Many industry experts are already aware of a number of airlines that are poised to enter restructuring. Speaking at the Airline Economics Growth Frontiers Dublin 2021 virtual conference in January, IATA Director General and CEO, Alexandre de Juniac, asserted that at least 50 airlines had disappeared in 2020 and he expects more to follow over the next six-to-eight months.
Cowen’s Helane Becker expects a few additional restructurings this winter, “mostly for airlines in Europe or southeast Asia as they had a horrible summer and don’t have the capital to get through the winter”. She adds that if the recovery starts “in earnest with the delivery of these vaccines into arms, then it is possible the airlines will make it through without additional restructurings”.
Apollo’s Rothschild noted the relatively low level of airline insolvencies in 2020 compared to 2019 numbers: “The total level of government support is north of $140 billion worldwide, be it loans, equity injections, and waivers on fees and taxes,” he says. “This is buttressing many airlines and … that support has deferred some struggling airlines from having to restructure, and the willingness of lessors and lenders to defer arrears because they are not willing to take back aircraft in this environment. Obviously there’s a limit to that government support. And there are a number of airlines that many expect to restructure either in or out of court.”
While there is likely a limit to taxpayers’ support of airlines but many observers do not foresee airlines, many have secured government investment already being allowed to fail. As one financier comments: “I imagine that flag carriers will survive; be it further cramdowns to lenders and lessors, or increased government support. Now the end seems near, it seems unlikely they will let them let fail now. It might be expensive to rescue an airline but it will be much more expensive in the long run to replace one.”
The total level of government support is north of $140 billion worldwide... that support has deferred some struggling airlines from having to restructure... Obviously there’s a limit to that government support. And there are a number of airlines many expect to restructure either in or out of court.
Like many other lessors, Peter Barrett, CEO of SMBC Aviation Capital, agrees there will be more bankruptcies but also praises the resilience of the airline industry: “I don’t think we’ve seen the bottom of this yet; we will see some more restructurings. The next four or five months are going to be challenging for the industry until there has been a meaningful rollout of the vaccine, which we start seeing some impact in the summer of 2021. There has been a lot of damage done to balance sheets and the cash position of airlines around the world and we will see the consequences of that; not just for the next number of months, but the next number of years. But airlines are very resilient, and it is hard to kill them. There will be further challenges, some failures, more restructurings; but airlines are very focused on survival. Many airline business models are built on the return of passenger demand recovering in the middle of this year in meaningful way.”
John Plueger, CEO of Air Lease Corporation (ALC), agrees, observing that even though the impact on the industry has been “breath-taking”, there are few other industries that can survive a 80-90% hit on revenue and cashflow for 10 months and survive. “The airline industry has survived and has put in place defensive measures that has enabled most carriers to draw upon all their capital resources,” he says. “The level of government support provided speaks to the fundamental importance of air transport to the global economy.”
Plueger disagrees with the view that the level of airline failures in 2020 was low compared to previous years considering the depth of the crisis. “I’m not a hundred percent of the view that we haven’t seen that many airlines failures. If you count informal restructurings with airlines that have entered bankruptcy restructurings, instead of just shutting down, I feel there has been a substantial amount of those,” he says. “Aside from Aeromexico, ALC avoided all these other major bankruptcies or restructurings. But we very much expect to see airlines continue to restructure for the next couple of quarters, and perhaps some will fold.”
Speaking in December, AerCap’s Kelly observed the resilience of carriers but also predicted some casualties. “There’s no question that there are airlines in difficulty,” he says. “As we reported on our Q3 earnings, all of the airlines that are in a formal bankruptcy process or are in restructuring accounts for 15% of our book, which is significant, but that leaves 85% that are not. The vast majority of the world’s airlines will make it through to the far side of this but it’s a given that there’s going to be casualties.”
At the outset of the crisis in March 2020, airlines were forced to pivot rapidly away from a business strategy focused on growth and increasing profit margins to shrinking fleets and conserving cashflow, notes Robert Korn, president of Carlyle Aviation Partners. “Most airlines have now repositioned themselves, formally or informally restructuring their payment terms with their stakeholders, to find a way through the winter. As we emerge into spring, many airlines have speculated traffic will pick up as we get into the summer.”
The survival of many airlines hinges on that predicted return of meaningful levels of air travel for summer 2021 but stress will continue to impact the market into 2022. Airlines will need additional liquidity and stricter cash cutting measures to ride out what is predicted to be a rocky road to recovery in late 2022-23.
“The ability for airlines to survive rests on their ability to manage their capex, but also the timing of the recovery,” says Corr. “Carriers that rely on the medium- and long-haul markets will have the greatest struggle. The stress may not be seen until the second half of 2021 and into 2022, because a number of the carriers have shored up their liquidity to get them through this winter. But again this is very dependent on the robustness of the summer season and the demand for traffic in 2021.”
The airline industry has survived and has put in place defensive measures that has enabled most carriers to draw upon all their capital resources. The level of government support provided speaks to the fundamental importance of air transport to the global economy.
As the lifeblood of the aviation industry, the survival of airlines is paramount. An early and major part in their survival journey has come from the aircraft leasing companies. When travel was halted, airlines with leased aircraft approached their lessor partners first for assistance in reducing costs with payment deferrals and lease renegotiations.
Speaking at the Airline Economics Growth Frontiers Dublin 2021 virtual conference in January 2021, Scott Haralson, CFO of Spirit Airlines, commented on how helpful their lessor partners were during the outset of the pandemic, despite their own issues, assisting the airline as best they can in a common goal to keep the partnership in He praised the open and honest communications between the airline and lessors that has continued as the crisis has lengthened, indicating that those strong relationships are essential as the airlines continued to access liquidity in the sale-leaseback market.
Robert Neal, treasurer and VP of fleet and corporate finance at Allegiant, echoed those sentiments. Even though the airline has only three leased aircraft, Neal experienced very strong support from the leasing community especially in the sale-leaseback space, even for older aircraft assets, and added that the same level of support was also extended by lenders and vendors. “While we didn’t have to make calls about postponing lease payments, certainly we were making calls to our airports and ground handling and maintenance providers to a little bit of extra time… and we just saw tremendous support across board.”
In Brazil, this support was not as immediate says Alex Malfitani, CFO of Zaul, observing however that lessors were much more willing to negotiate after several airlines in Latin America filed for Chapter 11 bankruptcy protection. After that “fork in the road”, Malfitani observed a “clear shift in willingness to negotiate”, adding that he was “very thankful” and that he fully recognised the value of the support the airline has received from lenders and lessors.
In spring 2020, lessors reported an average deferral request rate of between 70-80% of their customers as fleets were grounded due to lockdowns and an inability to travel. In December, however, lessors reported that this had reduced to 35-60% of customers requesting further deferrals.
AerCap’s Kelly observes that the second quarter of 2020 was the peak period for deferral requests from airlines as traffic levels collapsed. Speaking in December for this report, however, he remarked that the level of deferral activity had reduced by about 75%.
As the crisis continues, with restrictions expected to last for at least the first half of 2021, airlines are left with a surplus of aircraft and are working to shrink their fleets further. This has already led to airlines restructuring aircraft lease agreements, some under court protection and some more informally working with lessors to find an amicable agreement. As the operating environment remains depressed, more formal restructurings are predicted over the course of 2021. Lessors with exposure to troubled airlines will continue to negotiate for the most favourable outcomes but, the longer airlines are restricted from flying and generating revenue, the greater the burden shifts to leasing companies.
The general perception is that larger aircraft leasing platforms with strong shareholders or parents will be able to weather the crisis well, so long as they are able to retain access to capital, either via their shareholders or the capital markets. To date, the largest lessors have continued to raise substantial amounts of capital at relatively low interest rates.
“In terms of lessors raising capital and strengthening their liquidity profile, the result has been nothing short of exceptional,” observes DAE CEO, Firoz Tarapore. “The markets are functioning correctly and all the lessors – at least the observable ones – have behaved in such a responsible way to maintain the right level of liquidity and the right profile.” But he notes that smaller lessors are in some difficulty, pointing out the downgrading of certain lessors.
Nordic Aviation Capital – which has already succeeded in restructuring its debt – Voyager and Avation have all been downgraded by various rating agencies. The main areas of concern aired by rating agencies for Voyager and Avation are their liquidity levels and repayments of maturities.
With the exception of smaller lessors that are experiencing some financial pressures, to date, the resilience of the leasing market and the ability of lessors to grant forbearance to their client for long periods is testament to the maturity of the leasing market. Robert Korn observes how the sector has progressed over the past two decades: “We’re in a very different place than we were 20-plus years ago. We are now considered a mainstream institutional business. And a very resilient business. The large lessors have demonstrated that this year by continuing to issue phenomenal transactions that reflect the confidence in the stability of our industry.”
In terms of lessors raising capital and strengthening their liquidity profile, the result has been nothing short of exceptional. The markets are functioning correctly and all the lessors – at least the observable ones – have behaved in such a responsible way to maintain the right level of liquidity and the right profile.
Head of Aviation Finance
KPMG in Ireland