Air transport is in a race for financial survival

According to the International Air Transport Association (IATA), global passenger traffic is carried by airlines Collapsed (-66%) in 2020 compared to 2019 due to the health crisis. Logically, we see better local traffic resistance (-48.8%) than international (-75.6%) and all regions of the world are affected in a similar way.

Forty companies have already gone bankrupt, not to mention the ongoing bankruptcy proceedings … plus many companies do not owe them to stay. Of financial support from states.

IATA also believes that the pace at which airlines consume cash (funds available immediately) should not weaken, with an expectation between 75 and 95 billion dollars in 2021Knowing that The losses for 2020 are already estimated at 120 billion For 290 member airlines of the International Federation.

In light of these unprecedented circumstances, what is the status of airlines at the end of 2020? We have selected seven international groups: All Nippon Airways (Japan), Air France-KLM (France, Netherlands), American Airlines (United States), EasyJet (United Kingdom), IAG (United Kingdom, which particularly includes British Airways and Iberia), Lufthansa (Germany, which also includes Swiss and Austrian Airlines) and Singapore Airlines (Singapore).

Extremely degraded activity

Figure 1: The evolution of the activity of the seven airlines between 2019 and 2020 (Source: Corporate Annual Reports 2020). Author (DR)

The corresponding graph shows that businesses have been very negatively affected by the Covid-19 crisis with sales down by about 50 to 80% in 2020 compared to 2019. This is the collapse in passenger traffic that mainly explains this fall: up to -98.8% for Singapore Airlines, which cannot rely on domestic business, while EasyJet, which has no long-term business, has suffered the least.

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On the other hand, freight traffic is better resisted due to the transportation of pharmaceutical products in particular and the development of e-commerce with increasing prices and packing rates, which makes it possible to offset the general decline in air freight volumes.

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Figure 2: Operating margin for the seven airlines (Source: Company’s Annual Reports for 2020). Author (DR)

This significant downturn in activity naturally led to extremely negative operating margins (operating profit / turnover) for all airlines (up to -95.13% for UK IAG), very large overall losses and further weighed down by the provisions for restructuring (€ 822 million in 2020 in Air France-KLM), in addition to aircraft write-offs (€ 837 million in IAG due to the final and early withdrawal of 32 Boeing 747s for British Airways and 15 Iberia Airbus A340-600 aircraft).

Under these circumstances, one can legitimately question the financial capacity of these companies to withstand such a shock.

Improved liquidity …

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Figure 3: Evolution of liquidity for the seven airlines between 2019 and 2020 (Source: Company’s Annual Reports for 2020). Author (DR)

Contrary to what might be expected, most companies saw a significant improvement in their cash flow position over the period (excluding IAG). Knowing, moreover, this data does not take into account the unused credit lines they previously had or negotiated since the start of the crisis.

For example, American Airlines received $ 7.4 billion in undrawn loans at the end of December 2020. Given its liquidity volume (6.9 billion), this represents a potential cash flow in excess of $ 14.3 billion.

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Some airlines also benefited from secured loans from their countries. Thus, Air France-KLM at the end of December 2020 withdrew all loans of 7 billion euros from the French state and 0.9 billion from 3.4 billion from the Dutch state. These government pillars have also been the subject of systematic calls by competitors (Ryanair) who are not leveraging them to discredit the competition, but Without success so far.

Finally, all companies (at least as of the second quarter of 2020) have stopped paying dividends and have discontinued their share buyback programs. This improvement in liquidity is also a result of the massive appeal for non-governmental borrowing.

… at the expense of strong debt growth …

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Figure 4: Evolution of the net debt ratio of the seven airlines between 2019 and 2020 (Source: Company’s Annual Reports for 2020). Author (DR)

When we observe the net debt ratio (financial debt – cash / total assets) of airlines, we see that it increased sharply during 2020, except for Singapore Airlines.

Only easyJet (13%) and Singapore Airlines (14%) maintain reasonable levels of debt, but the reasons are different: easyJet had very little debt before the crisis, the increase compared to others had less harmful effects while Singapore Airlines benefited from the consolidation. Significant equity (SGD 8.8 billion) prevented it from resorting to debt in the same proportions as its competitors.

These loans have issued many loans sometimes secured by states (such as Air France-KLM or to a lesser extent Lufthansa which also benefited from recapitalization by the German state) or directly into the market.

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… and massive savings measures

Airlines have published unparalleled restructuring plans to ensure their sustainability. Due to the decrease in activity, expenditures were automatically reduced (mainly fuel expenses), but structural cost reduction measures were also implemented.

Demobilization plans launched: IAG has reduced its workforce by 10,000 people for British Airways (about a quarter of the workforce) and 500 for Air Lingus. For its part, Air-France-KLM separated from 8,700 employees and reduced its staff costs by 35% in 2020 compared to 2019.

Measures to freeze and reduce salaries, reduce training expenditures, take early leave, etc. It also contributed to reducing personnel costs. Investment cuts (less than € 7 billion in IAG for the 2020-2022 period, Lufthansa reduced its investment from € 3.5 billion in 2019 to € 1.3 billion in 2020) with postponement of orders, aircraft deliveries and tighter management of working capital requirements. Help keep these companies liquid.

If the liquidity position of the major airlines remains strong to this day, they will continue to burn cash every day as long as the health crisis is no longer behind us. Therefore, they are calling for all measures that can allow for a rapid restart Like digital health certificates In the absence of a healthy passport.

From a financial point of view, indebtedness will not be able to provide sustainable expenditures to maintain its solvency, and it will likely be necessary to make an appeal to shareholders or countries to boost their own money, as has already happened for some of them. Which may lead to Creeping nationalization.

From a strategic point of view, this crisis raises questions Their business models. Their survival will depend not only on financial measures, but above all on restructuring the sector that will inevitably make winners and losers.

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