How debt could complicate airlines’ post-Covid recovery

A surge in government bailout packages is helping the airline industry scrape through the worst of the disruptions caused by the Coronavirus crisis but the associated debt levels raise the prospect of bankruptcies, warns the International Air Transport Association (IATA).

Governments, especially in the developed economies, have extended $67 billion in credit to airlines, adding to the $52 billion they had already contracted from commercial sources. In its latest analysis, IATA says global debt for the airline industry could rise to $550 billion by the end of the year.


The association warns that the figure which represents $120 billion of additional debt or 28 per cent over and above what the industry owed at the start of the year, will complicate airlines recovery efforts from the impacts of the Covid-19 pandemic.

“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,” Alexandre de Juniac, IATA’s director general and chief executive said during a conference call on May 26,

“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,” Mr de Juniac added.


Of the $67 billion lent by governments, $50 billion comes as direct loans, $5 billion in deferred taxes and $12 billion in loan guarantees. Additionally, airlines have contracted $52 billion in commercial debt composed of $23 billion in commercial loans, $18 billion from the capital markets, and $5 billion from new operating leases.

A further $6 billion has been accessed from leveraging existing credit facilities.

In total governments have committed to $123 billion in financial aid to airlines but only $67 billion of this will need to be repaid.

The balance consists of $34.8 billion in wage subsidies, $11.5 billion in equity financing and $9.7 billion in tax relief and subsidies.

IATA said the aid is critical for airlines whose burn-curve for the second quarter of 2020 is projected to reach $60 billion of cash. Still, the $123 billion is equal to 14 per cent of the $838 billion that the airline industry earned in 2019.


Despite the huge figure, there are wide regional disparities with airlines in Latin America, Africa and the Middle East receiving only $1.1 billion of the aid disbursed by governments. IATA says the regional variations indicate that there are gaps that need to be filled.

“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. 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,” Mr de Juniac said.

Through its CARES Act, the US government has extended to airlines the equivalent of 25 per cent of the revenues they earned in 2019. Europe extended the equivalent of 15 per cent of annual revenues and Asia-Pacific 10 per cent, while aid to airlines in Africa, the Middle East and Latin America averaged just 1.1 per cent of 2019 revenues.


IATA says many airlines still need aid but governments will need to be conscious of the impact of debt because the type of aid provided will have a direct bearing on the pace of post Covid-19 recovery. The association says grants and subsidies will help airlines recover faster.

“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,” said Mr de Juniac.

“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,” he added.

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