British Airways has suffered another blow with a warning from credit agency Standard & Poor's that there is a high risk it will downgrade the airline's debt rating to junk status.
A day after BA warned it was heading for a £150m operating loss this year, S&P said it was placing the carrier's current BBB- rating on "credit watch with negative implications".
S&P's current rating is only one notch above non-investment grade. BA had £3.3bn of on-balance sheet debt at September 30 – though net debt was £1.4bn.
S&P said BA's ratings were constrained by "the cyclicality of the airline industry, volatile fuel costs, and profit concentration at BA's transatlantic network".
Credit analyst Leigh Bailey said Monday's profit warning "marks a clear downward shift in performance relative to our expectations and makes reference to the very challenging environment".
S&P added that the pound's sharp fall "against the US dollar and other currencies such as the euro is a major concern. The weak pound will further dampen domestic demand for foreign travel and raise the US dollar-based part of the group's costs".
Andreas Kindahl, another S&P analyst, said yesterday's rating action implied that there was "a 50:50 chance that the next move would be down".
A ratings downgrade would add to the headaches of BA chief executive Willie Walsh, who is this week meeting Fernado Conte, chairman of putative all-share merger partner Iberia.
BA initially wanted 65pc of any combined carrier but Mr Walsh's negotiating hand has been weakened by the airline's falling share price, down another 1.2 yesterday to 132.6p, and sterling's slide against the euro. BA was last night valued at £1.53bn – less than Iberia at £1.64bn.
Andrew Fitchie, an analyst at Collins Stewart, said given such ratios "there is a risk the deal may not proceed".
The Spanish airline has now received a report from consultants Mercer into BA's pension deficit but is yet to establish by how much annual contributions may have to rise from the current £131m.
QUESTOR SAYS: Will they or won't they merge? This question is now the key to BA's share price performance, writes Garry White. Willie Walsh wanted no worse than a 60:40 tie up with Iberia, but based on market capitalisations is now running the smaller company. This makes any negotiations tricky.
However, if BA can pulls off a deal, synergies would be huge – upwards of £450m a year according to chairman Martin Broughton. And that could prove conservative.
BA's core transatlantic market means the shares are also geared to a US recovery. It will be one of the first movers once green shoots appear. But, given the short-term risks, the shares currently rate a hold.
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