Egypt’s Finance Ministry has confirmed that it will be propping up the flag carrier EgyptAir with a guarantee of long-term financing of E£3bn ($191m). At the same time the Egyptian Presidency signed into law a guarantee of a central bank loan of E£1bn for the holding companies in charge of the airports and ATC.
Meanwhile in China, Longjiang Airlines (LJ Air) has become the first airline to appear on a judicial auction. LJ Air received its AOC in February 2017 after a seven-month delay from the initial launch date of June 2016. The airline had been operating out of its’ base at Harbin Taiping International with two A321s and three A320s, although one of those aircraft has been grounded and stripped for parts for some time now. The Harbin Intermediate Court in Heilongjiang province conducted a public auction yesterday on the Jingdong Judicial Auctions website for 98% of the airlines' equity. The auction was open for 24 hours and in that time only two bidders were registered.
So far in China all airlines have received state-backed assistance, either from central government or from local authorities, so this very public airline collapse is of interest. All eyes are on HNA, a basket case going into this crisis, the airline was guaranteed to fail, but has to date received quiet assistance.
In other news, AirAsia Japan has been making headlines. The airline grounded flights during the lockdown and is now grounding flights from October due to lack of demand. Three weeks ago AirAsia was looking to raise $602m to prop-up AirAsia Japan; today it is being reported across all major news services that AirAsia Japan is ending operations for good and that the airline has informed authorities of this fact. At this time this information seems incorrect; we understand that the airline was planning to ground aircraft for a period from October due to lack of demand, but it was not planning to leave the Japan market altogether and close down. The problem is that no matter what Tony Fernandes says or does now the Japanese press have all but ensured that forward bookings, slim on the ground though they are, are now going to tail-off. This is a very bad day for the airline and investors.
In this market where confidence is everything, this is the nearest you will get to a run on an airline due to hearsay – 2.17 million AirAsia shares traded today but the price held firm, which indicates that the major shareholders have been very busy propping up the stock. Airline PR staff beware – if you are going to shut down for a month or so make sure that fact is briefed well.
As always, lessors repossessing aircraft and taking lessees to court is the tell-tale sign of trouble. Thus far we have seen a steady up-tick in these actions primarily (again) involving Asia-based carriers, but we have not yet seen a flood of aircraft and engines being clawed-back by lessors through forced actions such as litigation/repossession or being asked to take back assets. This is because all airlines know that they cannot cut their capacity too much, or else they will be severely diminished when the market starts to snap open once again. This thought process affects the listed airlines more than most others, they cannot be seen to be shrinking too far during lockdown. As mentioned before, frequency cuts will take priority in the short term once the market opens.
The real worry for lessors is, as it always was, the large number of older aircraft coming off lease in 2021/2022. Placing those with the MAX and Neo in full production would have been very hard; placing them now (or when the market opens-up again) might, for some, be actually a little easier given the slowing rate of production and harsher, more expensive and restrictive financing terms on the new aircraft deliveries. Maybe extending the lease on those older aircraft will remain, as it was in January 2020, the priority in 2021/2022.
An additional concern regarding the fortunes of aircraft lessors is the diminished value of aircraft assets. We have seen a few airlines write down aircraft impairments but no lessors as yet – of course we are only likely to see the actions taken there by the few lessors that are listed. Market sources suggest that a wave of impairments by leasing companies are imminent and there will be two sources of action – the larger, more liquid lessors will write down all their impairments at once, whereas the smaller lessors with less stable access to financial support will seek to extend those impairments over a longer time frame as they fight for survival. The truth is that mid-scale lessors with aircraft on lease at tight lease rate factors to lower tier credits will bear the brunt of the pain over the next 12-24 months.