Moodys has downgraded Turkish Airlines’ (also known as Turk Hava Yollari Anonim Ortakligi or THY) corporate family rating to Ba3 from Ba2 and its probability of default rating (PDR) to Ba3-PD from Ba2-PD. Moody's also downgraded Turkish Airlines' Enhanced Equipment Trust Certificates (EETCs) to Baa1 from A3 (Bosphorus Pass Through Trust 2015-1A), to Baa1 from A3 (Anatolia Pass Through Trust 2015-1: Class A) and to Ba1 from Baa3 (Anatolia Pass Through Trust 2015-1: Class B). The outlook on the corporate and EETC ratings of Turkish Airlines is negative.
Moody’s states that the downgrade of the corporate rating reflects its downward revision in its forecasts for THY as it predicts the operating environment will remain weak entering into 2017. The rating agency also pointed to execution risks in the implementation of planned operational and strategic changes to address the currently challenging operating environment. Although it is not mentioned specifically, such weaknesses must point towards the lack of an experience financial treasury team, who were dismissed en masse last month.
Moody’s does point to a decline in THY’s passenger load factor to 73.7% for the January to July 2016 period from 78% a year earlier, which has been driven by a decline in foreign visitors travelling to Turkey as well as fewer travellers passing through the Istanbul hub as a result of heightened security concerns in Turkey and Europe. “This has been further exacerbated by the additions of new debt-funded aircraft into the airline's fleet, with available seat kilometres (ASK) increasing 14.1% for the January to July 2016 period from a year earlier. Although as of 31 March 2016 (LTM) the airline's adjusted debt to EBITDA (FX-adjusted) stood at 5.1x, Moody's forecasts adjusted leverage to be in excess of 7.0x by year-end 2016 and believes that, should operating conditions remain challenging over the near term, leverage could stay elevated above 6.0x in 2017.”
Moody's does note however that Turkish Airlines has begun to take proactive steps to improve its profitability, but states that it is “unclear at this stage on the timing and success of some of these measures”, adding that the “timely execution of capacity management measures, cost-cutting initiatives as well as revenue-enhancing steps could help to sustainably reduce leverage and improve profitability faster than what Moody's anticipates, which in turn could help stabilize the negative outlook.”
Meanwhile, local press in SriLankan are bemoaning the fact that flag carrier SriLankan Airlines is making a loss on the wet lease of one Airbus A330-300 aircraft to Pakistan International Airlines (PIA). Figures detailed in The Sunday Leader newspaper state that the airline is leasing the aircraft from AerCap at $1.4 million per month but is leasing out the aircraft at a loss of up to $6, 080 per month. SriLankanAirlines is in negotiations with PIA to lease a further three A330s on a dry lease basis, which critics say will also be at a loss and have favoured renegotiating the return of the aircraft to the lessor.
This is the second airline in the region to have leased out aircraft at a loss. The real question for airlines that are beginning to take delivery of large aircraft orders with the intent of leasing them out rather than defer or cancel orders, is whether they will have sound economics in place to ensure they are doing so at a profit to the company, or at the very least at break even.