The rating agencies S&P Global Ratings and Moody’s have downgraded the strength ratings financial numerous companies, among them Lufthansa.
June 8, 2020 7h37
Updated at 23h43
The airlines facing the wall of debt
PARIS — on Their airplanes grounded, airlines have resorted to aid and massive loans to the States not to sink. But the slow recovery of the announced air traffic risk to confront the wall of debt.
In April, with the peak of the epidemic due to the coronavirus, the world traffic has “hit the bottom”, down 94% compared to the previous year, according to the international air transport Association (Iata) which provides for a drop of more than half of the revenues on the year.
Their cash reserves evaporating at supersonic speed, the companies have called on the States to the rescue.
Out of a total of 123 billion US $state aids, 67 billion will be required to be repaid and the total amount of debt the sector will amount to “nearly 550 billion, a massive increase of 28 %,” according to Iata. Air France has thus received 7 billion euros (10,58 billion $) of loans, Lufthansa 9 billion (13,61 $ billion) of which € 3 billion (4.54 billion $) of loans, the companies of the us $50 billion US aid, with $ 25 billion of loans.
Some have already sunk, such as the two biggest airlines of Latin America LATAM and Avianca, Virgin Australia, South African Airways or Thai Airways. “Where governments have been slow to respond or did so with limited funding”, according to the director general of the Iata, Alexandre de Juniac.
“Today, it was a crisis of liquidity, which is managed mainly by loans from State grants. But this liquidity crisis will turn fast enough in a crisis of debt, and there are probably companies that will not be able to recover,” predicts Bertrand Mouly-Aigrot, an expert in air transportation cabinet Archery Strategy Consulting, interviewed by AFP. “The next challenge will be to prevent the airlines from sinking under the burden of debt” is Mr de Juniac.
The rating agencies S&P Global Ratings and Moody’s have downgraded the strength ratings financial many airlines, among which Lufthansa, IAG, Aeromexico or the Brazilian GOL classified in the category of alternative investment.
The debt of the group IAG (British Airways, Iberia) will double by the end of 2020, a 15 billion euro (22,68 billion $), while the Portuguese TAP may not meet its financial commitments by July, predicts S&P.
Conversely, the low-cost airline Ryanair entered the crisis with high liquidity and very low debt, notes the agency.
In the United States, the boss of Boeing, David Calhoun has thrown a stone into the pond in mid-may by considering it as “very likely” the collapse of a large american company. The firm CFRA Research, explains in a note having a “high confidence” in the fact that Delta and Southwest Airlines will survive the crisis, but be less positive for United, and especially American Airlines, considered to be “high-risk” because it entered the crisis already heavily in debt.
With a recovery is very gradual, traffic, revenues will be limited. American companies, like chinese, can rely on a large domestic market, the first to restart. But “the domestic traffic does not have the same profitability, the same potential revenue that the long-haul freight traffic,” said Bertrand Mouly-Aigrot.
And these are the companies very dependent on the long-haul, such as the hong kong-based Cathay Pacific or Singapore Airlines or companies in the Gulf that are “suffering a lot and will wait the longer the recovery,” according to him.
The return of the traffic in 2019 is not expected before 2023, are does in the area.
Tim Clark, the iconic boss of Emirates, which has prospered with its hub in Dubai between Europe and Asia, has also a bleak vision of the future. “I’m not optimistic about the fact that some of the carriers represented here today, who have already been bailed out in any significant way, will survive the coming months,” he said in a video conference during the fair Arabian Travel Market dedicated to tourism.
With networks today wiped out and a very gradual return of passengers, companies will need to be pragmatic and “resize it to a level of activity in the exit of the crisis which will be lower and not have a new problem of liquidity horizon of one or two years”, explains Bertrand Mouly-Aigrot, pointing to a “effect-ratchet” pernicious : “They are forced to reduce their size to reduce their cost base and thus reduce their ability to have a large supply”.
With the consequence of hundreds of aircraft retired and laid-off employees by the tens of thousands.