The world’s largest airlines have racked up net debt of more than $ 300 billion, a sign that the pandemic will stymie the recovery for years as carriers face huge bills from funding the rescue and supporting the economy. ‘State.
In hopes of a limited restart in travel this summer, attention is turning to how quickly airlines can recover from the biggest crisis in aviation history.
“Liquidity is and always has been of great importance in ensuring that we always have enough cash on hand to handle the situation,” easyJet managing director Johan Lundgren told the Financial Times.
But now there is a big price to pay afterwards shareholders, debt markets and government support schemes provided essential liquidity to help the industry survive the collapse in passenger numbers and avoid widespread corporate bankruptcies.
Although companies have cash and short-term investments of $ 140 billion, up from $ 90 billion at the start of the year, their net debt has also grown by $ 60 billion over the same period for reach $ 320 billion, according to FT analysis using FactSet data. balance sheets of the 50 largest airlines.
America’s Big Four – United Airlines, American Airlines, Delta Air Lines and Southwest Airlines – have led the way in raising funds, backed by more than $ 60 billion in government aid.
In Europe, national airlines Air France-KLM and Lufthansa were backed by billions of euros in state support, while British Airways owner IAG solicited shareholders for 2.75 billion euros. euros, received a £ 2 billion loan from the UK and raised 1.2 euros. in a bond issue this week.
Airlines entered the crisis in better shape than before the 2008 financial crash, which allowed them to raise billions quickly, according to Jonathan Root, senior vice president of rating agency Moody’s.
“Credit markets were there for businesses from day one,” he said. “If it was 2008, we would have a different discussion today.”
Airlines raised $ 42.6 billion in debt markets in 2020, the highest number on record, according to data provider Dealogic.
This month, American Airlines launched a record $ 10 billion debt contract This underscored how low interest rates have made investors look for yield, even in sectors that have been hit hard by the crisis.
“We were surprised, and I think the industry was surprised, how well supported a lot of companies have been,” said Rachel Gerrish, director of S&P Global Ratings.
However, the support will be needed longer than many in the industry had hoped, as the the outlook for air transport is uncertain this year, despite the success of vaccination campaigns in many key markets.
The International Air Transport Association said carriers could spend $ 95 billion in cash in 2021 and warned that its forecast that the industry could turn cash-positive by year-end could s be too optimistic.
“Liquidity is essential today and the industry will need more liquidity during this year to survive. But . . . a lot of that will likely translate into increased debt, ”said Iata chief economist Brian Pearce.
Once passengers are finally able to return to the skies, companies can start trying to improve their bottom line. “The ability to repay debt has always been a priority,” said easyJet’s Lundgren.
He said a recent UK government guaranteed loan of £ 1.4 billion was particularly helpful as it allowed the airline to repay some short-term loans and improve its debt maturity profile.
“Any debt that we contract, we want to repay, we want to find the position in which we were before we launched,” he added.
Next year is also expected to identify the strongest carriers, such as Michael O’Leary’s Ryanair, which have relatively low costs and flexibility to respond to the flyback, while rivals are weighed down by the fight against debt. .
Daniel Roeska, aerospace analyst at Bernstein, said the most indebted airlines will have to reduce “scars” on their balance sheets before they become attractive to investors again.
O’Leary offered a more crude analysis, calling some European airlines “state aid junkies”. His airline has opened legal proceedings to challenge the EU government’s bailouts.
In the United States, however, high leverage may not be such a problem, as large corporations are among the most profitable.
Moody’s Root said if a vaccine could be widely distributed this year, US airlines would be able to repay “a lot of the debt they incurred.”
Weaker groups and those without the luxury of meaningful government support face a bleak future. Norwegian, long one of Europe’s most vulnerable airlines due to its high debt load, filed for bankruptcy on November 18.
But regardless of the strategy or the balance sheets, “there won’t be a lot of free cash flow available for investment in the fleet or the product,” said Pearce of Iata, as airlines are always exposed to factors. independent of their will.
Etihad chief executive Tony Douglas told the FT he expects a recovery in the second half of the year as vaccines roll out, but added “almost every time we review what’s going on it changes. “.
Additional reporting by Chris Campbell