How do airlines get out of debt and find liquidity?

The pandemic crisis has wreaked havoc on the airlines’ finances. While many of them have been able to rely on public aid to save themselves in the first instance, this is not enough, and they need to find other ways of receiving fresh money.

Public aid is not infinite

Extreme situations call for extreme decisions. Many airlines have received one or even two rounds of public funding in one form or another, and there’s no guarantee that some won’t need a third. But it’s important to realize that the party’s almost over.

Firstly, because governments don’t have deep enough pockets to help airlines survive indefinitely and, in any case, because a single sector cannot disproportionately benefit from aid.

Secondly, because the competition authorities are watching. Alitalia is in the crosshairs, the latest aids granted to KLM and TAP have been rejected (at least in part), and when the aids are approved, they are sometimes accompanied by substantial quid pro quos.

Airlines still need fresh money

But in any case, most airlines still need new money, and if possible money that isn’t public. Why ?

Because not all of them have been helped by governments, and not always to the same extent.

Because the crisis isn’t over yet, and it’s going to be a long time before the books are back in the green. The airline business is one where, when you make money, you don’t make much, but when you do lose money, it’s usually on a massive scale.

Because they don’t want to be subject to the strings attached to state aid, and even want to pay back their initial aid as quickly as possible to get rid of any power of interference by the public authorities in their affairs.

Contrary to popular belief, public assistance is not inevitable! Given the urgency and lack of prospects in the sector a year ago, this may have been the most effective solution, but there were other options. As we wrote a year ago, some airlines have relied on the markets from the outset, sometimes even without governmental guarantee.

Now those who can continue to do so, sometimes for completely different reasons, and we’re going to look at 3 examples.

Leaseback: a proven way to receive cash

The first case is nothing new, and airlines didn’t wait for the crisis to put it to the test. It’s called “leaseback” (Sale-and-Leaseback if you want to be precise).

For an airline, this involves selling aircraft it owns to an organization which then leases them back to the airline. In simple terms, a capital asset is transformed into cash, which is used to pay operating expenses.

So, yes, this means they have to pay to use equipment they used to own, but it also generates cash flow and gives them time to see how the situation evolves.

Singapore Airlines, for example, leased back 11 aircraft in the spring, raising $1.5 billion (US).

Some use a loan to get rid of a cumbersome creditor

We knew that Lufthansa was deeply allergic to the German state meddling in its affairs., running a business being a matter for entrepreneurs, not politicians, and it is reluctantly that the airline saw the government take a stake in its capital following the granting of a first aid package in 2020.

Now that the horizon is clearing, the German airline is turning its attention to the markets. There is no question of repaying public aid with the money the airline is still struggling to earn, but the company’s management prefers to return to purely private shareholding and owe money to the markets rather than the taxpayer. What’s more, the repayment of public aid will mean that it will no longer have to accept any quid pro quos – quid pro quos that are admittedly much lighter than those imposed on Air France first by the French government for the granting of a Statate Backed Loan and then by the European Union for its recapitalization.

Lufthansa will therefore be carrying out a capital increase in the near future, which will enable it to repay public aid and remove the government from its shareholder base. It should be pointed out that the German airline, which received 6.8 billion in bailout funds, has only used 2.5 billion of these funds, and has already repaid 1 billion at the beginning of the year.

US airlines pledge future revenues as collateral

The third, and very creative, way of raising finance is to set up a highly profitable business in a subsidiary and use it to raise massive amounts of money! This works particularly well in countries where people are addicted to credit cards, which are a huge source of income now and in the future, whether the planes are flying or not. For the record, an airline like American Airlines often lost money in its core business (flying planes), and made a profit thanks to its frequent flyer program.

In short, US airlines have raised massive amounts of money by pledging the revenues from their loyalty programs, which are far more profitable and reassuring than their core business. But we’ve already explained all that to you recently.

Pre-crisis performers favored in recovery

Why doesn’t everyone do what Singapore Airlines and Lufthansa do? To borrow on the markets, you need to give guarantees of good health and good management, and while the crisis has had a severe impact on everyone, the markets don’t have short memories.

Airlines that had sound finances and management before the crisis will always be viewed favorably by the markets. The others will remain suspect for some time, and will always have to rely on direct or indirect help from the public authorities. This was the case at Air France, where the new management team did not have enough time before the crisis to erase the consequences of a “pilot by sight” approach that had lasted far too long before its arrival. That’s why, in a few months’ time, you’re likely to hear talk of a new government intervention in favor of the French airline, while its German competitor will have settled its debts with the public authorities.

Photo : Singapore Airlines A350by KITTIKUN YOKSAP via Shutterstock

Bertrand Duperrin
Bertrand Duperrin
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.

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