Turk Hava Yollari A.O.

The negative outlook reflects high uncertainty regarding the pandemic, its effects on air traffic demand, and THY's financial position and liquidity. While we currently don't see liquidity as a near-term risk, we would lower the rating if THY unexpectedly loses access to state-owned bank funding to roll over short-term debt and fails to raise funds elsewhere, such that sources were insufficient to cover uses in the upcoming 12 months. A downgrade would also follow if we expected adjusted FFO to debt to average well below 6% in 2020-2021 (after it achieved 7%-8% in 2020). This could occur if pandemic-related setbacks persist, such as prolonged lockdowns and travel restrictions, or people's reluctance to travel. To revise the outlook to stable, we

...Turk Hava Yollari A.O. (THY) remained profitable during the pandemic thanks to timely cost-containment measures and strong demand for its cargo operations, but negative free cash flow drives debt accumulation. S&P Global Ratings-adjusted EBITDA dropped about 60% to $1.4 billion in 2020. THY pushed back with stringent cost-saving measures, primarily in personnel expenses by using short-term employment allowance and agreement with the labor union to reduce wages by around 40%. Unlike most European airlines, THY has only one labor union, which provides a more flexible cost base. The airline also benefitted from a spike in demand for its cargo flights operations, which saw about 60% higher revenue driven by both high cargo yield and volume. The strong cargo performance and contributed to 40% of the almost halved group revenue in 2020, compared to 13% in 2019. That said, high interest payments and working capital outflow reduced our reported cash flow from operations by more than 90% to $228...

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