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Tough times ahead for a resilient airline industry

Jan 22, 2021

Putting the brakes on travel has been hard for passengers and the industry. But is there a light at the end of the tunnel for aviation companies? Dick Forsberg explains.

The disruption caused by COVID-19 will have unprecedented consequences for the airline industry, including significant and permanent structural changes. At the same time, record numbers of investors are lining up in anticipation of finding real value in distressed aviation-related transactions, arguably for the first time in over a decade, and according to PwC’s Aviation Industry Outlook 2021, capital should be available in scale as the recovery trajectory becomes better defined.

IATA predicts that the airline industry will have lost US $118.5 billion in 2020 and a further US $38.7 billion in 2021. The extensive government support provided, estimated to be at least US $180 billion to date, has played a major role in saving a number of weak carriers from collapse, but in doing so has created a long-term unlevelling of the playing field.

Airline casualties

According to the report, the extraordinary levels of additional indebtedness taken on by the airlines will permanently realign the finances of the industry. Airlines will need ongoing access to emergency liquidity – including government support – for the foreseeable future. There will be more airline casualties ahead and, for those that survive, the ability to thrive will be more challenging.

In order to survive and thrive in the post-COVID-19 world, airlines will have to fundamentally rethink their fleets, their business models and their finances. This will not always lead to change, but for most, a return to business as usual is not going to be a viable option for several reasons, such as:

  • there are too many aircraft in the system, and the market of 4.5 billion passengers will not return quickly;
  • the market has become uneconomic, and airlines cannot easily return to the service they provided before March 2020;
  • a heightened duty of care towards customers and front-line staff will reshape customer service; and
  • the crippling debt burden that is building across much of the airline industry will require root and branch restructuring in order to bring long-term solvency and profitability.

In many cases, drastic surgery will be needed to right-size fleets, restructure business models and recapitalise airlines.

Fleet rationalisation acceleration

It is expected that in 2021, the fleet rationalisation process that is already under way will continue and accelerate. Few airlines are looking to add capacity. 2020 ended with 30% of the global passenger airliner fleet inactive – more than 8,500 idle aircraft – and 5,000 aircraft may be surplus to requirements.

Demand remains muted, making lease extensions and placements more difficult and Original Equipment Manufacturer (OEM) production rates may not return to 2018–2019 levels before 2025. 2020 is expected to have been the low point in the current cycle for aircraft deliveries, requiring an estimated US $50 billion of finance, half of the 2019 volume.

Lessor restructuring and M&A activity

Managing liquidity will continue to be challenging for the airlines. Pressure on lenders, lessors, OEMs and other stakeholders will also extend well into 2021. As the crisis continues, an increase in lessor restructuring and M&A activity is expected. Incremental liquidity from a growing number of investors considering a role in the sector will be key to the continued ability of airlines to finance their aircraft and related assets.

Aircraft with the most efficient technologies will be the preferred fleet choices for airlines as they seek to minimise operating risk and cash outflows, and their residual values are unlikely to experience permanent reductions. Conversely, the largest and least efficient aircraft types will remain underutilised for longer with a higher risk of permanent value impairments.

Environmental issues and sustainability may have taken a back seat as airlines deal with the pandemic, but they have not gone away. The industry has set some extremely challenging green agenda targets and the actions required to make real progress on this front need to be woven into the plans rising from the wreckage of COVID-19.

Resilience

Once the virus is sufficiently tamed, passenger demand will slowly return. There is already evidence that the desire to travel is firmly embedded in our DNA and, given the opportunity and the confidence to fly again, the majority will do so. The industry has demonstrated its resilience many times in the past and will survive and thrive again, albeit with some sorely needed changes to its structure.

Dick Forsberg is Senior Aviation Finance Consultant at PwC.