Fitch Ratings has upgraded
The Outlook is Stable. A full list of rating actions is below.
The upgrade reflects our reassessment of the strength of the links between the company and its majority shareholder,
The Stable Outlook on the SCP reflects AFLT's strong domestic operations and gradual international flights recovery, with favorable yields. We expect profit margins and credit metrics to remain weak over 2021-2022, before strengthening from 2023. We estimate that liquidity will remain sufficient to sustain operations in 2021-2022, assuming available credit facilities from large state-owned banks and measures to preserve cash, such as slower expansion of the fleet and no dividends.
Key Rating Drivers
Domestic Segment Aids Recovery: AFLT as one of the key domestic carriers is better positioned than international peers to benefit from the early stages of air travel recovery. Limited international traffic, the absence of overseas travel opportunities, vaccination progress and loosening pandemic restrictions for domestic travel has driven a robust rebound in domestic leisure travel in the past 15 months. Domestic revenue passenger kilometers (RPK) and load factor outperformed pre-Covid-19 levels. While business and international travel remain weak, we still expect international travel to gradually recover to 2019 levels by 2023. The capacity removed during the course of the pandemic led to heightened 2021 yields, which we expect to normalise from 2022.
Expected Full Recovery from 2023: Fitch expects total RPK in 2021 and 2022 to be, respectively, 39% and 22% lower than 2019 levels before rebounding fully by 2023. Our assumptions for 2023 are essentially unchanged, as vaccine distribution throughout 2021-2022 should allow international traffic to normalise thereafter. Fitch still anticipates leisure travel to lead the recovery, and that competition will put pressure on international yields from 2022. We expect AFLT's passenger numbers, profitability and credit metrics to remain weak, breaching our negative rating sensitivities in 2021-2022, before returning to within their thresholds in 2023.
Delayed Deliveries, Higher Capex: Fitch expects free cash flow (FCF) to remain negative in 2021-2024, due to annual maintenance capex on average at
State Ownership and Control: State majority ownership (57.3%) of AFLT underpins our unchanged 'Strong' view of the airline's status, ownership and control. AFLT remains on the list of
Strong State Support: We assess support track record as 'Strong'. In 2020, state-guaranteed loans reached 52% of AFLT's total bank debt (forecast 30% in 2024), AFLT received subsidies of
Incentives to Support: The socio-political implications of a default by AFLT are 'Moderate', since the airline is important to
High FX Exposure: AFLT remains significantly exposed to foreign-exchange (FX) fluctuations as the majority of its debt and aircraft leases are denominated in foreign currencies, mainly the US dollar. This is partially mitigated by more than half of its revenue being generated in US dollars or euros, or linked to euros, although we expect revenue from international flights to be under pressure from pandemic-related disruption.
Derivation Summary
AFLT's SCP has been less affected by the pandemic, due to strong domestic market performance and government support, compared with peers whose ratings were more severely affected, such as
AFLT benefited from its scale and diversity of operations (with around 40% of revenue generated in the domestic market, and above 60% during the pandemic), strong domestic market position and favourable cost position.
AFLT's 'BB' IDR is derived from our top-down-minus-three rating approach, reflecting links with and support from the Russian state.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Russian GDP to grow 4.3% in 2021 and on average 2.3% in 2022-2024
Russian inflation at 4%-6% during 2021-2024
RPK to fall 39% in 2021 and 22% in 2022, relative to 2019 levels, before recovering to 2019 levels by 2023
Load factor of about 80% in 2021 (81.1% for 9M21) and gradually recovering close to 82% by 2023
Oil price of
Annual capex on average at
Pre-delivery payment refunds totalling
Fleet expansion in line with management's case for 2021-2023
No dividend payment for the next three years, dividends to resume from 2024 only
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive sovereign rating action
Strengthening links with the government, for example, in the form of explicit guarantees or cross-default provisions
Funds from operations (FFO) adjusted gross leverage falling below 5x on a sustained basis could result in positive rating action for the SCP
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Negative sovereign rating action
Weaker linkage with the state, via for example, diminishing or irregular state support
Inability to achieve FFO adjusted gross leverage below 5.5x and FFO fixed charge cover above 1x on a sustained basis, due to, among other factors, prolonged air-travel and social-distancing restrictions, substantial rouble depreciation, a protracted downturn in the Russian economy, weaker-than-expected yields or overly ambitious fleet expansion, would result in negative rating action for the SCP
The following rating sensitivities are for
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Structural features: Imposition of additional sanctions that undermine macroeconomic and financial stability, or impede debt service payments
Macroeconomic policy and performance: Changes in the policy framework that undermine policy credibility or increase the impact of oil price volatility on the economy
Public finances: Sustained erosion of the sovereign balance sheet, including from the materialisation of contingent liabilities from the large public sector
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Macroeconomic policy and performance: Sustained higher real GDP growth, for example stemming from the implementation of a reform strategy addressing structural constraints to growth, while preserving improved macroeconomic stability
Structural features: Reduction in geopolitical risk, or improvement of governance standards (for example rule of law, voice and accountability and control of corruption), which could cause the removal of the -1 QO notch
Public and external finances: Significant additional strengthening of fiscal and external savings buffers compared with Fitch's current projections, for example, through sustained high oil prices and windfall revenues
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: At end-1H21, AFLT had cash and short-term deposits of
Issuer Profile
AFLT is
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
AFLT's rating is linked to
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
Public Joint Stock Company Aeroflot - Russian Airlines LT IDR BB Upgrade BB-
ST IDR B Affirmed B
LC LT IDR BB Upgrade BB-
LC ST IDR B Affirmed B
senior unsecured
LT BB Upgrade BB-
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