Spiralling airline debt ‘a pandemic legacy’

The beleaguered airline industry could accumulate up to a trillion dollars in debt by the time travel returns to 2019 levels, industry experts are predicting.

And while indicating that now is not the time to panic, they believe that despite any light at the end of the tunnel attributed to vaccination, countries will need to be more coordinated with travel policies and ease travel restrictions.

Brian Pearce, Chief Economist at the International Air Transport Association (IATA) told a webinar today entitled,  Debt, debt, debt – The financial backpack of the industry, that  while government support and cash raised by bigger airlines have been keeping the industry on life support, continued rising debt will remain an albatross around the industry’s neck.

He said cargo remained a “bright spot” for air transport when it comes to revenue-earning potential especially in Asia, but it was too small to offset the collapse in passenger revenues.

Pearce explained that the airline industry burned through about US$50 billion per quarter over the last year and based on forecasting models, that could double by the end of this year, which he said could result in bankruptcy of some airlines.

Over the past year some 30 airlines either folded or restructured under bankruptcy laws.

Pearce said “The challenge though, once we restart, there is going to be an additional problem and that is going to be the burden of debt.

“We estimate that at the start of this year, debt had risen by 50 per cent over the year. So an additional US$220 billion dollars of debt that has to be serviced and of course repaid. I think that is going to drive the focus of the industry as we move into the restart hopefully in the second half of this year,” he said.

He said that as a result of the unsustainable debt levels and the need to train and retrain staff, airlines will have very little wiggle room to invest in product development or fleet upgrade.

“The other issue is that we have some way to go before vaccination allows passenger revenues to come back and stop the cash-burn,” said Pearce, who noted that airlines will require a lot more funding over the next six months to stay afloat.

Senior Partner at McKinsey and Company Alex Dichter said based on latest research, full recovery of the industry to 2019 levels was not expected before the year 2030.

However, he said the premium business travel segment would continue to suffer as more business leaders engage in online meetings and companies slash their budgets for travel and conferences.

“This is a middle-of-the-road forecast, there are some more pessimistic and some more optimistic, but we will see business traffic by 2024 not much more than 80 per cent of 2019 volumes,” added Dichter.

Stating that the airline industry got off to a worse than predicted start this year and 2022 was estimated to be a “cash consuming year” as airlines continued to reposition, Dichter said this meant that by 2024 the airline industry debt could increase by between US$240 billion to US$460 billion.

“Bringing pilots back triggers training events. You add that to normal plant cut-backs and we will likely end up at overall debt levels as an industry between US$870 billion and US$1.1 trillion,” he said.

This, he added, would place the industry in a very precarious and uncomfortable position, adding that there will be consequences to having such high debt.

“It will take until 2030 or later to return to 2019 leverage levels and that is if we continue to focus on extreme discipline on cut-backs. That doesn’t only mean fewer fleet upgrades, but it means delaying important upgrades of information technology systems and many of the things the industry was focused on for the next generation of performance improvement. A lot of that will end up having to be on hold for the better part of the next decade,” he explained.

Dichter said instead of panicking, industry officials and governments should think about what measures to put in place “for the next ten years and not the next month or two”. They should also contemplate what structures should be put in place to ensure stability and profit-driven growth.

They also agreed that while the airline industry was not the biggest employer in the overall tourism industry, governments should still see it as critical to tourism growth and open borders as early as possible. (marlonmadden@barbadostoday.bb)