Iata warns of 'a lot of failures' as airline debts soar to $550b

Airline debts have ballooned to $550 billion and the industry "could see a lot of failures" this autumn without additional government aid, according to International Air Transport Association (Iata).  
"I don't see the situation as sustainable. Given the combination of debt and a slow recovery, it's inevitable we will see failures as government aid unwinds, unless governments are going to own airlines," said Iata chief economist, Brian Pearce.
Iata has estimated the value of airline refunds owed for cancelled flights in the three months to June alone at $35 billion as carriers already burn through $60 billion in unavoidable costs in the quarter.
"We will see a wave of mergers or airlines exiting the market, particularly if European and US airlines don't get a summer for the airlines to bulk up cash flows. We will likely see consolidation in the fourth quarter of the year," warned Pearce.    
Pearce noted that the airline industry has taken on a lot more debt. "We estimated the total debt in 2019 at five times airlines' cash flow on average. In 2021, it will be 17-18 times cash flow."
"This situation is probably not sustainable. You could see a lot of failures, or we could see governments swap debt for equity and a lot more government ownership," said Pearce.
He estimates there is $35 billion worth of tickets due to be refunded in the second quarter. Not many airlines have sufficiently strong credit lines or cash reserves to do that.
Iata estimates total government aid to carriers to date at more than $120 billion, "to a large extent in loans but also in wage support, equity, tax deferrals, and cash injections".
Airline debts have ballooned from $430 billion worldwide at the end of 2019 to $550 billion, Pearce said, adding: "This has kept the industry on life support, but it comes with a problem. About $66 billion will have to be repaid. The economics of recovery is going to be tricky. Airlines have to service their debts and pay variable costs while pricing to stimulate demand," he said.
Last week, Iata called on governments across the globe to extend airport slot waivers amid the continued difficulty caused by the Covid-19 crisis, and warned that a return to normal flying would be a long way off from the current re-opening of borders.   
Iata director-general and CEO Alexandre de Juniac said even though business activity is slowly picking up, the market still has a long way to go. "Therefore, airlines still need support from governments to keep them going through the storm."
Pearce said a lot of measures to deal with Covid risk slowing down turnaround times and will cut aircraft utilisation.
"In some jurisdictions we see a requirement to keep middle seats empty and that will reduce seat use. Coupled with debt servicing, it is a difficult environment to restart. We expect losses of $84 billion this year and we have not seen losses on this scale before," Pearce noted. "Before the crisis, we had 10 years of sustained profitability. The industry went into this crisis in pretty good shape, but that improvement was driven by only 20-30 airlines."
issacjohn@khaleejtimes.com