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Wednesday,
May 13, 2020 / 04:38 PM / By Fitch Ratings / Header Image Credit: Business Traveller
The UK requirements to impose a 14-day quarantine on
international arrivals, including air travellers, will delay recovery in air
travel demand and test airlines' financial resilience, Fitch Ratings says.
Risks for airlines will increase should these measures stay in place for a
prolonged period.
Cross-border travel restrictions will be a key
consideration for our future rating-case reviews. We currently assume no
flights until end-June, followed by a 15% capacity utilisation of the entire
fleet from July, to gradually increase to more than 60% by December 2020.
The UK government COVID-19 recovery strategy,
published on 11 May 2020, will require all international arrivals, bar those on
a short list of exemptions, to self-isolate in their accommodation for fourteen
days upon entering the UK. We expect this regime to begin at the end of May.
Exemptions include journeys within the Common Travel Area (the UK, the Republic
of Ireland, the Isle of Man, Guernsey and Jersey) and passengers arriving from
France. It is unclear when and how often this measure will be reviewed.
New arrival requirements will discourage travellers
from flying to the UK, especially for short business trips, and will adversely
affect carriers such as British Airways (BA), Ryanair, Wizz Air and EasyJet.
Wizz Air resumed a fraction of its flights from London Luton airport prior to
the announcement. Ryanair and BA had anticipated resuming 40%-50% of their
flights from July due to increased demand during the summer holiday season.
BA, Ryanair and Wizz Air have strong liquidity
positions, which will enable them to finance their activities if the flight
recovery is delayed for several more months. Fitch estimates that the existing
cash balances and available revolving credit facilities (RCFs) will help these
companies to avoid a liquidity crunch in 2020, subject to their ability to
manage working capital efficiently. However, a substantial cash burn rate
during the aircraft grounding period will further impair the airlines' ability
to deleverage.
The quarantine may also suppress advance bookings and
complicate working capital management, which is already under pressure due to
refund requirements for cancelled flights. Under European law, passengers are
entitled to a cash refund within seven days. However, passengers are mostly
offered non-cash options such as flight vouchers. We expect the sector to come
under regulatory pressure to fast-track cash refunds despite logistical issues
in the processing of such refunds.
We expect the speed of recovery of European airlines
to vary depending on their relative exposure to short- or medium-haul traffic,
which will recover faster than long-haul traffic, as well as their ability to
adjust pricing. The companies' flexibility in pricing will be partly driven by
their starting liquidity positions and cost structures, and with that in mind
we believe Ryanair and Wizz Air will likely emerge stronger in the medium term
compared to other carriers.
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