The International Air Transport Association (IATA) has released an analysis showing that the airline industry’s global debt could rise to $550 billion by year-end. That’s a $120 billion increase over debt levels at the start of 2020.
$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).
Financial aid is a lifeline to get through the worst of the crisis without folding operations and much-needed government aid is keeping the industry afloat. But during the re-start period later this year, the debt load will see a massive 28% increase.
In total governments have committed to $123 billion in financial aid to airlines. Of this, $67 billion will need to be repaid. The balance largely consists of wage subsidies ($34.8 billion), equity financing ($11.5 billion), and tax relief/subsidies ($9.7 billion). This is vital for airlines which will burn through an estimated $60 billion of cash in the second quarter of 2020 alone.
“Over half the relief provided by governments creates new liabilities,” said Alexandre de Juniac, IATA’s Director General and CEO. “Less than 10% 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.”
North America is receiving 25% of 2019 revenues in government funding, more than any other region. The US government has led the way with its Coronavirus Aid, Relief, and Economic Security Act (CARES Act) being the main component of financial aid to North American carriers. This is followed by Europe with assistance at 15% of 2019 annual revenues and Asia-Pacific at 10%. In Africa, the Middle East and Latin America average aid is around 1% of 2019 revenues.
On May 28, the Port Authority of New York and New Jersey announced that its Board of Commissioners authorized management to apply for support from the Municipal Liquidity Facility, a new program created by the CARES Act.
The region’s airport traffic is down 97 percent; commuter rail ridership is down 95 percent; bridge and tunnel traffic is down over 40 percent. This collapse in traveler volume continues to produce enormous revenue declines.
The Municipal Liquidity Facility enables the Federal Reserve to buy bonds of eligible state and local government entities to help them manage cash flow stresses caused by the coronavirus pandemic. The original CARES Act did not include multi-state agencies in the list of eligible entities. The final version of the CARES Act was amended to make multi-state agencies – including the Port Authority of New York and New Jersey- eligible for Municipal Liquidity Facility support. Following the Board action, the agency will be considering all potential options in relation to the Municipal Liquidity Facility.
Congress is now considering additional legislation to provide direct grant support to replace revenues lost by state and local governments as result of the crisis. The Port Authority has made an urgent plea to Congress asking that multi-state agencies, as key local government agencies, be made eligible for direct federal support in the same way that multi-state agencies were made eligible for the Municipal Liquidity Facility.
The Port Authority is facing an estimated $3 billion in revenue loss over a 24-month period as a result of the coronavirus pandemic. Federal assistance is not only important, but vital for survival for the region which has been particularly hard-hit.
Many governments around the world have stepped up with financial aid packages that provide a bridge over this most difficult situation, including cash to avoid bankruptcies. It is possible that some countries will increase funding over time but IATA’s research shows that where governments have not responded fast enough or with limited funds, bankruptcies have been seen. Examples include Australia, Italy, Thailand, Turkey, and the U.K.
The kind of aid provided will influence the speed and strength of the recovery. IATA urged 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.
“A tough future is ahead of us,” he continued. “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 travelers. 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.”