Increased state ownership in airlines likely in a debt-ridden market

Financial relief comes at a cost for airlines, which could be forced to accept state ownership to avoid failure
Airlines now owe $550 billion after receiving bailouts from governments during the coronavirus crisis.
Airlines now owe $550 billion after receiving bailouts from governments during the coronavirus crisis.

More airlines could soon find themselves under state ownership if governments decide to swap debt repayments for shares in the carriers they have bailed out in recent weeks.

That is according to the industry’s largest airline representative body, which has warned that debt-ridden airlines could fail under the weight of the repayments to the governments that bailed them out of the coronavirus crisis.

Some of the world’s largest airlines, including the likes of Lufthansa, Air France-KLM and most recently Cathay Pacific have secured state-funded bailout deals, allowing them to stay afloat during the coronavirus crisis, which has decimated travel demand and ripped out revenues.

Debt levels among airlines have soared by $120 billion this year with carriers now owing $550 billion, equivalent to more than 90% of expected revenues for 2021, according to the International Air Transport Association (IATA). And they could run even higher if aircraft lessors decide to hike prices towards the end of the year in order to recover some of their revenues.  

Brian Pearce, chief economist at IATA, said on a media call on Tuesday that airlines will need to raise equity and find cash quickly in order to make repayments once the industry begins its recovery.

He said that one option for government lenders was swapping debt for equity in the airlines they have aided. The alternative could be more airline failures or consolidation, Pearce said.

“It’s difficult to see which path the airline industry will take,” Pearce said when asked whether bailouts have simply delayed the inevitable collapse of carriers.

“Airlines will need to get rid of some of that debt somehow and that could be by raising equity. Actually, the equity markets have remarkably strengthened…so perhaps now is a time for airlines to seek to raise some of that equity.

“But this could lead to a restructuring of the industry; it could be that it does just postpone changes. The obvious consequence could be that airlines fail. We could either see a lot more consolidation of the industry, or, if governments feel forced to swap the debt that they’ve provided for equity, more government ownership.”

Pearce said that although some airlines were looked on favourably by capital markets before the coronavirus crisis, now with rising debt, businesses will find it more expensive and difficult to raise equity.

Emirates president and industry veteran Sir Tim Clark said last week that airlines which have been bailed out by governments are “nowhere near out of the woods” and must start flying meaningfully and profitably soon or face failure further down the line.

Clark warned that most rescue packages so far are based on the assumption that airlines will begin generating positive cash flow in the next few months.

“All the money that has gone into those companies is absorbing the cash obligations they have at the time,” he said.

“But it presupposes that you will be starting to fly meaningfully and profitably, generating positive cash flow in the next few months. Unfortunately, I don’t see it to the scale that these companies need to meet their cash obligations; so we’re nowhere near out of the woods.

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