Debt for Airlines: Solution or Greater Problem?

As the COVID-19 outbreak continues to ground large part of the world’s fleet, airlines are recurring to debt to weather the crisis. However, the International Air Transport Association (IATA) warns that too much debt could cripple airlines in the long term.

The financial cost of COVID-19 has been significant for airlines, which are facing their deepest crisis in modern history. Two major airlines, Avianca and LATAM Airlines, filed for bankruptcy this month and another, Virgin Airlines, entered voluntary administration in April due to the sharp decrease in demand caused by the outbreak. Low demand is expected to continue as countries try to contain the spread of COVID-19. To stay afloat, some airlines are incurring in debt. IATA reports that airlines around the globe have received US$67 billion in government debt besides an additional US$52 billion in debt to capital markets, banks and lessors. Just this week, Aeroméxico announced that it would place MX$400 million (US$18 million) in one-year bonds, valued at MX$100 (US$4.5) each. The airline, which transported 91.1 percent less passengers during April in comparison to the previous year and saw its S&P rating fall from B+ to B-, is just one of many recurring to debt to manage their financial commitments during the crisis.

While the need is real and the relief welcome, IATA warns that too much debt could cause the airlines trouble later on. “Government aid is helping to keep the industry afloat. The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating,” said Alexandre de Juniac, Director General and CEO of IATA. The association estimates that by the time the industry prepares to recover, airlines would have increased their debt to US$550 billion, 28 percent more than the US$430 billion they had at the start of the crisis. This situation, explains IATA, would create liabilities later on and prolong the recovery of airlines as they struggle to pay back lessors.

Another problem highlighted by the organization is the unequal support for airlines across regions. While North America has committed US$66 billion to support the industry, Latin America has committed only US$300 million. “Many airlines are still in desperate need of a financial lifeline. For those governments that have not yet acted, the message is that helping airlines raise equity levels with a focus on grants and subsidies will place them in a stronger position for the recovery,” said de Juniac.