“Airlines are not all equal” – that was the message from BOC Aviation chief executive, Robert Martin, today who compared the current crisis in the aviation sector to past events and set out his vision of the future for the industry in a keynote speech to the Airline Economics Growth Frontiers Hong Kong online delegation.
Martin stated that it was very clear at this point in the crisis that the industry is going to see increased government involvement and that government support will be critical to an airline’s viability. The problem is that government support around the world has not been consistent, which will create an unlevel playing field for airlines, which Martin grouped into the “haves” and “have-nots”.
The “haves” are those airlines that have secured government support. That have unencumbered assets to hand and are able to raise funds in the capital markets. He also placed in this category emphasis on airlines with strong management experience in navigating previous downturns, with the ability to react quickly to right size the fleet and put in place a solid business continuity plan.
The “have-not” airlines are those without government support, without unencumbered assets, no access to capital markets nor backstop credit lines, and with inexperienced management teams.
Martin also applied the same categorisation to leasing companies. The “haves” in the lessor sector are those that have back-stop credit lines, access to capital markets and liquidity, with strong shareholder support as well as an experienced management team with a downturn plan, and strong and senior-level long-term relationships with airlines and aircraft manufacturers. The “have-not” lessors are those with limited shareholder support and back-stop credit lines, which have relied too much in the past on secured debt and/or warehouse debt from banks, with a focus on asset-backed securitisation for term funding and no other access to capital markets since these companies tend not to have a corporate credit rating.
He notes that the lessor proportion of global fleets has also increased during each past crisis and will do so this time as sale-leaseback deals grow in popularity and the percentage of the leased fleet has already moved up to 49% and is heading for 50%.
Lessor CEOs on their panel discussion, which follows Martin’s keynote, picked up on several of these themes during the conversation, notably the imbalance created by unequal levels of government around the world. The US and parts of Europe and Asia have provided support for their airlines, but areas in Latin America have had little to no support, which is causing an imbalance and will dictate who are going to be the survivors – “there will be no winners from this pandemic” say the panellists.
Although government support is very welcome for many airlines, when they emerge from the crisis carrying a huge debt burden, the likelihood is many airlines will file for bankruptcy with those large government loans converted to equity and airlines nationalised, which would allow an airline to restructure all of its debt and resume operations as a leaner operation, but those that survive will be saddled with debt for many years to come. And there is the very real future scenario of new airlines coming into the market to capitalise on those airlines that cannot compete effectively anymore due to debt. One panellist sees no shortage of equity for start-up airlines, which will be able to move faster and operate more leanly without that debt burden.
There were some very positive insights about the future of the industry by all of the panellists from day one of the conference, one excellent commentator said: “Zoom calls are great until you see your competitor in the room with your client!” Other panellists throughout the day emphasised the importance of business relationships, especially with banks. Bankers on the panel discussed how they were prioritising their focus with existing and long-term clients over opportunistic deals that come to market. They also commented that banks don’t want to repossess aircraft but they will to protect the rights of the bank. The banking panel also debating an important precedent regarding UK Insolvency law, which is a concern for aviation banks and is well worth listening to on the recording on our website after the event (this is accessible for all Airline Economics members).
Expert speakers continue the debate tomorrow in Day Two of the Airline Economics Growth Frontiers Hong Kong virtual conference continues tomorrow (Nov. 4). Join us live at 930am Hong Kong (130am UK time). Register here.