IATA has released an analysis showing that the airline industry’s global debt could rise to US$550 billion by year-end, representing a US$120 billion increase over debt levels at the start of 2020.
Providing a breakdown, IATA said that US$67 billion of the new debt is composed of government loans (US$50 billion), deferred taxes (US$5 billion), and loan guarantees (US$12 billion).
Elsewhere, US$52 billion is from commercial sources including commercial loans (US$23 billion), capital market debt (US$18 billion), debt from new operating leases (US$5 billion), and accessing existing credit facilities (US$6 billion).
Financial aid is a lifeline to weather airlines through the crisis, said IATA, adding that during the restart period later this year, the industry’s debt load will be near US$550 billion – a massive 28 per cent increase.
“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 Alexandre de Juniac, IATA’s director general and CEO.
In total, governments have committed to US$123 billion in financial aid to airlines. Of this, US$67 billion will need to be repaid. The balance largely consists of wage subsidies (US$34.8 billion), equity financing (US$11.5 billion), and tax relief/subsidies (US$9.7 billion). This is vital for airlines which will burn through an estimated US$60 billion of cash in 2Q2020 alone, said IATA.
“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,” said de Juniac.
The US$123 billion in government financial aid is equal to 14 per cent of 2019’s total airline revenues (US$838 billion). The regional variations of the aid dispersion indicate that there are gaps that will need to be filled.
IATA stressed that there are still large gaps in the financial aid needed to help airlines survive the Covid-19 crisis. The US government has led the way with its CARES Act being the main component of financial aid to North American carriers, which in total, represented a quarter of 2019 annual revenues for the region’s airlines. This is followed by Europe with assistance at 15 per cent of 2019 annual revenues and Asia-Pacific at 10 per cent. But in Africa, the Middle East and Latin America, average aid is around one per cent of 2019 revenues.
“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. Examples include Australia, Italy, Thailand, Turkey, and the UK. 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 reopen,” said de Juniac.
The kind of aid provided will influence the speed and strength of the recovery, said IATA, urging governments still contemplating financial relief to focus on measures that help airlines raise equity financing.
“Many airlines are still in desperate need of a financial lifeline. For those governments that have not yet acted, the message is that helping airlines raise equity levels with a focus on grants and subsidies will place them in a stronger position for the recovery,” said de Juniac.
He added: “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.
“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.”