortgage financing EETC transactions.

OUTLOOK

The stable outlook on the ratings reflects Moody's view that BA's FYE2013 metrics are adequately-positioned for the rating category. In addition, Moody's expectation that fuel prices will be fairly stable in the coming year should be supportive of BA's ambitious profitability targets for fiscal year (FY) 2015.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's believes that there could be positive rating pressure for BA if the company's gross adjusted leverage moves towards 4.0x, with strong liquidity. Moody's will continue to assess the extent to which Iberia's restructuring programme leads to operating losses being remedied. In Moody's view, a turnaround at Iberia without financial support from BA would be supportive of BA's own ratings.

Although not expected currently, there could be negative pressure on the rating or outlook if BA's earnings were to deteriorate, or if there were a material increase in the pension deficit, with gross adjusted leverage rising towards 6.0x.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Passenger Airlines published in May 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

British Airways (BA), based in Harmondsworth, United Kingdom, is one of Europe's largest airlines and flies to more than 400 destinations worldwide. For the fiscal year to December 2013, the company reported revenues and an operating profit (before exceptional items) of approximately GBP11.4 billion and GBP651 million, respectively. Following a merger with Iberia in January 2011, BA now reports as part of International Consolidated Airlines Group S.A. (IAG), which is incorporated as a Spanish company with its shares trading on both the London and Spanish Stock Exchanges. In 2013, IAG generated revenues and an operating loss (before exceptional items) of EUR18.7 billion and EUR770 million, respectively.

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.

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
Vice President - Senior Analyst
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

Eric de Bodard
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 upgrades British Airways' rating to Ba3; stable outlook
No Related Data.
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