A surge in government bailout packages is helping the airline
industry scrape through the worst of the disruptions caused by the
Coronavirus crisis but the associated debt levels raise the prospect of
bankruptcies, warns the International Air Transport Association (IATA).
Governments,
especially in the developed economies, have extended $67 billion in
credit to airlines, adding to the $52 billion they had already
contracted from commercial sources. In its latest analysis, IATA says
global debt for the airline industry could rise to $550 billion by the
end of the year.
PRIVATE LENDERS
The
association warns that the figure which represents $120 billion of
additional debt or 28 per cent over and above what the industry owed at
the start of the year, will complicate airlines recovery efforts from
the impacts of the Covid-19 pandemic.
“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,” Alexandre de Juniac, IATA’s director general and chief
executive said during a conference call on May 26,
“Over
half the relief provided by governments creates new liabilities. Less
than 10 per cent 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,” Mr de Juniac
added.
AID IS CRITICAL
Of
the $67 billion lent by governments, $50 billion comes as direct loans,
$5 billion in deferred taxes and $12 billion in loan guarantees.
Additionally, airlines have contracted $52 billion in commercial debt
composed of $23 billion in commercial loans, $18 billion from the
capital markets, and $5 billion from new operating leases.
A further $6 billion has been accessed from leveraging existing credit facilities.
In
total governments have committed to $123 billion in financial aid to
airlines but only $67 billion of this will need to be repaid.
The
balance consists of $34.8 billion in wage subsidies, $11.5 billion in
equity financing and $9.7 billion in tax relief and subsidies.
IATA
said the aid is critical for airlines whose burn-curve for the second
quarter of 2020 is projected to reach $60 billion of cash. Still, the
$123 billion is equal to 14 per cent of the $838 billion that the
airline industry earned in 2019.
SLUGGISH RESPONSE
Despite
the huge figure, there are wide regional disparities with airlines in
Latin America, Africa and the Middle East receiving only $1.1 billion of
the aid disbursed by governments. IATA says the regional variations
indicate that there are gaps that need to be filled.
“Many
governments have stepped up with financial aid packages that provide a
bridge over this most difficult situation, including cash to avoid
bankruptcies. Where governments have not responded fast enough or with
limited funds, we have seen bankruptcies. Connectivity will be important
to the recovery. Meaningful financial aid to airlines now makes
economic sense. It will ensure that they are ready to provide
job-supporting connectivity as economies re-open,” Mr de Juniac said.
Through
its CARES Act, the US government has extended to airlines the
equivalent of 25 per cent of the revenues they earned in 2019. Europe
extended the equivalent of 15 per cent of annual revenues and
Asia-Pacific 10 per cent, while aid to airlines in Africa, the Middle
East and Latin America averaged just 1.1 per cent of 2019 revenues.
OTHER HURDLES
IATA
says many airlines still need aid but governments will need to be
conscious of the impact of debt because the type of aid provided will
have a direct bearing on the pace of post Covid-19 recovery. The
association says grants and subsidies will help airlines recover faster.
“A
tough future is ahead of us. Containing Covid-19 and surviving the
financial shock is just the first hurdle. Post-pandemic control measures
will make operations more costly. Fixed costs will have to be spread
over fewer travellers. And investments will be needed to meet our
environmental targets,” said Mr de Juniac.
“On
top of all that, airlines will need to repay massively increased debts
arising from the financial relief. After surviving the crisis,
recovering to financial health will be the next challenge for many
airlines,” he added.
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