Fitch cuts Brazilian airlines to B-

Fitch cuts Brazilian airlines to B-

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Fitch Ratings has downgraded the three largest airlines in Brazil – Azul, Gol and LATAM Airlines – by one or two notches to B- and remain on Ratings Watch Negative, saying the companies are burning cash as travel restrictions remain in force during the coronavirus pandemic. 

Even after the restrictions are lifted, the airlines may face a long recovery period and a sharp deterioration in the Brazilian real, resulting in a mismatch between revenues in local currency and debt obligations in dollars and euros, Fitch said in a report on Tuesday.

The airlines have decreased the number of flights by 75% to 93% in Brazil and by up to 95% in the international markets in the second quarter this year. As a result, Fitch said the airlines will likely see revenue passenger kilometers, or RPKs, fall 55% year-on-year in 2020 and remain 22% below 2019's levels in 2021.

In the meantime, the airlines are burning through cash, which limits their ability to access new credit lines, Fitch said. LATAM, for example, will likely burn around $600 million through the rest of the year, while Gol will spend around BRL900 million ($159 million) and Azul BRL800 million, according to Fitch.

LATAM had $1.7 billion in cash on hand at the end of March this year, while Gol had BRL1.8 billion and Azul had BRL1.3 billion, Fitch said. In comparison, LATAM had $10.4 billion in debt at the end of 2019, including $1.8 billion in short-term debt. Gol had BRL14.5 billion in total debt at the end of last year, including BRL3.9 billion due in August. Azul had BRL20.6 billion in total debt at the end of March this year with BRL4.3 billion in short-term debt, including BRL2.4 billion in lease payments, according to Fitch.

The three airlines are in talks to receive BRL2 billion to BRL4 billion in emergency financing from Brazil's national development BNDES, and Santiago-based LATAM is also in negotiations with the governments of Chile and Peru.

"This cash inflow is a key credit consideration at this point and any major delay or failure to reach an agreement could lead to additional rating actions," Fitch said about the rescue package from BNDES.

The airlines will likely suffer a 90% drop revenues in the second quarter this year, followed by declines of as much as 70% in the third quarter and 40% in the fourth quarter for the carriers with more domestic flights and closer to 50% for those with more international flights, Fitch said. A full recovery will not likely occur before 2022, according to Fitch.