Government lifelines Government lifelines Government lifelines

Surviving rather than thriving is now the prime objective for airlines and other aviation companies. For some airlines, the sudden loss of revenue has been too great a burden and there have been a number of insolvencies and airlines filing for bankruptcy protection regimes. 

UK regional airline, Flybe, was an early victim of the crisis as it was already suffering from significant financial pressures. After Flybe collapsed, airlines began to access government support in various forms, which has helped to stave off further bankruptcies for many large and small airlines. 

The level of government support for the aviation sector has been dramatic and impressive but it varies widely between jurisdictions. Chart 14 (see page 23) details the state aid granted to airlines around the world in 2020. 

The USA has been a prolific supporter of its airline industry. Under the Payroll Support Program set out in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, first passed in March 2020, the US Treasury Department was authorised to provide up to $32 billion to compensate aviation industry workers and preserve jobs. In December, an additional stimulus package was passed into law that provides for a further $45 billion in transportation aid, including $15 billion to help airlines keep their employees on the payroll. 

The UK has supported airlines with furlough payment schemes, with larger firms being eligible for the Covid Corporate Financing Facility (CCFF) scheme, designed to boost liquidity to bridge coronavirus disruption to cash flows through the purchase of short-term debt in the form of commercial paper. British Airways, easyJet, Ryanair and Wizz Air have all raised funds in the UK via CCFFs. An important source of government support for the aviation sector in the UK is the UK Export Finance’s Export Development Guarantee (EDG), which helps large UK exporters access high value loan facilities (typically between £100m-£500m) for general working capital or capital expenditure purposes. In June 2020, Rolls-Royce was the first company to access this funding and secured a £2bn five-year term loan under this facility, which was 80%-backed by UKEF. This deal has since been replicated by BA and easyJet, as detailed in the regional review section above. 

The UKEF has also significantly expanded the scope of its working capital scheme for smaller businesses. Under the new scheme, the General Export Facility (GEF) announced in December 2020, UKEF is able to provide an 80% guarantee on financial support from lenders to support general exporting costs, up to the value of £25 million. Five of the UK’s largest banks – HSBC, Lloyds, Natwest, Santander and Barclays – are participating in the scheme aimed to offer firms the ability to meet costs and ease cash flow constraints. 

European countries have been more direct in their support of national airlines. In April, the Air France-KLM Group secured a €7 billion funding package comprising: a €4bn French state-backed loan with a syndicate of nine banks, priced at Euribor plus 0.75% in year one, 1.5% in year two, and 2.75% in year 3; and a subordinated four-year (with two one-year extension options) €3bn direct shareholder’s loan from the French state, granted by a syndicate of six banks to Air France-KLM and Air France, priced at Euribor plus 7% for the first four years, 7.5% for the fifth and 7.75% for the sixth. The €4bn state backed loan must be partially repaid (75%) by any new money raised by Air France-KLM or Air France from financial institutions or through debt capital markets. The loans come with environment and economic commitments. At the time the deal was announced, French finance minister Bruno Le Maire indicated that the “green strings” attached to the aid package would include targets for Air France to halve carbon emissions per passenger and per kilometre against 2005 levels by 2030, with domestic flights carbon emissions to be halved by 2024, which would include reducing its number of short-haul flights. Air France has also agreed to source 2% of its aviation fuel requirements from sustainable sources and commit to renewing its fleet with more fuel efficient aircraft. 

KLM secured a €3.4bn package of aid in June 2020, comprising: a €2.4bn five-year revolving credit facility with a syndicate of 11 banks priced at equal to Euribor plus 1.35%; and a €1bn direct 5.5 year term loan to KLM, priced at Euribor plus 6.25% for year 1, 6.75% for years 2 and 3, and 7.75% for years 4 and 5. Under the agreement, KLM has also committed to becoming more environmentally sustainable, and restoring its performance with a robust restructuring plan. Dividend payments to its shareholders are also suspended until the two loans have been repaid in full. 

Germany too has propped up flag carrier Deutsche Lufthansa with the largest single support package to a European airline with a €3bn state-backed loan and €6bn recapitalisation package financed by the German Economic Stabilisation Fund, Wirtschaftsstabilisierungsfond (WSF), established by Germany to provide financial support to German companies affected by the pandemic. The recapitalisation includes €300 million equity participation through the subscription of new shares by the German state, corresponding to 20% of Lufthansa’s share capital; €4.7bn silent participation with the features of a non-convertible equity instrument; and €1bn silent participation with the features of a convertible debt instrument. The package contains several conditions, including limits on dividends and buybacks, and divestments of slots at Frankfurt and Munich airports. At the time, the state indicated that it aims to exit from the airline’s capital by 2026.

The support in Asia for airlines has been more sporadic, from the almost total support shown by Singapore for its flag carrier and Chinese airlines also benefitting from state aid, to Thailand where its own flag carrier entered into administration after being denied government support. Indonesia and Malaysia have also been slow to provide significant support and airlines there are struggling as a result.

The list of airlines that have ceased operations, as well as those that have entered some form of debt restructuring, is relatively modest when compared to a more normal year and particularly considering the profound scale of the current health crisis and forced grounding of airlines. Government support has been critical for airlines that have seen revenue cut by 80-90% for the past year and, with cash burn continuing to outpace income generation, more support may be required to ensure the survival of some of the world’s airlines. However, government aid is limited and with more lockdowns weakening airlines further, pouring additional taxpayer funds into failing businesses is not a popular move politically. Norwegian, for example, after receiving substantial government aid and working to restructure its debt burden with its creditors all year, warned it could not continue operations without further government funds. When the Norwegian government refused more aid, the airline entered administration proceedings first in Ireland and then in Norway. 

The government financial support that has been provided has disrupted the airline business landscape significantly. Profitable airlines with strong parent companies and/or robust shareholders have received government aid, as have some weaker airlines that have been saved from formal restructuring for now with a state lifeline. Although some strong airlines in other jurisdictions have been denied significant government aid and have been required to rely on raising crippling levels of debt, while many weaker airlines are floundering at the start of 2021 without any support from the state and as creditors’ forbearance begins to expire. Heading into a recovery scenario over the next 12-24 months, this unlevel playing field will shape the future aviation operating landscape. 

State aid financing is regarded as credit positive in the short term since it boosts airline liquidity ensuring they can continue to operate through the crisis while restrictions remain on air travel. Indeed, banks and lessors have tightened their credit due diligence of airlines which almost all contributors to this report have indicated that whether or not the airline has secured government support is a major input into that decision making process. 

“When our airline clients first come to us for funding, my first question is always ‘what is your government doing to help you?’,” says one banker, “and then also finding out what support lessors and export credit agencies are offering. All of that has to be part of the conversation before banks can commit to any lending. Government support was, and is, a very important question for lenders because it’s not just about aircraft financing, banks have a lot of unsecured exposure to the aviation sector. Every lender expected the Thai government to step up and help the airline. When it didn’t, lenders were thrown into a quagmire and began to question the future of government-owned airlines. This happening in a country where the airline is so important to the economy sent negative messages to the market and as a result made the lives of other airlines much more difficult.”

In many cases, government support has been pivotal to companies’ ability to raise finance with commercial banks or in the capital markets. In March and April 2020, airlines in the US were effectively closed off from raising debt apart from very high coupons. “In March investors just didn’t want to put money into airlines,” said one financier at the Airline Economics Growth Frontiers Dublin 2021 virtual conference. “But after the US Government – and in other jurisdictions – pumped in unprecedented levels of liquidity, the markets regained the confidence to buy into even the largest offering by an airline by Delta and into a EETC with a portfolio of 20 year old aircraft, spare parts and engines.”

Government money has succeeded in boosting investor confidence around the world. In the UK, the success of Rolls-Royce’s £5bn recapitalisation package, completed in November 2020, comprised £2bn of new equity, £2bn in new bonds with maturity in 2026/2027 and a £1bn two-year bank facility, was boosted by UKEF’s in-principle support for an £1bn extension of its 80% guarantee of the company’s existing £2bn five year term loan. As the US carriers will attest, having that government backing in place, offers comfort to investors, boosting the ability of aviation companies to raise funds in the capital markets. 

Government support is clearly essential to assist airlines and manufacturers weather this crisis, but the type of support will impact greatly on the fortunes of the company in the recovery. In the post-pandemic operating environment, Fitch Ratings expects airlines to operate in smaller and more competitive markets due to the lagged demand recovery, which will require them to strengthen their capital structures by deleveraging, executing cost and capex saving programmes, and implementing more conservative strategies to remain competitive. Airlines that have received government aid with stringent conditions attached, may have sacrificed some of their operational and financial flexibility. In a recovery environment, decarbonisation targets, job retention conditions, minimum air fares, curbs on share buybacks, restrict flexibility, disadvantage other creditors, and of course increase debt burdens. With increased state ownership, comes operational interference. As airlines begin to generate revenue once more, their first requirement will be to de-lever and especially refinance those more restrictive government loans. 

However, certain government aid packages will be much more simple to refinance in the commercial markets than others. UKEF-backed facilities, for example, are much easier to refinance than direct government loans such as those secured by Air France and KLM. 

State aid restrictions could also hinder airline M&A activity, which in certain circumstances could be critical for survival.

Despite the extensive government support that has already been committed, more is likely to be required the longer the vaccination programmes take to roll out. “We remain concerned about the outlook for airlines worldwide,” says Cowen analyst Helane Becker. “Clearly most airlines would have gone bankrupt without government aid. Our view is that without a robust airline industry there cannot be robust economies, so we continue to expect governments to help their airlines through this pandemic. That said, we would not be surprised to see airlines that are not getting government aid fail.”