Wednesday, May 27, 2020

Airline Industry Shudders Under the Weight of Increasing Debt

Expert Forecast Reveals Depth of Problems
Shipping News Feature

WORLDWIDE – The extensive financial damage being caused to the world's airline industry by the current pandemic is almost palpable and has now been quantified by the International Air Transport Association (IATA), making concerning reading for anyone in the logistics industry.

The Swiss headquartered Association says that the airline industry’s global debt could rise to $550 billion by year-end. That’s a $120 billion increase over debt levels at the start of 2020. It estimates that $67 billion of the new debt is composed of government loans ($50 billion), deferred taxes ($5 billion) and loan guarantees ($12 billion).

Therein lies a further problem, just this week the German government announced a €10 billion support package for its national carrier, Lufthansa, something which will probably provide work for anti-competition lawyers for some time to come as it would appear to ride roughshod over EU rules on state aid, something Germany has fallen foul of previously with support for its rail industry.

The balance of debt as analysed by IATA, $52 billion, is from commercial sources including commercial loans ($23 billion), capital market debt ($18 billion), debt from new operating leases ($5 billion), and accessing existing credit facilities ($6 billion). Financial aid may be a lifeline to get through the worst of the crisis to prevent carriers, and indeed airports, going to the wall, but during the re-start period, hopefully later this year, the industry’s debt load will be near $550 billion, a massive 28% increase.

In total governments have committed to $123 billion in financial aid to airlines. Of this, $67 billion will need to be repaid. The balance largely consists of wage subsidies ($34.8 billion), equity financing ($11.5 billion), and tax relief / subsidies ($9.7 billion). This is vital for airlines which will burn through an estimated $60 billion of cash in the second quarter of 2020 alone. Alexandre de Juniac, IATA’s Director General and CEO commented:

“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. 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 to governments and private lenders will mean that the crisis will last a lot longer than the time it takes for passenger demand to recover.

IATA has published its observations in full on its website and included how it sees regional variations as the crisis deepens.