Even the best-run airlines will eventually run out of cash if ticket sales dry up. Governments across the world are going to have to step in.
The speed at which the coronavirus outbreak is ripping through the travel and tourism industry is like nothing we’ve ever seen before. Case in point, the International Air Transport Association, which only two weeks ago said that the crisis could cost passenger airlines up to $113 billion in lost revenue, thinks we’re probably already beyond that figure, officials said on a call Tuesday.
Airlines across the world are grounding their fleets, laying off staff and drastically cutting their number of flights in a frantic bid to stay afloat. This isn’t just a case of bad airlines failing, it has the potential to bring down those airlines with even strongest balance sheets, for one simple reason: cash.
Most companies that go bankrupt do so not because they aren’t profitable but because they run out of cash. That’s exactly what is happening in the airline industry at the moment.
Demand for travel has almost totally dried up and it looks like that will remain so for the next few months at least. So passenger airlines are not making any money from ticket sales. At the same time they have fixed costs to pay.
There has been a marked improvement in the industry over the last decade with consolidation in North America and Europe helping to shore up finances. The problem is for every Delta and IAG there are multiples of carriers that are barely profitable.
Aside from 30 or so top tier airlines, IATA estimates there is a long tail that have shown next to no improvement.
“The rest of the industry, the vast majority of airlines still have high levels of debt and that means there are fixed obligations to pay even in the absence of any revenues, and that’s the critical thing driving the crisis for liquidity,” Brian Pearce, IATA’s chief economist, said on a call with journalists on Tuesday.
Airlines have to pay a certain amount for software or aircraft leases costs even when they aren’t bringing any cash in through the door. The same is true for labor – although some airlines have done a better job than others about making this more variable through profit sharing.
Carriers also aren’t benefiting from the massive drop in the price of oil thanks to extensive fuel hedging. Also in the short-term it’s largely irrelevant with people not flying.
IATA believes that 75 percent of airlines only have enough cash to cover their expenses for a maximum of three months.
Analysts at aviation intelligence company CAPA came to a similar conclusion, estimating that by the end of May most airlines in the world would be bankrupt.
“As the impact of the coronavirus and multiple government travel reactions sweep through our world, many airlines have probably already been driven into technical bankruptcy, or are at least substantially in breach of debt covenants,” CAPA said.
What Needs to Happen
The global airline industry needs a massive financial stimulus to keep it going. In the United States it looks like the figure will total around $50 billion. The Italian government has already said it will takeover struggling Alitalia and Norway has said it will hep the sector. Expect more to come.
“There is no one-size fits all solution. So, we will be writing to governments around the world to alert them to the dire situation of the industry and get them moving—in the circumstances of their country,” Alexandre de Juniac, CEO of IATA, said.
“Time is of the essence. Governments cannot take a wait-and-see approach. We have seen how dramatically the situation has deteriorated globally in a very short time. They must act now and decisively.”
De Juniac thinks the industry needs support totaling around $150 to $200 billion. The question is who will it get it?
CORRECTION: This article has been corrected to show the estimated level of support needed for the global airline was $150 to $200 billion not million.
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Photo credit: A Norwegian Air aircraft. the airline industry is desperate for financial support. K Bahr / Flickr