NEW YORK & CHICAGO--(BUSINESS WIRE)--Negative effects of the UK's Brexit referendum are adding to an already pressured transatlantic air travel market and contributing to ongoing revenue pressures for US airlines, according to Fitch Ratings. Heavy-capacity growth from discounters and the recent series of multiple terrorist attacks are also contributing to weak revenue trends in the region.
Although the economic fallout from the Brexit referendum is likely to add some revenue pressures for the major US carriers over the intermediate term and delay efforts to reverse persistent negative unit revenue trends, Fitch does not anticipate any near-term rating actions.
The effects of the UK's Brexit referendum are becoming clearer in the sector's second-quarter earnings calls, as Delta Airlines announced last week that it would cut its winter capacity to the UK by 6% directly as a result of the Brexit vote, while United announced that it would bring fourth-quarter transatlantic capacity down by 1%-2%, in part due to the effects of the Brexit referendum. IATA estimates that the number of air passengers in the UK could be down by 3%-5% by 2020.
The immediate consequences of the vote include the weaker British pound, which makes foreign travel from the UK more expensive. Longer term effects of a weaker UK economy are harder to predict given the uncertainty around the timing of the UK vote to exit the EU. Nevertheless, the Brexit referendum likely represents an incremental headwind for the foreseeable future.
Additionally, there is a risk that the recent string of terror attacks and political unrest in the region could have a larger than normal impact on travel demand. Travel demand tends to bounce back fairly quickly after incidents of terrorism, but the string of successive high-profile attacks (Brussels, Ataturk and Nice) could have a broader impact on bookings.
Of the big three US carriers, American (rated BB-/Stable by Fitch) has the most direct exposure to the UK, particularly through its partnership with British Airways, but the turbulence in the UK has the potential to affect all three. Delta (rated BBB-/Stable by Fitch) has made a particular focus in recent years in growing its presence at Heathrow through its partnership with Virgin Atlantic, while the transatlantic region represents United's (rated BB-/Positive by Fitch) biggest international market, producing more than 18% of its total passenger revenue in 2015.
The airline sector had already been facing unit revenue pressures in international markets based on issues like economic weakness in Brazil, foreign exchange headwinds and increasing competitive capacity in the Pacific. Domestic trends have been softer recently as well, with most airlines reporting weaker close-in bookings and continuing to predict negative unit revenues at least through the rest of the year.
Despite a pressured operating environment, the airlines are still seeing the benefits of fuel prices that remain much lower than they were just two years ago and from structural changes to the industry that have come from years of consolidation and efforts to reduce debt. The industry continues to generate sizable profits in the transatlantic region despite the various headwinds affecting unit revenues. For the most part, credit metrics for the airlines are strong for their current ratings and the industry continues to generate significant amounts of cash; thus, the airlines have some room to weather near-term pressures without triggering negative ratings actions.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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