As airlines struggle with their revenues and cashflows as a result of the travel slump brought about by the Covid-19 pandemic, Director, Conor Blake examines the impact on aircraft leasing activity and how significant financial restructuring will be required by airlines and lessors.
It is fair to say that few sectors have been more impacted by the global population lockdown than commercial air travel. In the UK for example, travel data provider OAG reported that for the week beginning 30 March, international flights were down 81% and domestic flights 61% on 2019 figures. Many airlines have grounded their entire global fleets and been forced to furlough employees, with Europe's largest commercial carrier Ryanair operating just 1% of its normal schedule and British Airways furloughing 30,000 of its 40,000 staff. The few planes that are flying are not operating anywhere near full capacity.
As the airlines have ground to a halt, their revenues have plummeted. IATA, the airline industry's trade body has warned that airlines are facing an "enormous cash problem", forecasting them to burn through $61bn of their cash reserves during the second quarter of this year. It is well documented that even the most successful airlines with solid balance sheets only have a few months' liquidity to meet their needs. Compounding this, if they own aircraft there will be a likely write down in book value.
Cash is king
Airlines are exploring all options to raise cash, including utilising credit facilities, selling assets, and negotiating with their creditors for some relief. EasyJet for example, became the first big name to tap into the UK Government's Covid-19 Corporate Financing Facility, taking £600m while also drawing down the full $500m from its revolving credit facility.
We have seen many airlines requesting payment holidays in the form of deferrals of their loans and/or lease payments. The scale of the pandemic means that it is likely to be in the best interest of the lenders and lessors to negotiate with their borrowers as to whether they enforce security and take possession; in the current market they would likely struggle to get the aircraft back on lease or sold in the near term and if they did, it would be at a significant discount. Ultimately, in order to survive the current turbulence, airlines need to get back to business as quickly as possible once the travel restrictions are lifted.
There will be significant financial restructuring required by the airlines and lessors and as a trustee, we are seeing that first-hand as requests for waivers and amendments need to be assessed in terms of the impact on the interests of the secured parties.
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