The International Air Transport Association (IATA) released analysis showing that the airline industry’s global debt could rise to $550bn by the year-end.
That’s a $120bn increase over debt levels at the start of 2020.
$67bn of the new debt is composed of government loans ($50bn), deferred taxes ($5bn) and loan guarantees ($12bn).
$52bn is from commercial sources including commercial loans ($23bn), capital market debt ($18bn), debt from new operating leases ($5bn), and accessing existing credit facilities ($6bn).
Financial aid is a lifeline to get through the worst of the crisis without folding operations. But during the re-start period later this year, the industry’s debt load will be near $550bn—a massive 28% increase.
“Government aid is helping to keep the industry afloat. The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating,” said Alexandre de Juniac, IATA’s director general and CEO.
In total governments have committed to $123bn in financial aid to airlines. Of this, $67bn will need to be repaid.
The $123bn in government financial aid is equal to 14% of 2019’s total airline revenues ($838bn).
The balance largely consists of wage subsidies ($34.8bn), equity financing ($11.5bn), and tax relief / subsidies ($9.7bn).
This is vital for airlines, which will burn through an estimated $60bn of cash in the second quarter of 2020 alone.
“Over half the relief provided by governments creates new liabilities. Less than 10% will add to airline equity. It changes the financial picture of the industry completely. Paying off the debt owed governments and private lenders will mean that the crisis will last a lot longer than the time it takes for passenger demand to recover,” said de Juniac.
The kind of aid provided will influence the speed and strength of the recovery. IATA urged governments still contemplating financial relief to focus on measures that help airlines raise equity financing.
“Many airlines are still in desperate need of a financial lifeline. For those governments that have not yet acted, the message is that helping airlines raise equity levels with a focus on grants and subsidies will place them in a stronger position for the recovery,” said de Juniac.
“A tough future is ahead of us. Containing Covid-19 and surviving the financial shock is just the first hurdle. Post-pandemic control measures will make operations more costly. Fixed costs will have to be spread over fewer travelers. And investments will be needed to meet our environmental targets. On top of all that, airlines will need to repay massively increased debts arising from the financial relief. After surviving the crisis, recovering to financial health will be the next challenge for many airlines,” said de Juniac.