Fitch Ratings has upgraded the Long-Term Issuer Default Rating (IDR) for Air Canada (AC) to 'BB-' from 'B+'. The Rating Outlook is Stable. Fitch has also affirmed AC's senior secured credit facility at 'BB+/RR1'. In addition, Fitch has upgraded Air Canada's senior unsecured debt to 'BB-/RR4' from 'B+/RR4'.
The rating action is supported by AC's improved financial position including leverage that has declined from the high levels seen after the previous recession, prospects for leverage to move incrementally lower beginning in 2018, the elimination of the company's pension deficit, and prospects for improving free cash flow (FCF) generation as AC moves past the peak of its heaviest period of capital spending. The upgrade is also supported by a strengthened overall North American aviation market, which has led to improved credit profiles for most industry participants.
Fitch's primary concerns include the heavy capital spending that is still to occur in 2017, which will limit the company's FCF generation, the still-soft unit revenue environment, and AC's aggressive international expansion efforts. Other concerns are typical for the airline industry and include the possibility of rising fuel prices, cyclicality, high operating leverage, and exposure to exogenous shocks.