Airlines face ‘critical’ threat from coronavirus-related cash crunch, IATA says

Mar 17, 2020

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Airlines around the world are being pummeled by the coronavirus crisis, with many facing tough questions about their future as the cash needed to pay their bills runs low.

The International Air Transport Association (IATA), the global organization representing airlines, estimates that carriers have on average cash and access to credit — otherwise known as “liquidity” — to pay their bills and sustain them selves for less than three months, said IATA chief economist Brian Pearce on Tuesday.

“At times like this, it’s actually balance sheets that are critical to survival,” he said. “More than 75% of airlines we looked at actually had less than three months of cash and equivalents to cover those costs.”

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Liquidity is critical to any business. Even when revenues drop off, as they have with travelers staying home and countries implementing broad travel restrictions to stop the spread of COVID-19, airlines still need to pay their fixed costs, for example regular loan or aircraft lease payments.

Companies fail when liquidity dries up. Travelers saw this happen last year when Thomas Cook and WOW air shut down.

This liquidity crunch is driving airlines’ requests for government aid to get them through the crisis. On Monday, U.S. carriers unveiled an at least $50 billion request for aid, including both grants and loans. Airlines elsewhere have made similar asks to their governments.

Related: US airlines seek at least $50 billion in aid to combat coronavirus crisis

“What has happened with this pandemic has been debilitating, and the deterioration of business has been incapacitating,” Airlines for America (A4A) president and CEO Nicholas Calio said on NPR’s Morning Edition Tuesday. A4A is the industry group representing U.S. carriers.

Globally, IATA director general Alexandre de Juniac estimates that airlines will need more than $200 billion in aid to get through the crisis. His estimate includes the $50 billion request in the U.S.

“If we want to maintain a strong airline sector, able to cope with this difficult crisis but able also to provide the resources that the recovery [will need]… we need government to act quickly,” said de Juniac.

Related: Coronavirus crisis raises questions about the survival of already-struggling airlines

Even with government support, IATA expects changes in the airline industry when global economies emerge from this crisis. Fewer players are likely from some combination of consolidation and shut downs.

“It is clear that we will see… probably consolidation, [and] unfortunately some airlines will be disappearing,” said de Juniac.

Already, the UK’s largest regional carrier Flybe ceased operations due to the crisis.

Some airlines could benefit from an industry cull. In a report Monday, J.P. Morgan analysts forecast that Air Canada, American Airlines, Delta Air Lines and United Airlines could see stronger financial returns on transatlantic routes after the crisis if some weaker players stop flying. European carriers were not mentioned as the scope of the report was limited to the airlines covered by the bank’s North American analysts.

Related: US ‘big 3’ well-positioned to survive possible coronavirus crisis shakeout

And the crisis will end. Pearce at IATA said that airlines in China, where the coronavirus outbreak first began in January, have already begun resuming flights and loads — or the percent of seats that are filled — are trending above 60%.

“We are seeing a recovery phase in China, but certainly that is not the case in Europe and North America,” he said.

Featured image by JIM WATSON/AFP/Getty Images.

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