Airlines are on the verge of a downward spiral in debt


Coolers are seen at Schiphol Airport as Air France-KLM cargo operations prepare for a massive logistics operation transporting new vaccines and vaccine candidates for COVID-19 via Amsterdam Schiphol Airport, the Netherlands , November 25, 2020. Photo taken November 25, 2020.

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LONDON, Dec. 15 (Reuters Breakingviews) – Airlines are on the verge of breaking corporate credit cards. Since 2019, the six major network operators in the United States and Europe have accumulated additional net debt of $ 44 billion, more than their pre-pandemic EBITDA. Even with a return to normal in 2022 – an increasingly unlikely scenario – it will take years.

In addition to flogging planes, laying off staff and demanding money from shareholders, airline bosses have borrowed huge sums from banks and capital markets. Taxpayers also contributed, with the US Congress somewhat controversially approving $ 54 billion to cover ground staff salaries for 18 months. To a large extent, survival skills have worked. Only Air France-KLM (AIRF.PA) is close to nationalization, the French and Dutch governments respectively holding 29% and 9% of the capital.

Having said that, the industry’s debt levels are unsustainable. Since 2019, the three major American carriers Delta Air Lines (DAL.N), American Airlines (AAL.O) and United Airlines (UAL.O), and their European counterparts Air France-KLM, the German Lufthansa (LHAG.DE ) and IAG (ICAG.L), owner of British Airways, increased its net debt by 63% to $ 112 billion, according to analyst estimates compiled by Refinitiv. This equates to a whopping 4.7 times next year’s EBITDA. In 2019, the year before the pandemic began, the absolute figure was $ 69 billion, just 1.7 times that year’s EBITDA.

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The return to 2019-type debt levels will cause years of suffering for shareholders. Government support programs in the United States and Europe prevent the payment of dividends until government loans are repaid. Even after that, there is the question of affordability. During the global financial crisis, Delta’s net debt fell from $ 6 billion to $ 12 billion, and it took five years to normalize even as demand for air travel rebounded sharply. Since 2019, it has multiplied by 2.5. A negative EBITDA for 2020 and 2021 means that traditional measures of financial sustainability are for the birds. The Omicron variant could still wreak havoc on the 2022 forecast, and even airline executives are wondering if business travelers will ever return to full capacity.

Another solution is to pass the hat to shareholders again. But Omicron has again crushed stock prices, increasing the burden on stock investors. The additional net debt taken on over the past two years is two-thirds of the current market value of the six, which itself could be inflated. Even when the viral storm clouds do eventually pass, the outlook for airline shareholders looks grim.

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– CEOs of major U.S. airlines were scheduled to appear before Congress on Dec. 15 to defend a $ 54 billion government lifeline that covered most of the industry’s wage costs for 18 months.

– Major UK airlines have called for more economic support to offset the impact of travel restrictions aimed at curbing the spread of the Omicron coronavirus variant, the Financial Times reported on December 13.

– The newspaper said industry executives would ask for extensions of pandemic government-issued loans, and potentially another leave scheme for aviation workers.

– Air France-KLM announced on December 13 that it had repaid 500 million euros on a loan of 4 billion euros backed by Paris, and had negotiated an extension of the maturity of the outstanding debt from two years until in 2025.

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Editing by Lauren Silva Laughlin and Sharon Lam

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