Coronavirus Liquidity Report - Who will be the survivors?
Key findings:
- Many airlines have departed from the 25% ‘rule-of-thumb’ of having liquidity equal to at least three months of annual revenues;
- Secondary players, regional and “national” European carriers are facing severe survivability risk;
- Some airlines are running on very low levels of cash and have no standbys and few unencumbered assets;
- Chinese, Korean and other Asian carriers have large portions of their fleets inactive; and
- Airlines operating trans-atlantic routes severely impacted by latest US announcement
In a crisis like this, “Cash is King”.
Airfinance Journal’s The Airline Analyst has compiled a unique dataset that will help evaluate the ability of around 50 of the world’s leading airlines to survive the Coronavirus crisis. This is a special, one-off, report available to the subscribers of The Airline Analyst which covers a total of 220 airlines.
The survivors will be those who have satisfactory liquidity or can access enough liquidity to get to the other side. The key unknown is how long it will take to get there as that determines the cash requirement.
I have lived through many down-cycles in the airline industry: Gulf War 1 in 1990, the Asia financial crisis in 1997/98, September 11, SARs and the Global Financial Crisis, and I have seen liquidity rapidly depart the sector. But I have never witnessed anything close to what the airline industry is facing today. We have seen, perhaps, 10-20% capacity reductions in the past but NEVER the 50-70 or so % that some airlines are suffering today.
The focus is therefore on available cash, “standby” facilities and unencumbered assets – and viability of the business model.
The rule of thumb used to be that it was prudent for an airline to have liquidity equal to at least 25% of annual revenues – or three months’ worth - to cover event risk such as a grounding, a crash, a war or a strike.
As this is an expensive practice due to 0% interest rates, some airlines, particularly in the USA, Europe and Australia, increasingly use standby facilities to cover a portion of their liquidity requirements.
These facilities may contain conditions precedent to drawing such as financial covenants and/or a minimum level of unsecured assets that make them not quite “cash in the bank”.
The report shows how far some of the major airlines have departed from the 25% rule-of-thumb, based on their most recent published accounts.
Some airlines are running on very low levels of cash and have no standbys and few unencumbered assets.
A measure we follow to evaluate the level of unencumbered assets is secured debt as a percentage of tangible assets. Some airlines have only modest amounts of secured debt, suggesting that they are in a position to generate liquidity through secured financings, refinancings and sale-leasebacks. Those with high levels of existing secured debt will probably end up bankrupt, dependent on government support or nationalised.
Accelerated consolidation in the sector seems highly likely.
We have already seen this morning’s announcement that the Norwegian government will support “airlines”, without naming names. It is also understood that the German government will be discussing providing liquidity support to German airlines on Monday. Perhaps industry participants are already dusting off the documentation from the US federally guaranteed loan program that followed 9/11 for ideas?
On 11 March, United raised a new $2 billion secured loan facility and American highlighted its total liquidity of $7.3 billion – and we have seen Boeing draw down their recently arranged $13.8 billion facility, reckoning it’s better to have the cash on the balance sheet than in a commitment.
The lessors and OEMs are the normal providers of liquidity in times of crisis. Fortunately, despite the sell-off in their stock prices, the leasing industry is in rude health and will no doubt step up in a big way. Sale leaseback pricing may finally go up. There are rumours, however, that some new investors are pulling back from the market. The OEMs will have limited appetite and, in Boeing’s case, limited capacity to help.
Transatlantic routes which are the subject of today’s announcement from President Trump tend to be dominated by the major airlines who should get through this, assuming the crisis lasts only 3-6 months. Secondary players, regional and “national” European carriers are facing severe risk to their survival.
The situation in Asia is even worse, particularly for the Chinese and Korean carriers which have large portions of their fleet inactive. They tend not to have standbys but historically have had supportive and compliant banks to help them in times of trouble. Will they be there this time or shall we see a series of failures, both big and small?
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