Airlines’ $120B Debt Balloon Could Reshape Commercial Aviation

Airline debt has risen by $120 billion since the beginning of the year as airlines have sought to raise cash to survive the coronavirus crisis, according to the industry group IATA. This debt balloon could result in a greater number of airline failures and re-shape the global commercial aviation market.

• $67 billion of the new debt is composed of government loans ($50 billion), deferred taxes ($5 billion) and loan guarantees ($12 billion).
• $52 billion is from commercial sources including commercial loans ($23 billion), capital market debt ($18 billion), debt from new operating leases ($5 billion), and accessing existing credit facilities ($6 billion). 

“Debt is going to be a substantial burden on the industry as it restarts. we could easily see airline failures under the weight of this debt. Alternatively, we could see some more government involvement if there is interest in trading debt for equity,” IATA’s Chief Economist, Brian Pearce, said.

Asked why airlines accepted aid packages that included financing, IATA’s Chief Economist Brian Pearce and Director General and CEO Alexandre de Juniac, replied that airlines had little option but to accept loan terms, given their limited cash reserves to weather this crisis.

Airlines have received $11 billion in equity, along with other rescue measures including waived or reduced taxes, wage subsidies, equity financing and operating subsidies including route financing.

There have also been significant regional differences in government support packages, which will shape the competitive environment when the crisis has passed.

Even within regions where governments have lent airlines greater support, there is an imbalance from country to country, with airlines in developing markets worst affected.

This regional imbalance has already lead to some airline failures, including the recent bankruptcy announcements by Latin American carriers LATAM and Avianca. Whether any airlines in advanced economies could capitalize on the weakness of airlines in other markets is an open questions, since even airlines in advanced economies who have received strong government support are currently weak.

The concern now is two fold. First, that the process of recovery for airlines may be too prolonged for even some those airlines who were in good standing prior to the coronavirus crisis to survive debt repayment. Second, that any additional support from governments to manage this debt will come with heavy strings attached.

If it sounds as though airlines are pushing for additional government support, with no strings attached, that’s because they are. If that sounds like some cheek, that’s because it is. But it may be the only recourse airlines have, if markets are unwilling to offer greater equity on assets.

Alexandre de Juniac walked a fine line on capitalism’s ability to manage situations like the coronavirus pandemic today, arguing both for free market dynamics and against them.

“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,” de Juniac said.

This comes to the essential question which has been looming in the shadows during this crisis: was the deregulation and privatization of commercial aviation a mistake? Are airlines too critical a part of modern global infrastructure not to be government owned?

Pearce addressed these core questions by arguing that governments would want to ensure that they and their citizens are “covered by a strong airline network” during period of economic recovery ahead.

He added: “I think we saw in the past where governments have provided equity support because of the recognition that companies with too much debt don’t have the ability to operate…Governments have often sold their shares when markets have recovered which is a good return for tax payers. We would see that as the main reason for governments wanting to do this…We would want governments to allow the private sector back in as soon as possible.”

That may be true, but will the private sector be as keen to re-enter this time around? If they can be persuaded, it might finally lead to global airline consolidation and the fall of the flagship.