COVID pushing airline finances to the brink

With COVID showing no signs of abetting, airlines are digging in to see out this unprecedent slump in demand. This past week has been another standout week in terms of updates with many airlines reporting new efforts to raise equity, while others looking for survival as they continue to work on their restructuring plans and search for new sources of investment.     

Alitalia, Comair, Spirit, Ryanair, Virgin Australia and Virgin Atlantic, to name but a few, have all come out with news of a rescue deal, significant refinancing, or restructure.

With the northern hemisphere heading into winter and important Asian markets still largely closed, preserving cash and seeing through vital restructuring will be critical ahead of an inevitable further reduction in global ASK’s after initial green shoots.  

Below is a round up of the latest news with my personal outlook for each. In conclusion – unless borders and quarantine restrictions are managed in a better way – a very tough and uncertain future awaits the aviation industry.

Alitalia

The European Commission gave the green light to the Italian Government’s plan to inject €199 million into Alitalia. Surely enough is enough and Alitalia has had more lives than the proverbial cat, but this latest injection comes in during their current restructuring plan with the Italian Government planning to invest a further €3 billion – which will be heavily scrutinised by the EU.

Outlook: I think Alitalia will survive – there is a clear desire & agenda by the Italian Gov’t to make it happen.

Norwegian

Bloomberg has reported Norwegian Air Shuttle ASA said it will need more funds to avert insolvency and announced plans to scale back the discount long-haul operations that it pioneered in order to survive. The beleaguered carrier, which reported a pre-tax loss of 4.8 billion kroner ($541 million) for the first half, said it will require additional working capital in the first quarter of 2021 to meet its obligations and will consider another private placement of shares as well as selling assets. That’s after the carrier already received a Government-backed loan and converted debt into equity.

 Outlook: Norwegian is in a very tough position because of the heavy financing. They need to completely focus on where the money is and get a positive outcome on the fresh investment hunt.

Virgin Australia

Virgin Australia given renewed hope for the future after creditors agree to Bain’s $3.5 billion deal.

This will be the end of Virgin Australia as we knew it, reinventing itself as a smaller value carrier, dropping its full-service approach. This was a critical move for Australian aviation as losing a key player would have effectively handed a monopoly to Qantas.

Outlook: The future looks bright for Virgin Australia as it returns to its roots with its original business model – domestic Australia and low cost.

Comair

Comair looking to restart flight operations in December. The South African carrier’s rescue plan envisages a consortium of investors taking 99% control of the airline, if certain conditions are met. Given the position South African Airlines find themselves in, it is critical that Comair continues to serve the African market under both brands. Equally BA will be keen to see the franchise continues as it also supplies key connectivity across Africa.

Comair will require up to R1.2 billion of funding and will have to cut a fifth of its workforce to complete the restructuring and restart operations.

Outlook: Comair plays a critical role in regional African market and has long been the stand out private operator despite all of the challenges SAA has faced over decades. South African market can’t afford to lose Comair!

Ryanair

Ryanair deepens the war chest as it boosts its balance sheet with a €400 Million share placement.

Ryanair has already weathered the storm better than others in the industry and now with a much-improved position, will be an even greater threat to ailing legacy carriers.

Outlook: the competition should be worried as Ryanair is in an incredibly strong position. One article described it as “Ryanair sharpens its knives!”

Virgin Atlantic

 Virgin has been saved from bankruptcy after creditors voted in favour of a ￡1.2bn rescue deal.

The airline secured the “overwhelming support” of its 170 creditors in an important vote at the High Court today, during which the vast majority agreed to a complex restructuring plan.

Despite the positive news, Virgin announced that is to shed another 1500 jobs as well as the closure of its training centre at Gatwick called “The Base”.

Outlook: Despite all the hard work being done, unless the US opens its borders Virgin Atlantic will find itself in an untenable position. 

Qantas

Qantas reported an annual loss of ￡1bn as it deals with the impact of the coronavirus pandemic.

Qantas has announced fresh redundancies with another 2500 at risk on top of the 6,000 previously announced.

Outlook: Qantas is hurting but has a strong position in domestic market. That said, Qantas is bleeding and is resorting to any and all means to raise cash, including the sale of its inflight pyjamas. 

US airlines – the CARES act

As the conditions surrounding the CARES Act loans come to an end, all the US carriers are likely to reduce service, with American Airlines taking the lead announcing it’s likely to scrap 30 US destinations for winter. United has come out and stated that unless a support mechanism is in place 16000 will likely be furloughed. So far Delta has resisted the urge to make either announcement, but it is only a matter of time when others will follow.

In a bid to recapture demand, United’s move to remove change fees has shook up the sector with many carriers following suit. It is fair to say United has handed the consumers a billion dollar gift.

Outlook: Like we have seen in the past, US majors will dump capacity as they look to stay away from Chapter 11, however Chapter 11 is always a place of security for US airlines as they rarely liquidate.

 Spirit

Spirit Airlines is another airline looking to bolster the balance sheet as it seeks to raise new funds. Spirit is looking to secure it position by planning to issue USD850 million in five-year bonds. 

Outlook: Tough spot for the smaller player, however they are fighting back by further stripping out the cost – reducing the network, seeking voluntary leave and removing overheads, e.g. agentless bag-drop.

 South African Airlines

SAA continues to fight for survival and is now facing the prospect of liquidation after specialists were appointed at the end of April 2020 to try to save the airline. Like Alitalia, SAA has continually found itself in need of help, which could this time come in the form of an African neighbour - the Ethiopian Airlines, who is in talks over the possibility of being involved in the rescue. With SAA not making a profit since 2011 and needing over $500Million in fresh funding, this is an ambitious approach from Ethiopian. 

Outlook: Unless Ethiopian proceeds with support, or any other third party, there will be little chance of survival for SAA, considering the Government is not in the position to further support.

 Singapore Airlines

Singapore Airlines has announced that it has burnt through $4.4 billion of the $8.8 billion to see it through the COVID pandemic. With Singapore still in lockdown, the airline is finding it difficult to deal with overheads across the business.

Outlook: unless borders open Singapore will continue to burn through the rest of the money.

Air New Zealand

Air New Zealand continues to bleed senior management positions with Cam Wallace, Chief Commercial and Customer Officer the latest to tender his resignation. Air New Zealand has done well in the NZ domestic market with capacity back above 65%, however key resignations are cause for concern with the longhaul fleet still grounded. Air New Zealand has stated it will focus predominately on Australasia in the medium term with Longhaul and Ultra Longhaul seeming some way off.

Outlook: Air New Zealand will do just fine as their domestic flying is back to 75% of 2019 operations. This is possibly one of the airlines that should prioritise their internal management structure to ensure strong leadership for the future.

Hawaiian Airlines

Hawaiian Airlines has announced it will furlough more than 2,000 of its workers as the latest cost cutting act. The furloughs are expected to kick in from October 1, 2020.

Outlook: The 14-day quarantine is killing the leisure demand and as a consequence Hawaiian continues to suffer through Covid.