CreditRiskMonitor recently published a High Risk Report on distressed Scandinavian airliner SAS AB. This detailed report will provide a holistic financial evaluation for those working, in any capacity, with this company. Before diving in, we are offering five quick and important facts that you need to know about SAS AB to make a more solid business evaluation – or, perhaps, even an alteration in the extension of credit or a pivot to a transportation sector peer.
1. A High Risk of Corporate Failure
Relative to other international airliners, SAS AB has a very low FRISK® score of "2", which is among the worst on the "1" (highest risk)-to-"10" (lowest risk) scale. This score indicates a 4-10x greater risk of bankruptcy than the average public company. What you need to watch out for: SAS AB continues to pay its bills in a timely manner, which effectively cloaks the true underlying risk that counterparties face today.
Essentially, knowing that risk professionals monitor payment history, public companies with access to capital markets and bank lines of credit will do everything possible to pay promptly, manage cash efficiency and maintain access to their trade credit lines. The FRISK® score avoids the cloaking pitfall by instead examining financial statement ratios, stock market performance, credit agency ratings, and crowdsourcing subscriber research patterns to identify bankruptcy risk with 96% accuracy.
So, while you may be receiving prompt payments from SAS AB as your customer, mounting distress and debt can only be held off for so long. Before the company’s next invoice is due, the company could end in corporate failure, totally blindsiding unsecured creditors.
2. A Terrible Backdrop
The major story for the travel industry today is the ongoing impact of the coronavirus pandemic. Government-encouraged vaccination efforts have helped to buoy transportation in certain pockets of the world, yet the rapidly mutating virus continues to scare travelers from committing to get on airplanes – at least, compared to pre-pandemic figures.
The Delta variant – 60% more infectious than the alpha variant, per Public Health England – has caused an uptick in COVID-19 cases and has delayed the reopening plans of many countries, causing medical officials to suggest increasingly stringent lockdown measures for countries that have begun to reopen. Intercontinental travel will face further restriction as nations deal with unvaccinated holdouts representing large swaths of their respective populations. SAS AB’s global route map primarily serves Western European countries such as France, Greece, and Italy that, as of publishing date, are less than 50% fully vaccinated. Sweden, where SAS AB is headquartered, is less than 40% fully vaccinated.
The initial hit from the novel illness was damaging for SAS AB's business, but the lingering impact could be what puts the company over the edge. SAS’ Q2 2021 available seat kilometers declined nearly 60% year-over-year and its load factor collapsed to 29.4%, corresponding to total sales falling by 63%.
3. Heavily Leveraged
Airlines’ capital intensity stems from procuring aircraft fleets, although more commonly being leased, as well as their high maintenance costs. SAS AB made a decisive effort to reduce spendings where it can, such as headcount, discretionary spending, handling, and technological investments, yet its losses have continued. While dealing with a highly leveraged capital structure, one concerning factor remains that its total liabilities are 3x larger than its market capitalization. Furthermore, the company’s leverage metrics rank in the bottom quartile of its air transportation peer group.
That even comes after a 2020 recapitalization plan that exchanged kr2.25 billion of debt into equity. Poor operating conditions even led the Swedish and Danish governments to step in to offer the airliner additional support through separate credit facilities in 2021. So far, these credit facilities are largely unused as of Q2 but accessing these lines in the second half of 2021 would further raise its excessive debt burden.
4. Interest Coverage Challenges
A high debt load combined with a difficult operating environment can quickly turn into an unbearable weight. That's exactly what's going on today at SAS AB, among other airliners. Notably, SAS AB’s weak operating performance, which includes over a year of operating and net losses, and a seemingly uncontrolled cash burn, has left the airliner unable to cover its interest expenses. SAS AB's interest coverage ratio has been negative for more than a year, which is a sharp reversal from strong pre-COVID interest coverage levels.
5. The Bite of the Debt Ladder
There’s also a sizable amount of short-term debt on SAS AB's balance sheet. With current debt accounting for about 20% of the airliner's total balance, its ability to maneuver is restricted. What’s most concerning, however, is that over 40% of its debt stack matures by 2023, leaving a relatively short timeline to improve operating performance. While the 20% short-term debt % of total debt figure isn't out of line with the peer group or its historical trend, the company's ongoing operating weakness turns it into a real problem. Although regional governments have stepped in to help, you shouldn't forget that management is still working against the clock.
SAS AB's operating and financial problems are severe and will likely remain so until:
- coronavirus vaccinations rise further,
- governments ease travel restrictions, and
- normal business travel resumes
The company's FRISK® score of "2", nestled deep within the high-risk "red zone," is signaling that counterparties to SAS AB should be watching this situation closely.
Do not let the airline's prompt payment behavior cover up the underlying risks associated with the company. Contact us today to see how we can help you identify distressed operators like SAS AB across your entire portfolio.