Airplanes on Stand

Lower Passenger Capacity Going Forward

As widely expected there has been an increase in the number of airlines entering bankruptcy proceedings. The CDS market is indicating that Americal Airlines may be about to join this group. However, there are also other airlines across the globe, who are restructuring by closing subsidiaries, significantly reducing capacity and availing of state aid and not entering bankruptcy. Indeed, Norwegian has restructured, with lessors now the majority equity holders. Regardless of the legal mechanism adopted, airlines are starting to make significant reductions in passenger capacity. IATA forecast a slow return of passenger numbers to 2019 levels, indeed under their base case scenario, they could still be 10% lower in 2025.

Ishka reported on Friday that 11 carriers are in bankruptcy proceedings following the outbreak of the coronavirus crisis, placing as many as 500 aircraft – 80% of which are leased – at risk of re-entering the market. The pandemic is pushing fragile carriers into bankruptcy, especially where government support is either weak or lacking.

Some of the airlines are likely to emerge from these restructuring as a going concern, but Ishka expects that even these carriers will need to embark on sizeable fleet reductions. A combination of sizeable debts and muted travel demand in the medium-term will likely result in the accelerated retirement of aircraft.

According to Ishka carriers are in bankruptcy proceedings following the outbreak of the coronavirus crisis, has placed as many as 500 aircraft – 80% of which are leased – at risk of re-entering the market.

The FT reports that the 5 year Credit Default Swap (a financial instrument to insure against corporate default) for American Airlines a rose to a price of 66.59%, compared to 36.77% for United Airlines, 12.12% for Delta Air Lines and 5.05% for Southwest Airlines. American’s debt totals $34bn, well above the $23bn on the balance sheets at both Delta and United, and almost six times as much as Southwest. That reality is driving speculation that American, which filed for Chapter 11 bankruptcy restructuring nine years ago is about to di the same again!

These figures do not include airlines that have restructured such as Norwegian Air Shuttle. Norwegian convinced its bondholders and aircraft lessors to a NOK 10bn (€910m) debt-for-equity swap which was a precondition for a NOK 2.7bn (€250m) State Aid Package from the Norwegian government.

This restructuring deal made lessors the largest group of shareholders in the airline with a collective 53.1% stake, followed by bondholders with a 41.7% stake and existing shareholders with just a 5.2% holding in the “New Norwegian”.

Shareholders also agreed to a NOK 400m (€36m) rights issue, the firm’s fourth rights issue in two years, which will further dilute the value of their shares.  The deeply discounted sale of 400 million new shares, at just NOK 1, was about seven times oversubscribed.

The airline is entering a “hibernation phase” and doesn’t expect a recovery until the summer of 2021, with a return to normal operations in 2022. By that time, it expects the size of its fleet to shrink from its pre-COVID-19 peak of 168 to about 110 to 120. Under plans for what it calls New Norwegian, the airline would see its long-haul network consolidate by some 40%, concentrating on “top-tier” cities and “key flows” between Europe and the US.

Indeed there has also been significant amounts of state aid extended to airlines globally, Ishka estimates that as of 14th May governments are preparing or executing $94.3bn in confirmed bailouts or assistance measures for airlines globally. Unconfirmed reports suggest the total tally could be as high as $114.18bn. The range of aid covers deferrals of taxes or operational charges, state-backed commercial loans and the nationalisation of airlines.

Meanwhile, a comment by IAG CEO Willie Walsh during the group’s recent Q1 earnings call provides some food for thought on how bailouts may shape the future competitive landscape. Walsh noted that while a lot of state aid debt “may be cheap on the current environment,” it would actually be “quite expensive” in terms of where the industry was and argued that this pricier debt may “influence decisions” that recipients make going forward. Walsh’s comments may have been at least partly aimed at Air France, who on 6th May announced details of its €7bn French bailout package. The €3bn direct loan from the French state has a margin over EURIBOR of 7% for years one to four, 7.5% for year six and 7.75% for year seven!

IATA in their “Outlook of air travel in the next five years” believe that “air travel may recover more slowly than most of the economy” and we will not get back to the level of flights operated in 2019 until 2023. Consumer confidence in air travel remains key and may take some time to be restored after government restrictions are relaxed. They believe that the average trip length will fall sharply and that the initial preference will be for short-haul flights. They see a risk that passenger capacity could be between 32% and 41% below pre-COVID-19 levels in 2021, and 10% lower in 2025 under their base scenario.