COVID-19: IATA warns global airline debt levels will stall recovery and additional carriers likely to fail

Association says equity with focus on grants and subsidies a better alternative

PHOTO: Shutterstock)

The main trade group for the world’s airlines, the International Air Transport Association (IATA), said on its weekly media call Tuesday (26 May) that a new analysis shows the airline industry’s global debt could rise to US$550 billion by the end of 2020, a US$120 billion increase over debt levels at the start of the year as the industry struggles to cope with the international travel shutdown caused by the COVID-19 pandemic..

A screenshot of the COVID-19 tracking site at Johns Hopkins University taken on 27 May. To access the live site, click on the image. (PHOTO: Matt Driskill)

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

Airlines like Singapore Air have had to ground thousands of planes. (PHOTO: Steve Strike/Outback Photographics)
IATA Director General Alexandre de Juniac (centre) and other IATA officials address reporters in Geneva at IATA’s Media Day in December 2019. (PHOTO: IATA)

“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,” said Alexandre de Juniac, IATA’s director general and CEO.

To download the IATA report on aid for airlines, click here.
To listen to the 26 May media call, click here.

In total governments have committed to US$123 billion in financial aid to airlines. Of this, US$67 billion will need to be repaid. The balance largely consists of wage subsidies (US$34.8 billion), equity financing (US$11.5 billion), and tax relief/subsidies (US$9.7 billion). This is vital for airlines which will burn through an estimated US$60 billion of cash in the second quarter of 2020 alone, IATA said.

“Over half the relief provided by governments creates new liabilities. Less than 10 percent 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,” said de Juniac.

The US$123 billion in government financial aid is equal to 14 percent of 2019’s total airline revenues (US$838 billion). There are still large gaps in the financial aid needed to help airlines survive the COVID-19 crisis, IATA said. The US government has enacted the CARES Act to North American carriers which in total represented a quarter of 2019 annual revenues for the region’s airlines. This is followed by Europe with assistance at 15 percent of 2019 annual revenues and Asia-Pacific at 10 percent. But in Africa, the Middle East and Latin America average aid is around 1 percent of 2019 revenues, IATA said.

“Many governments have stepped up with financial aid packages that provide a bridge over this most difficult situation, including cash to avoid bankruptcies. Where governments have not responded fast enough or with limited funds, we have seen bankruptcies. Examples include Australia, Italy, Thailand, Turkey, and the UK. Connectivity will be important to the recovery. Meaningful financial aid to airlines now makes economic sense. It will ensure that they are ready to provide job-supporting connectivity as economies re-open,” said de Juniac.

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. 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 travellers. 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,” said de Juniac.

De Juniac also said IATA was worried about the “politicisation of quarantine measures”.

“In response to the UK government’s announced 14-day quarantine measures for all arrivals, France announced that it would do the same for arrivals from the UK. Measures must be guided by science, not politics. And tit-for-tat quarantine measures are, frankly, unacceptable,” de Juniac said.

“Last week we outlined principles that our board of governors has committed to for the recovery. Health and safety are at the top of the list. And this is followed by support for scientifically based measures. If governments do not have the confidence to open their borders without imposing onerous quarantine measures, then we need to work with them to understand what scientifically supported measures will give them that confidence,” de Juniac said.

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Matthew Driskill is the Editor of Asian Aviation and is based in Cambodia. He has been an Asia-based journalist and content producer since 1990 for outlets including Reuters and the International Herald Tribune/New York Times and is a former president of the Foreign Correspondents Club of Hong Kong. He frequently appears on international broadcast outlets like CNN, Al Jazeera and the BBC and has taught journalism at Hong Kong University and the American University of Paris. Driskill has received awards from the Associated Press for Investigative Reporting and Business Writing and in 1989 was named the John J. McCloy Fellow by the Graduate School of Journalism at Columbia University in New York where he earned his Master's Degree.


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