Coronavirus lockdowns have taken a heavy toll on the financial performance and stability of global airlines and their suppliers.
According to aviation tracking site FlightRadar, the number of global passenger flights has fallen 77% since January 2020, and the US Transportation Security Administration reported a 96% drop in US traveler screenings compared to 2019 figures.
Meanwhile, the ARCA Global Airline stock market index, which tracks global airline shares, shed just under 60% of its value this year.
The International Air Transport Association (IATA) forecasts a US$252 billion fall in ticket revenues if travel bans remain in place for three months.
The rapid decline in passenger traffic and revenues has forced airlines around the world to announce large-scale layoffs. Qantas has put 20,000 staff on leave and 700 pilots at American Airlines have taken early retirement.
Airline financing structures have also come under strain. EasyJet, Ryanair, Lufthansa, IAG, Air Baltic and Turkish Airlines are just some of the operators that have had credit ratings downgraded and placed on watchlists. Some high profile airlines, such as Virgin Australia, have already been pushed into administration as a result. Avianca and LATAM also recently filed for Chapter 11 protection. All eyes will be on these cases as they may set the tone for how leases may be renegotiated in future Chapter 11 cases, and give us an understanding of which aircraft will be abandoned/rejected.
The financial impact on airlines has rippled down the supply chain. Aircraft and engine manufacturers are preparing to cut thousands of jobs. Aircraft leasing companies, which own around half of the world’s passenger fleet, have also been squeezed. Lessors have been approached by airlines asking for rent deferrals and restructurings but have little room to play hardball as there are currently no other options for redeploying aircraft.
Chapter 11 and administrations could be on the horizon for lessors without the backing of significant equity buffers. Cash-rich players, however, will be well-placed to win market share and buy up distressed rivals when lockdowns ease.
Focusing on cash
In the face of these operational and financial challenges, aviation companies have been considering all available lending options to bulk out their cash balances.
Government-backed loan programs, such as the Coronavirus Aid, Relief, and Economic Security (CARES) Act in the US and the UK Treasury’s coronavirus fund, have been the first port of call. Larger airlines with the resources to navigate and apply for the programs have moved quickly to secure funds. EasyJet secured a £600 million (US$744.4 million) loan from the UK’s coronavirus fund, while American Airlines, United Airlines and Delta Airlines will receive funds from the CARES Act, according to a recent report by Xtract Research.
To date, American Airlines will take a direct grant of US$4.1 billion and a low-interest loan of US$1.7 billion from, and issue warrants to, the US government. Delta will receive a US$5.4 billion package made up of low interest loans and warrants.
Exploring all options
State-backed export credit agencies (ECAs) have always supported aerospace manufacturers and provided low-interest loans to airlines. The Export-Import Bank of the United States, for example, has historically supported aerospace manufacturers and airlines with low interest rate loans, while Norway’s credit agency Giek has opened a US$522 million scheme to guarantee loans made to the country’s airlines. We will likely see better credits take advantage of ECA support if they can’t achieve attractive cost of funds in the market.
For some airlines, the reopening of the high yield bond markets after a sharp decline in Q1 2020 has also provided an opportunity to raise finance. High yield bonds have not been options for all airlines but, at the end of April, Delta Airlines came to market seeking US$3 billion, split between a five-year senior secured note and three-year term loan B. The company is also expected to benefit from a Federal Reserve commitment to continue buying the bonds of previously investment grade issuers that have been downgraded as a direct result of the pandemic.
But while there appears to be some interest in the high yield bond market for airline bonds, not all airlines have enjoyed success, as investors remain cautious and demanding. United Airlines, for example, cancelled its US$2.25 billion bond offer after failing to settle on terms with lenders. The airline had already upped the price of its bonds to 11% to secure investor support, but decided against proceeding with the bond issue.
A sticking point was said to be the valuation attributed to United’s fleet, which was to be used to secure the bonds. This theme is likely to characterize any loan negotiations in the aviation industry in the coming months. Appraising the value of aviation assets will remain challenging until it’s clear when airlines can resume operations at scale. This will lead to a pricing tug-of-war between borrowers holding out for a swift recovery and more skeptical lenders.
Pricing stasis in bond markets will see aviation businesses lean on their relationship lenders and explore other options, such as sale-and-leaseback financing. United, for example, agreed a loan deal of undisclosed value to sell and leaseback 22 planes to BOC Aviation. Sale-and-leaseback arrangements could secure significant sums of liquidity for airlines that have above average levels of fleet ownership.
All aviation companies, including those that have been able to bring on additional liquidity, however, face a period of prolonged uncertainty that will continue to color lending in the sector for some time.
Even when travel restrictions are lifted, it could be some time before passengers feel confident enough to resume travelling en masse, and there are questions around whether corporate travel will rebound to pre-pandemic levels as businesses have become more comfortable using video conferencing tools during the pandemic.
The post-COVID-19 aviation industry will likely be materially transformed, which in turn will influence the financing options available to airlines. The next few months will be decisive for the future of the sector.