S&P: British Airways Upgraded To 'BBB-' On Strong Credit Metrics; Outlook Stable

S&P Global Ratings today raised its long-term issuer credit rating on U. K.-based British Airways PLC (BA) to 'BBB-' from 'BB+'. The outlook is stable.

We also raised our long-term issue rating on BA's class B enhanced equipment trust certificates (EETCs) to 'A-' from 'BBB+' and affirmed our 'A' rating on the class A EETCs. The 'A' rating is capped at the rating on liquidity facility provider, Landesbank Hessen-Thueringen Girozentrale (A/Stable/A-1).

At the same time, we raised our issue rating on BA's subsidiary, British Airways Finance (Jersey) L. P.'s €300 million preferred notes by two notches to 'BB' from 'B+'. This reflects our reassessment of a more remote default risk following our upgrade of BA.

Our upgrade of BA, combined with the reassessment of our view of the overall IAG group's creditworthiness, reflects the positive impact of BA's and IAG's consistently improving operating performance and the group's conservative acquisition strategy. IAG was formed by a merger between the Spanish airline IBERIA (not rated) and BA in 2010 to play a major role in consolidating the European airline market. After IAG's acquisition of Vueling in 2013 and Aer Lingus in 2015, we have not seen further material acquisitions, despite IAG's expression of interest in additional airline assets. We consider this measured acquisition strategy and financial policy commensurate with an investment-grade rating and we believe that the current rating and credit ratios are more likely be affected by (currently unexpected) operational setbacks rather than higher financial leverage due to large debt-funded acquisitions or shareholder remunerations.

Regulatory challenges and uncertainty related to Brexit remain a credit constraint, although the company is confident that it will comply with the EU's and the U. K.'s ownership and control rules after the U. K.'s exit from the EU. The recent announcement of a Brexit transition arrangement until December 2020 somewhat eases risks.

BA is one of the world's leading airlines, carrying more than 40 million passengers a year, operating a fleet of nearly 300 aircraft, and serving about 1,000 destinations. We continue to assess BA's competitive position as strong, underpinned by its key market position at London Heathrow, where it has about 50% of the take-off and landing rights. These support its high-value premium traffic routes across the North Atlantic and its high profitability compared with peers. However, the company also has to manage the fundamental challenges of the airline industry such as its susceptibility to economic cycles, oil price fluctuations, high capital intensity, and unforeseen event risk including global terrorism and disease outbreaks that affect global travel.

The stable outlook reflects our view that BA and IAG will be able to broadly maintain current profitability and financial leverage, despite potential economic headwinds that may stem from a weaker U. K. economy and currency fluctuations. We think that BA and IAG will be able to maintain FFO to adjusted debt at 40% or above over the next two years.

We could lower our ratings on BA if IAG's earnings and cash flow weakened such that its FFO-to-debt ratio fell below 40% with a limited prospect of improvement. This could happen in the event of weakening passenger demand or an increase in fuel prices that was not offset by higher average ticket prices. A downgrade could also result from IAG making significant debt-funded acquisitions or adopting a significantly more aggressive financial policy.

We could raise our ratings on BA if IAG's earnings and cash flow improve materially or its financial obligations decrease significantly, such that the FFO-to-debt ratio sustainably improves to 55% or above.
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