As the global aviation industry gradually begins to shift towards decarbonisation, Morningstar DBRS does “not expect the sector’s ratings to be materially affected by transitional risks in the near term,” explains Rohit Kumar, assistant vice president of Diversified Industries. However, over a longer period, carbon and greenhouse gas emissions cost factors could rise from ‘relevant’ to ‘significant’ in Morningstar’s ratings process, ‘resulting in changes to current ratings or trends, compared with the impact of their current relevant status’.
The global credit rating agency believes that the ‘long and gradual process’ towards decarbonisation in the airline sector will initially focus on carbon offsets, with sustainable aviation fuel (SAF) also expected to ‘contribute meaningfully in the medium to long term’; neither of which will materially affect the sector’s ratings profile in the near term. However, longer-term transition towards alternative technologies (described as being ‘critical for airlines’ survival') will require heavy investments, with those who lag behind at risk of detrimental impact to their ratings.
Although climate and climate change considerations are already included in several of Morningstar DBRS’ ESG criteria (which is in turn applied to every credit rating), the company notes that an status upgrade from ‘relevant’ to ‘significant’ would likely be predicated by a legislative requirement for airlines to comply with decarbonisation targets and/or a ‘the pace of process and cost incurred by airlines to adopt alternative technologies’.
Climate and weather risk-related costs, which do not currently affect airlines’ ratings, might also be flagged as relevant in the medium term; something Morningstar DBRS says are ‘increasingly posing challenges to airlines’ operational reliability’.
Morningstar DBRS: Decarbonisation not likely to impact ratings short-term
