Toronto, September 27, 2024 -- Moody's Ratings (Moody's) has changed Air Canada's (Air Canada) ratings outlook to positive from stable, and affirmed Air Canada's Ba2 corporate family rating (CFR), Ba2-PD probability of default rating, Ba1 senior secured notes rating, and Ba1 senior secured term loan B rating. The company's Speculative Grade Liquidity Rating (SGL) remains unchanged at SGL-1.
We also either affirmed or upgraded its ratings of the company's enhanced equipment trust certificates ("EETCs"). See the debt list herein for the actions on the EETCs.
The outlook change to positive reflects our view that Air Canada's debt to EBITDA will trend to the mid to low 3x range, along with its ability to adapt financially and operationally to changing industry dynamics. Despite pressure on its passenger revenue per available seat miles (PRASM) from higher operating costs and industry capacity growth, these issues are expected to stabilize over our outlook period. Moreover, Air Canada has revised its capital expenditure, deferring approximately $1.1 billion to 2027, which alleviates the demand on free cash flow.
RATINGS RATIONALE
Air Canada's (Ba2 positive) rating benefits from a leading position in the duopolistic Canadian air travel market, our expectation that adjusted debt/EBITDA will remain in the mid 3x range, very good liquidity and strengthening financial flexibility with a meaningful number of unencumbered aircraft and a valuable loyalty program (Aeroplan). Longer-term, the continued fleet transformation will improve the company's efficiency and allow it to preserve its cost profile.
The company's rating is constrained by cost inflation including labor and demand related expenses, exposure to volatile fuel prices which could pressure margins, and potential for increased competition in markets where Air Canada operates.
Air Canada will have very good liquidity (SGL-1) through September 2025. The company's sources include cash and short-term investments of about CAD7.9 billion at June 2024, and a fully available $975 million credit facility that expires in January 2029. These sources will be more than sufficient to fund approximately CAD1 billion of annual mandatory debt and lease repayments and our expectation of about CAD400 million of negative free cash flow through September 2025. We expect compliance with Air Canada's two financial covenants (minimum cash reserves and minimum collateral coverage ratio) over the next 12 months. Possible additional liquidity could be provided by Air Canada's unencumbered asset pool (excluding the value of Aeroplan and Air Canada Vacations) which is in excess of CAD6 billion.
The EETC ratings consider estimates of loan-to-value for each of the transactions. We believe the aircraft models that comprise the collateral across these transactions will remain important to Air Canada's network, which supports our expectation that the company would likely affirm these transactions if it were to reorganize under Canadian bankruptcy and insolvency law. The aircraft collateral are 777-300ERs (2013-1), 777-300ERs and 787-9s (2015-2) and 737-8 MAXs and 787-9s (2017-1). The 787s and 737 MAXes are the most fuel efficient in the fleet; the 777-300ERs have high seating density, and are used mainly on long haul flights to Europe and Asia. These models provide emissions benefits as well.
The positive outlook reflects our expectation that Air Canada will be able to withstand cost pressures while maintaining leverage in the mid to low 3x range. The outlook also assumes that Air Canada will continue to grow passenger volumes and maintain current margins with efficiencies providing some offset to cost inflation.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Air Canada is able to maintain adjusted debt-to-EBITDA towards 3x, EBITDA margins toward 20%, very good liquidity, and a track record of conservative financial policy.
The ratings could be downgraded if the company's liquidity or operating performance deteriorate, adjusted debt/EBITDA is likely to be sustained above 4x, or EBITDA margins sustained below 15%..
Changes in EETC ratings can result from any changes in the underlying credit quality or ratings of the company or our opinion of the importance of the aircraft collateral to the operations. Changes in estimates of current and projected aircraft market values, which will affect estimates of loan-to-value, could also result in a change to EETC ratings.