DISTRESSED SECTORS

Grounded: how COVID-19 has impacted the aviation industry

The COVID-19 pandemic has resulted in lockdowns and travel restrictions in every part of the globe, with a huge impact on the global aviation industry. It is clear that operators, airports, lessors and support businesses need to look at all the options open to them to survive.

COVID-19 has been an unprecedented shock for the global aviation industry, resulting in fleets of idle aircraft, empty airports and a huge and sudden drop in passenger numbers. And the disruption looks set to remain for a significant period of time. According to the International Air Transport Association (IATA), passenger numbers in Europe were down 97% in June as compared to last year. It is forecasted the industry will not return to 2019 levels of activity until 2024. Aviation is in for the long haul when it comes to pandemic-related disruption, but what are the specific challenges that businesses are facing?

Liquidity

Global industry losses could top $84 billion in 2020, as revenues are halved due to a mix of lockdowns, travel restrictions and reluctant passengers. This makes cash flow management a top priority for airlines, lessors and support businesses, but uncertainty is a clear risk. Firstly, many businesses are relying on government support which will not last forever. Secondly, with fears of fresh spikes and second waves growing in Europe, it is not possible to accurately predict when travel restrictions will be lifted.

Operating costs

Up until now, the main strategy for lowering operating costs has been reducing staff levels, either through redundancies or by placing workers on the government’s furlough scheme. But this is only a temporary source of stress-relief and creates further issues later on when operators are looking to scale operations back up, especially when it comes to staff with more specialised skill sets and experience who could be harder to recruit when growth returns.

Debt and restructuring

For airlines, the capital debt accrued through the ownership or leasing of aircraft is a huge part of their fixed costs. A large number of these assets are now going unused, with some operators in Europe carrying out 17% to 38% of scheduled flights in May. In the US, the TSA reported a 96% drop in passenger numbers to the lowest level since 1954, while operators in China reported a 71% year-on-year decrease in flight numbers as early as February. As such, businesses are looking to negotiate payment deferrals with banks and lessors. Lessors themselves often hold between 70% - 80% debt on each of their aircrafts, and many are in serious financial difficulty. While attempting to draw down funds, secure more finance or restructure debts, it is clear joint efforts between all market participants will be necessary for some time.

Operational changes

Another large source of uncertainty is simply what exactly a return to business looks like for the aviation industry. As some airlines begin to take on more activity, there has been a variety of approaches to social distancing. Operating at a lower capacity could just not be feasible as a long-term strategy for smaller operators with shallow cash reserves. Lessors are looking to create more resiliency to market volatility, with some businesses likely to take new approaches to fleet management and pricing.
The aviation industry faces a long road to recovery, and the choices that businesses make over the coming months are extremely important. We can help you assess, protect and restore value to your business.

Get in touch with one of our aviation industry experts in your local area.