What a difference a year and a couple of months make. Fitch Ratings has upgraded OneSky Flight’s Issuer Default Rating (IDR) to ‘B’ from ‘B-. Fitch also upgraded the company’s senior secured term loan to ‘BB-‘/’RR2’ from ‘B’/’RR3’. The Rating Outlook is Stable. OneSky is a unit of Directional Aviation. Its private aviation brands include Flexjet, Sentient Jet, FXAIR, PrivateFly, and Halo. In April 2020, Fitch had downgraded OneFlight citing, “the effects of a global drop in demand related to the coronavirus pandemic.”
Now Fitch says it “expects private aviation tailwinds to persist in the post-coronavirus pandemic environment and to drive top-line and margin outperformance relative to prior expectations.”
The upgrade is supported by higher liquidity, says Fitch. One Sky increased its cash by nearly 500%, from $109 million in 2019 to $512 million at year-end 2020. Fitch noted, “The company’s elevated margin profile is expected to remain in the low double digits as it continues to reduced fixed overhead, partially offset by increased sales costs to cater to the growing base of new customers.”
According to Fitch, in the first quarter, OneSky saw a 35% increase in fractional share hours sold from the year prior for Flexjet, further emphasizing the positive demand shift realized within the Sentient jet card business in the second half of 2020. It noted, “The company continues to expand its product offering to cater to its target market through the acquisition of Associated Aircraft Group, a vertical take-off helicopter operator.”
Sentient has said jet card sales last year jumped to $450 million from $300 million in 2019 and after initially estimating it would reach the $400 million mark. In 2021, OneSky bought helicopter operators on both sides of the Atlantic and has placed an order for 200 eVTOLs.
Fitch added, “[A]djusted leverage will be strong for the ‘B’ rating, given the company’s path towards deleveraging as operational leverage improves and amortization of the term loan continues. Despite the harsh initial shock driven by the pandemic, the company reduced Gross Adjusted Debt to EBITDAR to 5.5x, down from 6.2x at year end 2019. Fitch expects adjusted debt/EBITDAR to decline below 4x by YE 2023, which includes adjustments off balance sheet debt with regards to leases. The company’s covenant calculation regarding Total Net Debt to EBITDA for 2020 was 1.8x. Fitch does not anticipate the company will voluntarily pay down debt in the near term, but its improving margin profile in combination with the amortization of the term loan will likely reduce leverage over the rating horizon.”
The ratings agency continued, “In 2020, the company drove approximately 260 bps in EBITDA margin expansion via strong cost management. We believe the company will maintain margins in the low double digits throughout the rating horizon, as the company aims to reduce fixed overhead costs and utilization rates normalize. We expect utilization rates will continue to improve from the current level of 92% to historical rates of 99% as pent up demand utilizes its core fleet offerings. Fitch believes these margin improvements will be partially offset by an increase in the company’s sales workforce, which has been ramped up to take advantage of the growing appetite for private flying.”
Fitch expects cash flow in 2021 to be lower in comparison to the company’s free cash flow margin performance in 2020. Free cash flow in 2020 was driven by the strong growth in jet card sales and customer deposits contributing over $332 million for the year and as well as $80 million in additional support via the CARES grants. As customers who purchased jet cards in 2020 utilize their flight hour privileges, we expect a marginal cash burn in the first half of 2021. We expect the company will utilize a portion of liquidity and free cash flow to support growth initiatives in both the margins and top-line arenas.”
Fitch estimates the company’s liquidity as of March 31, 2021, to be approximately $469.5 million, including $34.2 million available on their $40 million ABL facility, which held a borrowing base of $36.2 million and reduced by $2.0 million in LOCs, and approximately $435.3 million of cash and cash equivalents. “This metric is well above expectations from Fitch’s prior review. Liquidity is robust for the company’s current rating, with ample headroom to service fixed and variable costs throughout the rating forecast. Debt maturities consist solely of required amortization under the term loan for the next several years. We view the amortization payments as manageable given the company’s cash flow profile over the forecast period,” says the agency.