The International Air Transport Association (IATA) has released its latest analysis showing the airline industry’s global debt could rise to US$550 billion by year-end. That is a $120 billion (28%) increase over debt levels at the start of 2020.
Some $67 billion of the new debt is composed of government loans ($50 billion), deferred taxes ($5 billion), and loan guarantees ($12 billion). A further $52 billion is from commercial sources including commercial loans ($23 billion), capital market debt ($18 billion), debt from new operating leases ($5 billion), and accessing existing credit facilities ($6 billion).
“Government aid is helping to keep the industry afloat,” said Alexandre de Juniac, IATA Director General. “The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating.”
In total, governments have committed to $123 billion in financial aid to airlines. Of this, $67 billion will need to be repaid. The balance largely consists of wage subsidies ($34.8 billion), equity financing ($11.5 billion), and tax relief/subsidies ($9.7 billion). This is vital for airlines, which will burn through an estimated $60 billion cash in the second quarter of 2020 alone.
“Over half of the relief provided by governments creates new liabilities,” added Alexandre. “Less than 10% will add to airline equity. It changes the financial picture of the industry completely. Paying off the debt owed to governments and private lenders will mean that the crisis will last a lot longer than the time it takes for passenger demand to recover.”
The type of aid provided will influence the speed and strength of the recovery. IATA has urged governments still contemplating financial relief to focus on measures that help airlines raise equity financing.
“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. A tough future is ahead of us. Containing Covid-19 and surviving the financial shock is just the first hurdle. Post-pandemic control measures will make operations more costly. Fixed costs will have to be spread over fewer travellers – and investments will be needed to meet our environmental targets. On top of all that, airlines will need to repay massively increased debts arising from the financial relief. After surviving the crisis, recovering to financial health will be the next challenge for many airlines.”