Mounting Debt To Shackle Airlines' Pandemic Recovery

The leading airline industry group is warning that mounting debt incurred by members to stay in business during the coronavirus crisis could eventually endanger their survival when the bills come due.

Airlines are scrambling to borrow money from commercial banks and investors, sell securities, and tap government aid in a desperate attempt to build a cash cushion that will let them weather a long drought in revenue while passenger traffic slowly rebuilds from pandemic lows.

Deutsche Lufthansa AG, for example, on Sunday agreed to $9.8 billion in German aid, much of which will have to be repaid. And LATAM Airlines received $900 million in debtor-in-possession financing as part of its bankruptcy reorganization plan.

The International Air Transport Association (IATA) on Tuesday said its research finds that the industry's collective debt could increase 28% from Jan. 1 to $550 billion by the end of the year. Of the $67 billion in new debt, $50 billion comes from government loans, $5 billion from deferred taxes and $12 billion from loan guarantees.

An additional $52 billion in debt is from commercial loans ($23 billion), debt offerings ($18 billion), debt from new operating leases ($5 billion), and tapping existing credit facilities ($6 billion).

"Government aid is helping to keep the industry afloat. The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating," said IATA Director General Alexandre de Juniac during a media briefing.

Governments around the world have committed $123 billion in financial aid to airlines so far, and more than half that amount will need to be repaid, according to IATA. Government rescue plans take multiple forms, including $34.8 billion for payroll grants, $11.5 billion in equity financing, and $9.7 billion in subsidies. The money, equal to 14% of the industry's 2019 total revenues, will help blunt the industry's estimated cash burn of $60 billion in the second quarter.

U.S. passenger airlines, for example, received $25 billion in wage subsidies from the federal government, about 30% of which came in the form of loans and warrants, and the rest as grants. The airlines are also eligible to apply for $25 billion in government loans and loan guarantees.

The U.S. has been the most generous to airlines so far, with financial aid equivalent to a quarter of the domestic carriers' 2019 revenues, followed by Europe at 15% of 2019 revenue levels. Asia-Pacific governments have contributed aid worth 10% of revenues, while average aid is about 1% in Latin America, the Middle East, and Africa.

Companies are also tapping private financing for operating reserves. Delta Air Lines expects to raise $12 billion by the end of the second quarter, and Southwest Airlines says it has raised $14 billion since the beginning of the year. Unlike borrowing for capital expenditures that typically provide some return on capital, the current loans will mostly be used for wages and other operating expenses.

"Over half the relief provided by governments creates new liabilities. Less than 10% will add to airline equity. It changes the financial picture of the industry completely. Paying off the debt owed governments and private lenders will mean that the crisis will last a lot longer than the time it takes for passenger demand to recover," said de Juniac.

IATA has repeatedly called on governments to swiftly provide economic relief, saying airlines are foundational pieces of society that will be needed to support economic recovery and trade growth. 

Besides LATAM, other carriers that have filed for bankruptcy are Avianca, Virgin Australia, Thai Airways, South African Airways, and Air Mauritius, with El Al on the watch list. Small, regional carriers such as Flybe (U.K.), German Airways, Compass Air (U.S.), Trans States Airlines (U.S.), Ravn Air Group, and Miami Air have closed down.

After the initial shock of the global shutdown, airlines will face ongoing financial challenges for the foreseeable future. Operating costs will be higher to maintain hygiene and social distancing, and fixed costs will be spread over fewer travelers.

"Policymakers, however, should be fully aware that the increased debt-burden will have consequences. Governments will still want airlines to improve environmental performance, to provide affordable connectivity, and to manage the increased operational costs of COVID-19 containment measures," de Juniac said. "For governments that have not provided assistance, we continue to ask them to do so. But, considering the industry's ballooning debt, our advice is to focus on ways that will not further increase the debt burden. This could be grants, subsidies, or payroll assistance."

An Austrian newspaper reported Tuesday that Austrian Airlines has reached agreement on a public-private loan package with the government worth $330 million to keep operating its hub at Vienna airport. The government is also expected to take an equity stake in the airline.

One way airlines are trying to free up cash for operations is to defer orders and leases for new aircraft.

On Tuesday, Dublin-based Aer Cap Holdings said it has arranged with aircraft manufacturers to reschedule delivery of 37 aircraft until 2023 or later after airline customers said they wouldn't need new aircraft for the next couple of years. In total, the lessor has rescheduled the delivery of more than 100 aircraft over a three-year period.

Postponing the fleet additions will reduce Aer Cap's cash capital expenditures in 2020 and 2021 by about $4.7 billion, and the company said talks continue to delay more scheduled deliveries.

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