Fitch Ratings has revised the outlook for Air Canada from stable to positive and affirmed its long-term issuer default and senior unsecured ratings at ‘BB-‘.
The revised outlook reflects Fitch’s expectation that Air Canada’s liquidity position will continue to improve relative to the rating level, supported by an expected moderation in capex requirements and continued fundamental improvement in operating performance.
Air Canada is expected to continue to reduce its gross leverage, which should produce a meaningful strengthening in its credit metrics. Fitch expects the carrier’s net leverage to decline from 5.5x in 2016 to approximately 4.0x by year-end 2018 primarily from internal cash generation and modest debt repayment.
Fitch also notes Air Canada’s capacity discipline, with the airline maintaining a low double-digit EBITDAR margin despite significant industry capacity increases.
Fitch expects Air Canada’s operating performance to remain strong, aided by continued gains in unit revenues and moderate fuel price headwinds.
Air Canada is also expected to maintain a strong liquidity position, supported by committed credit facilities and substantial unencumbered assets. The carrier has access to C$3.8 billion in committed credit facilities as of June 30, 2017.
In addition, Air Canada has substantial unencumbered assets, including owned aircraft and real estate, that were valued at approximately C$5.0 billion at year-end 2016.
Air Canada is currently implementing cost reduction initiatives, including the introduction of a low-cost carrier and streamlining operations, which are expected to improve its cost structure and bolster its competitive position.
The positive outlook suggests that Air Canada’s ratings could be upgraded over the intermediate term should the company demonstrate a sustainable improvement in credit metrics and operating performance as well as liquidity position.
Fitch could also upgrade Air Canada’s ratings if the company successfully launches and expands a successful low-cost carrier, while maintaining its current investment-grade liquidity position.
However, Fitch warns that Air Canada could face significant headwinds from increased competition or geopolitical events that could negatively affect the airline industry as a whole. Furthermore, the airline’s concentration of revenue and earnings in the Canadian market limits the company’s geographic diversification.
Overall, Fitch sees Air Canada well-positioned to sustain its fundamental improvements due to the carrier’s commitment to capacity discipline, strong liquidity profile, and positive operating trends.
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