Airlines Need A Saviour To Survive The Crash

The Airline crisis has left a massive crater in the world of travel. There are many reports that paint the picture of the destruction and surrounding loss, but suffice to say, this is the fastest slowdown on record, fastest market correction on record, fastest rise in unemployment on record. We are officially in the middle of the black swan of all black swan events.

Lufthansa has cut 95% of its capacity, IAG by 80%, Cathay Pacific and Singapore Air have cut nearly everything, Virgin Atlantic, Ryanair have all grounded most of their fleets, United’s transatlantic, transpacific and Latin America routes are stopped, Norwegian’s fleet is grounded. Everyday more airlines are following suit and we haven’t seen the bottom of this yet so the next six to twelve months will get extremely ugly. We forget but just last year we lost so many airlines to liquidation. Thomas Cook, Flybe and now there is fear looming over Alitalia, Air India, Norwegian, Hainan Air and many other airlines. The ones who will survive this cataclysm will depend on which of the FOUR saviours come to the Airlines rescue.

1. Your own liquidity position

Of the hundreds of carriers, very few have enough funds to see them through the year. Going by the cash ratio of some of the largest carriers, which is the ability to pay for liabilities over the next 12 months out of cash, every single carrier will run short of money before satisfying their creditors. IATA estimates that only 30 out of the 300 airlines have enough liquidity to survive for more than 3 months and most have only 2 months liquidity. Most Airlines will also find themselves locked out of capital markets given the impact of coronavirus further limiting options to secure financing. If we add short-term assets such as receivables and inventories to the mix, a couple of the players might survive. If you can further cut general operating expenses and aircraft lease liabilities there will be a few more that can pull through. Apart from the lucky few who can tide over the crisis, the rest of the airlines industry is still condemned to death by guillotine.

2. Loyal shareholder base

Global Airlines have already raised $17 billion in debt from banks according to a recent Bloomberg article. On the equity side, the publicly traded Airlines who have a loyal shareholder base can raise further capital by selling shares. Crisis aside, some Airlines are structural winners and the public markets will choose to stand by them. If the public markets don’t come to the rescue, then it will force consolidation as an agenda to create a more efficient sector. Either way, it is imperative for all Airlines to raise capital fast and do so urgently as the window of opportunity might not exist for too long.

3. Helping hand of a wealthy patron

Airlines have always had wealthy shareholders who have backstopped their commercial ambitions. Never before has it been more important to have a wealthy sponsor who can rescue the Airlines – especially the privately held ones. EasyJet, Norwegian and SpiceJet and some others are the fortunate few who will actively bank on the on the ability and willingness of their wealthy founders to dig deep into their pockets and get them out of this tight spot. We had Singapore Airlines recently announce a sale of new shares and convertible bonds worth nearly $10 billion. The state-owned investment fund Temasek Holdings already owns 55% of SIA and will likely end up with far more.

4. Friendly government

Airlines are far too essential for infrastructure, for the economy, for the supply chain, for employment and for branding of a country. Airlines that are state owned or retain significant government shareholdings will call on their governments to help out in this crisis. I don’t foresee a Qantas, Lufthansa, Korean Air or the many Middle Eastern carriers being abandoned by their parents. Clearly a friendly government with the requisite strength and resolve is very much need of the hour to survive the crisis especially as Airlines are at the core of the national vision of growth and transformation of many of these countries.

Conclusion

Shutting down of skies is far beyond what could have expected. Although one could argue Air travel needs to be reopened first and most urgently, it is unlikely to get restarted in a hurry. The most prominent US Airlines like Delta, American Airlines and United will get a bailout but that would only cover a few months of liabilities and this time it comes with many strings attached including limits on executive compensation, stock buybacks and dividends. In the UK, the Treasury has refused to bailout the Airlines. The message is simple - shareholders and owners need to look out for their own interests. Now this might be OK for the ones who have enough cash on their balance sheets, who have a rich patron or those who will be rescued by the governments. But what becomes of the weaker airlines who will not have the same luxury? The End.