You could be forgiven for thinking Ryanair has started a trend. Barely two weeks after the Irish airline earned its second credit rating – from Fitch – ranking it as a lower risk for lenders than rival Lufthansa, Moody's has given the German carrier a boost by upgrading its view of the company.
Moody’s, one of three organisations, along with Fitch and Standard & Poor’s, which earn their crust by judging businesses’ ability to repay debts, has just changed its outlook on Lufthansa’s BA1 rating to positive on the back of a reasonable set of results published earlier this month.
In some ways it is a theoretical change, as the rating, which classes the airline’s debts as speculative and subject to substantial credit risk, remains the same. However, the Moody’s note suggests this too could improve considerably, moving Lufthansa up a notch to the lower-risk BAA.
That would bring it a substantial step closer to the BBB+ ratings earned by Ryanair from both Fitch and Standard & Poor’s. Those ratings class the Irish operator as the world’s most creditworthy airline, a fact it has not been shy about sharing.
However, given a reasonable tailwind, Lufthansa could at least make a race of it with Ryanair for that title. The Moody’s rationale is partly based on a €1.1 billion reduction in the German airline’s pension deficit and that its cost-cutting programme will continue to underpin earnings growth, improving its financial profile.
Lufthansa believes its cost-cutting programme, dubbed Score, will contribute €2.1 billion to its earnings between this year and next. Moody’s agrees that should the airline achieve this, along with a reduction in its debt-to-earnings ratio, an upgrade in its credit rating should follow.
Ryanair is almost always sceptical about “legacy” airlines’ ability to deliver on cost savings. In this case at least, Moody’s seems to share that scepticism, calling Lufthansa’s operating profits targets ambitious.
However, it is not dismissing them either, acknowledging that the airline could well manage to grow earnings and cut debt over the coming years.