Airline debt could grow to $550bn by year-end – IATA

In total, governments have committed to $123bn in financial aid to airlines



The airline industry’s global debt could rise to $550bn by end of the year, a $120bn increase over debt levels at the start of 2020, new analysis by the International Air Transport Association (IATA) has revealed.

It added that:

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

During the re-start period later this year, the industry’s debt load will be near $550bn, marking a 28 per cent increase.

Financial aid is imperative to weather the crisis without folding operations, it added.

“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.

In total, governments have committed to $123bn in financial aid to airlines, of which $67bn will need to be repaid. The balance largely consists of wage subsidies ($34.8bn), equity financing ($11.5bn), and tax relief / subsidies ($9.7bn).

This is essential for airlines which will burn an estimated $60bn 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,” said de Juniac.

Regional variations
Analysis revealed that $123bn in government financial aid equals 14 per cent of 2019’s total airline revenues ($838bn). The regional variations of the aid dispersion suggest gaps that will need to be filled.

Aid promised ($bn)

% of 2019 Revenues

Global

$838

$123

14

North America

$264

$66

25

Europe

$207

$30

15

Asia-Pacific

$257

$26

10

Latin America

$38

$0.3

0.8

Africa and Middle East

$72

$0.8

1.1

However, large gaps in financial aid needed to help airlines survive the Covid-19 crisis remain.

The US government has led the way with its CARES Act being the main element 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, the average aid is around 1 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,” said de Juniac.

Debt Impact 
The measure of aid extended will determine 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 travelers. 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.