The world’s largest airlines have built up a mountain of more than $300bn in net debt, a sign the pandemic will hamper recovery for years as carriers face paying back huge bills from rescue financing and state support.
With hopes of a limited restart to travel in the summer, attention is turning to how quickly airlines can heal their balance sheets after the biggest crisis in aviation history.
“Liquidity is and has been of great importance to always make sure we have enough cash to manage the situation,” easyJet chief executive Johan Lundgren told the Financial Times.
But there is now a big price to pay after shareholders, debt markets and state support schemes provided essential liquidity to help the industry survive a collapse in passenger numbers and avoid widespread corporate failures.
Although companies are sitting on cash and short-term investments of $140bn, up from $90bn at the start of the year, their net debt has also risen by $60bn over the same time to $320bn, according to FT analysis using FactSet data of the balance sheets of the 50 biggest airlines.
The four big US carriers — United Airlines, American Airlines, Delta Air Lines and Southwest Airlines — have led the way in raising money, bolstered by more than $60bn of government aid.
In Europe, flag carriers Air France-KLM and Lufthansa have been shored up by billions of euros in state support, while British Airways owner IAG tapped shareholders for €2.75bn, received a £2bn state-backed loan from the UK and raised €1.2bn in a bond issue this week.
Airlines came into the crisis in broadly better shape than before the financial crash in 2008, allowing them to raise billions quickly, according to Jonathan Root, a senior vice-president at rating agency Moody’s.
“Credit markets were there for the companies from day one,” he said. “If this was 2008, we would be having a different discussion today. ”
Airlines raised $42.6bn in the debt markets in 2020, the most on record, according to data provider Dealogic.
This month American Airlines launched an industry-record $10bn debt deal that underscored how low-interest rates have spurred investors to hunt for yield even in industries that have been badly hit by the crisis.
“We have been surprised, and I think the industry has been surprised, how well supported a lot of the companies have been,” said Rachel Gerrish, a director at S&P Global Ratings.
However, the support will be needed for longer than many in the industry had hoped as the outlook for air travel is uncertain this year despite the successful vaccination campaigns in many key markets.
The International Air Transport Association has said carriers could burn through $95bn of cash in 2021 and warned that its forecast that the industry could turn cash positive by year-end may prove too optimistic.
“Cash is essential today and the industry is going to need more cash as we go through this year to survive. But . . . a lot of that will probably come in the form of more debt,” said Iata chief economist Brian Pearce.
Once passengers are finally able to return to the skies, companies can start trying to improve their balance sheets. “The ability to repay debt has always been a focus,” easyJet’s Lundgren said.
He said a recent £1.4bn UK government-backed loan was particularly useful as it allowed the airline to pay back some short-term loans and improve its debt maturity profile.
“Any debt we take on we want to repay, we want to get back into the position we were in before going into this,” he added.
The next year is also expected to single out the strongest carriers, such as Michael O’Leary’s Ryanair, that have relatively low costs and flexibility to respond to the flying recovery, while rivals are weighed down by the debt struggle.
Daniel Roeska, an aviation analyst at Bernstein, said airlines with the highest debt would have to reduce their balance sheet “scars” before they become attractive again for investors.
O’Leary offered a cruder analysis, calling some European airlines “state-aid junkies”. His airline has opened court proceedings to challenge European government bailouts.
In the US, however, high debt loads may not be such a problem as the big groups are among the most profitable.
Moody’s Root said if a vaccine could be widely distributed this year, then US airlines would be able to repay “a large portion of the debt that’s been incurred”.
The weakest groups, and those without the luxury of significant government support, face a bleaker future. Norwegian, long one of Europe’s most vulnerable airlines because of its high debt, filed for bankruptcy on November 18.
But regardless of strategy or balance sheets, “there is not going to be a lot of free cash flow available for investments in fleet or the product”, Iata’s Pearce said, as airlines are still exposed to factors beyond their control.
Etihad’s chief executive Tony Douglas told the FT he was planning for a recovery in the second half of the year as vaccines are rolled out, but added “almost every time we revisit what’s going on, it changes”.
Additional reporting by Chris Campbell