Irish aviation industry is back to take off
The disruption does not come close to adequately describing the impact of the Covid-19 pandemic on the global aviation industry. Air travel has been completely halted in much of the world for several months in 2020 and again in 2021. Unprecedented levels of government support have kept most airlines in business, and the rental industry. aircraft also played an important role. Nevertheless, the scale of the losses suffered by the industry remained breathtaking.
Despite the hammer blow from Covid-19, Ireland remains a key player in the global aviation leasing and financing industry.
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Airlines saw a 60% drop in passenger numbers in 2020, according to Dr Marina Efthymiou, assistant professor of aviation management and director of the Masters of Management (Aviation Leadership) program at DCU. “Overall, airlines carried 2,699 million fewer passengers in 2020 than in 2019. This resulted in a loss of $ 371 billion in gross passenger revenue.”
Year-to-year comparisons typically focus on the number of passengers and available seats, she adds. “The seats offered fell by 50% in 2020.”
This discrepancy with the number of passengers is explained by the ‘use it or lose it’ rule for slots in the EU, which meant that airlines initially had to continue to fly empty planes in order to keep roads. “The European Commission changed the regulation for economic and environmental reasons and this has allowed airlines to stop flying empty planes.”
Things have improved somewhat, however. “As restrictions have eased and vaccination programs have progressed, passenger confidence has increased,” Efthymiou said.
“Compared to 2021 with the same period in 2019, the seats offered have been reduced by 38 to 40%. The number of passengers fell from 46 to 49 percent. This translates into a reduction of 2,000 to 2,200 million passengers and a loss of revenue of 305 to 342 billion dollars.
Surprising, but still an improvement. “It varies from country to country,” she adds. “Personally, I consider Ireland a bit slow to allow overseas travel compared to other countries.”
Regulatory assistance went beyond slot rules. “The European Commission has changed the regulations to allow national governments to support the industry,” she says. “A number of countries have offered bailouts with certain conditions, such as reducing the impact on labor. “
Lufthansa received the largest support package of any European airline with a state-guaranteed loan of € 3 billion and a € 6 billion recapitalization program funded by the German Economic Stabilization Fund. The Air France-KLM group obtained financing of 7 billion euros including a loan guaranteed by the French state of 4 billion euros with a syndicate of nine banks providing the rest. The UK and US governments have also stepped in with aid programs for the industry and its supply chain.
“Government support has been crucial,” says Joe O’Mara, head of aviation finance at KPMG in Ireland. “Overall, governments have invested $ 200 billion in loans, grants, wage support programs and some grants. All of this was done with the strategic objective of having airlines in place when the pandemic is over. As a result, there were fewer bankruptcies in 2020 than in 2019. ”
Airlines were also fortunate to enter the crisis in fairly good health, O’Mara adds. “At the onset of the crisis, the industry had experienced an unprecedented 10-year period of growth and had significant liquidity. Money was the key.
The aircraft rental industry has also faced serious challenges, but it has weathered the crisis remarkably well and may even emerge stronger.
It’s reasonable to think that it will take five years to recover, and that’s the optimistic scenario
“The beauty of leasing was its ability to enforce the contract,” says O’Mara. “They could get on the plane and rent it to someone else. It has become a zero sum game in Covid, when you have no one else to rent it to. “
Airlines have understandably demanded deferred payments from lessors, with some seeking to switch to “power by the hour” as pay-as-you-go arrangements for airplanes. They also sought to defer orders from aircraft manufacturers. In some cases, the lessors stepped in to take these orders and then made agreements with the airlines to lease the plane to them instead. This reduced the need for airlines to raise money and take on debt to buy planes. In other cases, lessors have entered into sale-leaseback agreements with airlines. This gave the airlines a much needed injection of funds at a crucial time.
“About 25% of the planes in the world were leased 25 years ago,” says O’Mara. “It’s now up to 45-50 percent. Leasing represented 55% of the market in 2020. It is believed to exceed 50% overall in the coming years.
In this context, it should also be noted that the Irish leasing industry is responsible for around half of this total.
Leasing has become more attractive and more common for investors as a result of the crisis. “Donors have raised money on capital markets cheaper than before the crisis. They raised capital at rates below 2% – and below 1% in some cases. They raised $ 9 billion in the first quarter of the year, partly because there was a lot of cash and partly because of confidence in the leasing model. It is not without challenges, of course. They are facing complicated restructurings, and we will see more airlines fall. But they probably developed deeper relationships with customers as a result. “
And they made new relationships. “Blue-chip airlines that did not use leasing before are now more open to all forms of financing,” says O’Mara. “Most of the government’s money will have to be repaid, and many airlines around the world are going to be extremely cash-strapped. As you go along, you will see more and more airlines using the rental channel.
A full recovery of the sector will be long in coming, according to Efthymiou. “It’s reasonable to think it will take five years to recover, and that’s the optimistic scenario. The loans that the airlines have received mean that they will come out with very large debt. And profitability is very low in European industry. You make more money selling apples than running an airline. I don’t think airlines will buy a lot of planes over the next five years, but some will have aging fleets and have incentives to reduce their environmental impact and fuel bills. Leasing can play a bigger role in this, as they can choose to lease rather than acquire the assets. But you have to look at market by market and airline by airline. “