• Charles Heighton

Can airlines survive without help?

By Charles Heighton – The London Financial Markets Editor and VP of Trading at King’s Global Markets

The Coronavirus pandemic severely damaged airlines as flights stopped and restrictions were imposed. The chart below from Statista shows the change across the world in tourist arrivals in the first five months of 2020 compared to 2019. Across the world, the number was under half of the arrivals in 2019.

Source: Statista; https://www.weforum.org/agenda/2020/09/coronavirus-cuts-international-tourism-in-half

Most travel restrictions were only imposed in the middle of March, so this damage occurred in just 10 weeks. If the data for June and July was included, it would look even worse. If we assume that we are just over halfway through this crisis, airlines may have to wait at least another eight months before things start to return to normal. Even then, it is hard to know what the demand for travel will be like.

A huge amount of revenue comes from business class passengers, who account for roughly 12% of traveller (pre-pandemic) but generate double the amount of revenue. The world has now seen another way for these business meetings to occur; so logically, travel driven by business need may fall.

Some of these airlines are already in a bad way. British Airways is literally selling off the silverware to generate cash. IAG, its parent company, lost a staggering $6.4 billion in the first nine months of 2020. While the current earnings do not cover the interest payment on the company’s debt, IAG might also struggle to raise more debt in the public markets as it is already very leveraged, as the chart below shows.

Source: https://images.simplywall.st/asset/chart/131475881-debt-equity-history-analysis-1-dark/1606657852877

Other European airlines are not faring much better, EasyJet is also very leveraged and will struggle to cover debt payments. Ryanair’s CEO is one of the few not calling for state aid because his airline is in a better position, but its future is far from certain.

I am not advocating for state aid to airlines, but the argument could be made that the government is partly responsible for their current predicament because of the stringent measures taken. Lives should naturally come first, but when measures that directly hurt certain industries are taken, it only seems right to consider extending aid to them — even if it is an unpopular decision. The government should not prop up unhealthy businesses, but it also should not condemn healthy ones.

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