World airlines’ debt to hit $550 billion by end of year

World airlines’ debt to hit $550 billion by end of year• FG to bail out carriers, ground handlers, others

The airline industry’s global debt could rise to $550billion by year-end, the International Air Transport Association (IATA), has said. The debt is a $120billion increase over debt levels at the start of 2020. According to the breakdown, about $67billion of the new debt is composed of government loans ($50 billion), deferred taxes of $5billion and loan guarantees of $12billion.

Another $52billion is from commercial sources including commercial loans of $23billion, capital market debt of $18billion, debt from new operating leases $5billion, and accessing existing credit facilities of $6billion.

In a related development, the Director-General, Nigerian Civil Aviation Authority (NCAA), Musa Nuhu, has disclosed that the Federal Government was working on a bailout package to support the local airlines and other operators in the industry. Nuhu, who spoke at a webinar forum recently, said all the heads of aviation parastatals were recently summoned to a meeting to map out ways of developing economic stimulus package for the sector.

Indeed, financial aid is a lifeline to get through the worst of the crisis without folding operations. But during the restart period later this year, the global industry’s debt load will be near $550billion – a massive 28 per cent increase.

IATA’s Director-General and Chief Executive Officer (CEO), Alexandre de Juniac, said while the government’s aid was 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”.

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

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

The $123billion in government financial aid is equal to 14 per cent of 2019’s total airline revenues of $838billion. The regional variations of the aid dispersion indicate that there are gaps that will need to be filled.

There are still large gaps in the financial aid needed to help airlines survive the COVID-19 crisis. The U.S. government has led the way with its CARES Act being the main component of financial aid 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 per cent of 2019 annual revenues and Asia-Pacific at 10 per cent. But in Africa, the Middle East and Latin America average aid is around one per cent of 2019 revenues.

“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,” de Juniac said.

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.

“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,” de Juniac said. Nuhu said the package would not be limited to the airlines alone but the agencies and ground handling companies.

“We have made consultations and we are still consulting. We plan to have another consultation with the airlines and the ground handlers. We are developing a programme for an economic stimulus package that is all inclusive. All heads of agencies were recently locked up in a hotel in Abuja with the Minister to map out ways of getting stimulus for the sector. The minister presented a very good case on this with the Vice President,” Nuhu said.The NCAA’s DG noted that air transportation was very critical to a nation, especially Nigeria that is dependent on oil; hence the sector cannot afford to be comatose.

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