The airlines most in danger of succumbing to pandemic

Delta Air Lines planes are among hundreds of planes from other carriers grounded amid the coronavirus pandemic. The US airline, with billionaire investor Warren Buffett backing it, will have access to other avenues for cash.
Delta Air Lines planes are among hundreds of planes from other carriers grounded amid the coronavirus pandemic. The US airline, with billionaire investor Warren Buffett backing it, will have access to other avenues for cash.PHOTO: EPA-EFE

Those with high debt levels need to secure funds from govts or other sources to survive

HONG KONG • The global airline industry has never had it so bad. Not even after the Sept 11, 2001, terrorist attacks in the United States.

Airlines could lose a quarter of a trillion dollars in revenue this year, according to the International Air Transport Association, as travel comes to a standstill with countries imposing lockdowns to fight the coronavirus pandemic. Most carriers will go bankrupt by the end of May if they cannot find support, the Sydney-based Capa Centre for Aviation said last week.

"In this very difficult period, it will only be the survival of the fittest," said Qatar Airways chief executive officer Akbar Al Baker.

Which airlines are most at risk? Using the Z-score method developed by Professor Edward Altman in the 1960s to predict bankruptcies, Bloomberg News filtered out listed commercial airlines to identify those most at risk of going bust, based on available data. The calculations do not take into account government bailouts or other funding sources that could help keep operators alive.

While the list is concentrated in Asia, mostly due to high debt levels, European carriers are not immune, as the collapse of British regional airline Flybe has proved. According to Prof Altman, scores of 1.8 or below indicate a risk of bankruptcy and scores over 3 suggest a sound footing. Indebted low-cost carrier Norwegian Air Shuttle and Air France-KLM both landed below the threshold, as did American Airlines Group and SkyWest.

Governments worldwide are in talks with aviation companies about financial support, and those with deep-pocketed backers - such as Delta Air Lines with billionaire investor Warren Buffett - will have access to other avenues for cash.

Singapore Airlines on Thursday announced it will raise up to $15 billion through the sale of shares and convertible bonds. The fund-raising is being underwritten by the airline's biggest investor, Singapore investment firm Temasek, which owns about 55 per cent of the group.

Qatar Airways' Mr Baker warned that many airlines will go bust, limiting the scope for takeovers.

"People who were bragging about not taking state aid and being independent are now themselves all over the world asking for state aid," he said on Bloomberg Television on Thursday.

The Z-score involves five variables, measuring liquidity, solvency, profitability, leverage and recent performance. The model initially had accuracy rates of over 95 per cent in predicting bankruptcies, but that has come down to between 80 per cent and 90 per cent based on a year before insolvency, Prof Altman said in a 2018 interview.

A spokesman for Pakistan International Airlines said losses and debt have become too much for the company to handle alone and that options suggested to the government include a debt-to-equity swap and long-term bond issue.

Airlines could sell assets including planes to raise cash. Without taking that step, assuming revenue from ticket bookings is kept, some may still last more than a year, according to analysts at Credit Suisse Group.

Indian budget carrier SpiceJet sees "no possibility at all" of failing, has maintained adequate cash flows and expects a surge in demand as the virus is contained, a spokesman said.

Virgin Australia, which has furloughed 80 per cent of its workforce and slashed flights to a bare minimum, said it is taking measures to rapidly reduce its cost base to preserve cash.

Asiana Airlines said it secured a bridge loan and will receive 1.6 trillion won (S$1.89 billion) from Korea Development Bank and other creditors. It also said its financials will improve once HDC Hyundai Development and its partners complete their acquisition of Kumho Industrial's stake.

Avianca Holdings did not respond to requests for comment. The Bogota-based company has offered its 21,000 employees unpaid leave and is negotiating payment terms with suppliers.

Norwegian Air Shuttle is trying to secure a government lifeline worth up to US$270 million (S$386 million) under certain conditions, and this week two Nordic banks were approved to provide a guarantee for the required 10 per cent for the first tranche. The airline declined to comment further.

A spokesman for Air France-KLM declined to comment. The airline counts the French and Dutch governments as its biggest shareholders, and both governments have signalled that they will provide support if needed.

American Airlines and SkyWest declined to comment. US passenger carriers are poised to receive up to US$25 billion in payroll support funds and cargo haulers US$4 billion - earmarked for items such as salaries, benefits and healthcare - with a similar amount of loans.

Much hinges on an airline's ability to use cash in hand or access more money. Some carriers in Asia, including Korean Air, Asiana, China Southern Airlines and China Eastern Airlines, have reserves to last only weeks, according to Bloomberg Intelligence. IndiGo, operated by InterGlobe Aviation, has enough to last about a year even if its fleet remains grounded (and staff costs drop only 30 per cent), BI analysts including Mr James Teo wrote in a note on Wednesday.

Different methods of estimating airline viability give out varying results, and not all airlines that are short of cash are going to go bust.

The model used by BI uses publicly available data on cash in hand and operating expenses to reach estimates on monthly cash burn. That method does not take into account undrawn credit facilities or unencumbered aircraft assets, which are often used as a cash buffer, said Mr Teo. The model also assumes 100 per cent capacity cuts and zero cash inflow.

Air China declined to comment and China Southern did not respond to an e-mail for comments. China Eastern said it maintains sufficient liquidity funds, which can fully guarantee normal production and operation. Qantas Airways, Cathay Pacific Airways and IndiGo declined to comment.

A Korean Air spokesman said the company is about to raise funds through asset-backed securities, reflecting market confidence in the carrier. "We also expect the government to provide support measures," she said, adding that the airline plans to generate more revenue by raising cargo operations.

Japan Airlines issued bonds earlier than originally planned based on the trend in interest rates, according to a spokesman, who said details on the company's financials will be revealed in its next earnings report. All Nippon Airways declined to comment, saying the health and safety of its passengers and employees was its priority.

Airlines could sell assets including planes to raise cash. Without taking that step, assuming revenue from ticket bookings is kept, some may still last more than a year, according to analysts at Credit Suisse Group. While the liquidity situation is fluid and does not take into account potential bailouts, this list gives a sense of which airlines are best positioned if travel is suspended for longer.

Ryanair said it had cash and equivalents of more than €4 billion (S$6.3 billion) as of March 12, undrawn credit lines and nearly 300 owned aircraft valued at about US$8 billion to US$10 billion.

Panama's Copa grounded its fleet as of Monday. It said earlier in the month that the impact on its finances depended on the extent of the pandemic and related travel hit.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 28, 2020, with the headline 'The airlines most in danger of succumbing to pandemic'. Print Edition | Subscribe