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Credit Risk of the Aviation Sector: Comparing Airline Ratings

On 8th October, I had the great opportunity to moderate our webinar on Assessing Credit Risk in the Aviation Sector and wanted to share some of my key takeaways.

Olli Rouhiainen from Standard & Poor’s Ratings Services opened the webinar by providing an overview of S&P’s current rating levels and credit outlooks. He highlighted that stable outlooks are currently predominating across airlines’ credit ratings, and this is a result of positive economic growth prospects and consolidation in the industry, particularly in the U.S.

On the risk side, Olli highlighted that Ebola has overtaken oil prices as the key threat for the industry and this might possibly have a short but sharp impact on travel volumes.

One area of Olli’s presentation that I would recommend reviewing is the analysis of the relative standing of some of the bigger credits in the industry, which shows SAS and American Airlines as strongly levered in comparison to other local peers like Ryanair operating with much lower leverage (see chart).

The second speaker, Paul Whitmore from S&P Capital IQ, highlighted that whilst our fundamental database reported more than 3,200 entities have ‘airlines’ as their primary industry classification, only 25 of those airlines actually had a public credit rating by Standard & Poor’s.  

In this context, the rest of the presentation provided an interesting exploration of some of the tools that are currently being utilized to measure credit risk outside the rated universe.

One example that resonated with me the most was the distribution of the credit quality of airlines beyond the rated universe.  Paul relied on S&P Capital IQ fundamental data and CreditModel, to calculate credit risk on a subset of 77 global airline carriers. 

This sample showed that while the overall concentration of quantitative credit scores were at the ‘b’ level, in line with the concentration of public ratings, 55% of the sample concentrated in the ‘b’ range (from ‘b-‘ to ‘b+’), as per the charts below.  This implies that the credit quality of the non-rated portion of the industry presents a relatively weaker profile their rated peers.

Watch the full webinar replay for more insight into this topic.  

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