David Yu is a finance professor at New York University in Shanghai who specializes in cross-border financing and aviation finance and leasing. He is author of "Aircraft Valuation: Airplane Investments as an Asset Class."
The business model for most airline operators is similar to the seasonal life cycle of bears: store the profits from the peak travel periods from spring through to fall to tide them over the winter when less people travel.
The problem now is that after COVID-19 ravaged the summer travel season in the northern hemisphere, many airlines are facing a cash crisis before winter has even started. Without those golden periods of abundant cash flow, it has been a long and painful year, hastening the need for immediate restructurings or in some cases the shutdowns of airlines such as AirAsia's Japan franchise and its AirAsia X subsidiary.
Fortunately for airline operators, there have been varying degrees of government aid and support that have helped extend their timelines. But even generous cash injections, which have been in the billions of dollars at the top of the range, might not be enough to keep large airlines with large fixed costs flying as the pandemic continues to drag on.
Singapore Airlines, having received a $13 billion taxpayer-funded cash injection in March, has reportedly already burned through more than half of it and is ceasing its SilkAir brand. Cathay Pacific, which in June received $5 billion in government aid and recently announced significant layoffs and the closure of Cathay Dragon to help stop the bleeding, has continued to hemorrhage up to $260 million a day. Likewise, Japan's ANA Holdings, which recently announced its largest forecast yearly loss at $4.8 billion, will need to raise a further $3.8 billion in debt to sustain operations.
It would be wishful thinking to believe that governments will supply endless amounts of financial aid to the airline industry. Even the funds paid out so far have not been enough to overcome the aviation industry's high fixed costs. COVID has also severely impacted many other related industries including hospitality and tourism which are also demanding government support.
Instead of just providing funds directly, governments would be better off focusing on ways to get as many people back in the air as possible, such as the continued development of bilateral or multilateral travel bubbles like the trans-Tasman corridor between Australia and New Zealand and the Singapore-Hong Kong route. Increased testing, as well as uniform testing protocols, would help mitigate safety concerns associated with opening borders to more travelers.
Looking ahead, further airline restructuring cannot be put off any longer. The faster that different airlines can be restructured, the more quickly things can be reset to a business model that can accommodate the current dynamics.
Many airlines themselves have been practicing self-help, and not just waiting for government handouts. In many cases, the consequences have been severe, including restructurings and liquidation. Since February, many global airlines have raised funds by mortgaging all available assets at a record pace, to the tune of $33 billion in public debt over the northern hemisphere summer period.
U.S. airlines have greater access to capital markets than competitors in Asia, as shown by United Airline's $3 billion A class enhanced equipment trust certificate. That has been characterized as "everything and the kitchen sink" in terms of all the assets mortgaged after the airline previously pledged all major assets including its frequent flyer program. But even these efforts might not be enough to keep many carriers in the air.
Airlines have also been attempting to downsize in order to preserve cash, and have been working with their financiers to reschedule or push back various commitments. Banks and aircraft lessors have been mostly amenable for rental and interest holidays and restructurings to help airlines conserve cash.
While this is viewed as a temporary stopgap, most restructure plans and cost-saving measures have already been in place for at least six months and are now into round two extensions. The next three months will be critical as the deadlines for internal risk tolerance limits approach, with most banks having received minimal or no payments for up to one year. In normal circumstances, most banks would have put a stop to this and started imposing measures to recoup their loans including repossessions. But given today's climate, what would that really achieve?
This situation where minimal repayments -- or in some cases the complete lack of repayments -- is made worse by the fact that the value of underlying aircraft assets is depreciating. The longer the payments are pushed back, then the more that higher returns are needed to stay above water. Collateral will also be deteriorating, not to mention higher technical maintenance risks associated with severely cash-strained airlines.
It is in banks' self-interest to enforce better preservation of their assets by not waiting around for the recovery that keeps getting pushed back. As values dive, banks will be in a better position to control their position. Winter is a major overhang not only for airlines but also for aircraft lessors who are tied to the supply chain.
The sooner the next restructuring steps come, the sooner the industry can rebound to the next phase of industry growth where there will be plenty of opportunities for responsive airlines, the supply chain, and their financiers to benefit.