Fitch Ratings has upgraded Etihad Airways PJSC’s (Etihad) Long-Term Issuer Default Rating (IDR) and senior unsecured ratings to ‘A+’ from ‘A’. The Outlook on the IDR is stable.
The upgrade follows the application of the Fitch updated Government-Related Entities (GRE) Rating Criteria and Fitch’s assessment of a materially stronger Standalone Credit Profile (SCP) of the company compared with Fitch’s last review. Etihad’s ratings are now two notches below those of Abu Dhabi (AA/Stable), and the new support score results in ‘Extremely Likely’ support from the emirate, based on GRE Criteria definitions.
State support drives IDR
Etihad is rated two notches below its indirect majority shareholder Abu Dhabi under Fitch’s GRE Rating Criteria. Fitch assesses decision-making and oversight as ‘Very Strong’ and precedent of support, preservation of government policy role and contagion risk as ‘Strong’.
Decision-making and oversight
Furthermore, Etihad is fully owned by the government through Abu Dhabi Developmental Holding Company PJSC (ADQ; AA/Stable), an intermediate holding company with no material operations and delegated by the government to hold its interest in core companies across key sectors in Abu Dhabi. Through board representation, ADQ has strong oversight over and close control and monitoring of Etihad’s strategic planning and finances.
Etihad board approves all major corporate activities, including annual budgets, investments and M&As. The board has seven members and includes key government officials. Also, Etihad board chairman is the chairman of Abu Dhabi Department of Municipalities and Transport, and its vice chairman is the deputy CEO of ADQ. Fitch’s assessment assumes that Etihad will remain fully owned by ADQ.
Precedent of support
Moreover, Etihad has a strong record of receiving government support in the form of equity injections, grants and shareholder loans. Fitch does not assume further tangible support from the parent in the medium term due to Etihad’s improving creditworthiness, but Fitch expects ADQ and the government to be committed to supporting Etihad (similar to previous years). Etihad remains a key contributor to the economic diversification of Abu Dhabi.
Incentive to support
Etihad is the national carrier to Abu Dhabi with a vital role in the government’s plan to increase the contribution of the non-oil sectors and to establish the emirate as a global connectivity hub for transportation and logistics. Etihad is also a key contributor to Abu Dhabi’s non-oil GDP. In addition, Etihad is a major employer with around 9,800 staff at end-2023. Fitch sees ‘Strong’ contagion risk as Fitch believes that an Etihad default could affect the funding cost of other GREs.
Improving SCP
Etihad’s SCP has significantly improved from previous years. Following the implementation of its turnaround plan, finalized in 2022, and very large equity injections, Etihad now has manageable leverage with a leaner cost base and a more flexible fleet structure. Etihad is now better positioned to compete both regionally and globally, and Fitch expects it will maintain a sustainable financial profile over the medium term, the report noted.
Solid performance in 2023
Etihad’s performance in 2023 surpassed Fitch’s expectations, driven by robust demand, good cargo performance, and healthy pricing that offset cost inflation. These favorable factors, along with a reduced cost base, resulted in EBITDAR slightly above USD900 million, based on Fitch’s estimates. The 2023 equity injection was applied to debt repayment, leading to a reduction in adjusted gross debt. As such, EBITDAR gross leverage was materially better than Fitch’s previous projections and higher than the levels Fitch projects for 2024-2025.
2028 strategic plan
Etihad’s strategic plan for 2028 is ambitious, targeting a fleet expansion to approximately 150 aircraft (89 as of 1Q24). This expansion will be driven by investments in new, fuel-efficient models, with a focus on A321LRs and narrow body aircraft (including the A321 NEOs). These additions aim to increase flight frequencies on existing routes and open new markets, thereby enhancing network flexibility. The fleet expansion is also expected to reduce the average fleet age and improve overall fuel efficiency.
Read more: Abu Dhabi’s Etihad Airways launches daily flights to Boston, Toronto
Growth capex drives negative FCF
Additionally, Fitch expects the high capex associated with Etihad’s 2028 strategic growth plan to result in negative free cash flow (FCF) in 2024-2028, which may be mitigated by some disposals and will be financed from available cash. Etihad’s network strategy is set to capitalize on the fleet enhancements to drive operational efficiency and increased market presence, amid growing regional competition.
Diversified network
The report further stated that Etihad has smaller scale of operations and network diversity than major rated carriers in EMEA. Etihad is gradually increasing its network (15 new routes launched in 2023) as it focuses on strengthening its presence in key markets. This includes increasing flight frequencies and offering more efficient schedules. Etihad’s base, Abu Dhabi, is geographically well-positioned to allow higher usage of both narrow- and wide-body aircraft.
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