IBA’s Operator Score Index Update – Headwinds Prevail
IBA Report: issued August 2019
IBA’s advisory team have updated their Operator Score Index to encompass the 2018 financial year end results for over 120+ airlines. Updated every six months, the Operator Score Index provides an overview of risk and operations for a range of airlines. The Index combines financial health with operational efficiency, access to capital, jurisdictional risk and, IBA’s proprietary intelligence on the operator’s performance as a Lessee to give an IBA credit score rating. As expected, the results of the update reflect challenging market conditions and confirms rising levels of risk amongst some credits.
So, what’s changed in the last six months?
In summary, the airline industry appears to be more volatile. IBA has revised credit scores for 36 airlines, with a higher volume of airline/entity tier downgrades than upgrades, this reflects the increased numbers of loss making carriers and some recent airline failures. IBA’s Operator Score Index has downgraded 28 airlines and upgraded 8. Some of the notable downward movers include Air Astana, Avianca Holdings, NOK, Transat A.T, and Aeroflot, which all saw significant decreases in net/comprehensive profits.
Chart 1 shows the movements in IBA Score Tier gradings – suggesting an increase in risk across the market.
In terms of absolute net/comprehensive income, 40 airlines registered an overall loss compared to 30 airlines in our previous update. Some of the biggest loss making airlines were Etihad, Virgin Australia, Hainan Airlines Holding, the LATAM Group, Korean Air Lines, Thai Airways, GOL, Norwegian, Asiana, and the Thomas Cook Group, with net income margins varying from -2% to -22%.
Chart 2 shows a deterioration in net result performance YoY.
Despite an increase in losses amongst some airlines, overall, we are seeing an uptick in airline revenue. Only five airlines within the IBA index have seen an absolute decrease in their revenue to varying degrees (up to 5% decrease YoY). The remaining airlines saw absolute revenue increases, with Jazeera Airways, Enter Air, and Jet2.com registering revenue growths well above 40% YoY. In terms of earnings, 81 airlines experienced a decrease in EBITDAR margin, with an average decrease of 4% YoY across the board and a maximum decrease of 12% YoY. Rising fuel prices were the main driver of the reduction in earnings.
Increasing debt levels
Relative indebtedness has generally increased across the board, with 57 airlines having a moderate 1.5 times degradation in adjusted debt to equity levels. In terms of relative cash reserves, 61 airlines saw a 6% YoY reduction in cash as a percentage of total liabilities, compared to 43 of the airlines that saw a 4% YoY increase in their cash and cash equivalents.
Regionally, we have seen the most outright score downgrades in the Europe & CIS and the Asia Pacific regions, with 10 downgrades each. There were also three upgrades in the Asia Pacific region, and two upgrades in Europe & CIS. Chart 3, shows regional performance by Average Revenue increase and Average Net/Comprehensive Income Decrease.
Going forward, the airline industry appears to be getting riskier. IBA has seen a higher volume of airline/entity tier downgrades than upgrades, an increased number of loss making carriers and some recent airline failures resulting in two exits from the Index. A number of airline M&As, cash flow issues, and rising input costs, particularly fuel, will exacerbate levels of risk going forward. Of course, each airline/airline group will be slightly different, as you will know, it is therefore pertinent to understand the risk associated with each airline prior to doing business.