Since the beginning of the pandemic, Covid-19 has shattered air travel demand. Scheduled flights of June 2020 decreased by 65% compared to flights of the same week in June 2019. With further proliferation of the Covid-19 pandemic within Europe at one point governments of several European countries simultaneously announced grounding of the respective airline industry for a couple of weeks.
In Europe as well as all over the world the airlines were the first in the aviation value chain to be hit by the pandemic, forced to go on an aggressive cash preservation mission. Airlines rapidly started to reduce capacity by canceling already scheduled flights and grounding their fleet afterwards. Moreover in order to reduce costs airlines also furlough employees and seek government support. Prior to the worldwide grounding the International Air Transport Association has predicted airlines are likely to lose €75 billion this year alone and foresee even higher loss in the upcoming years.
The French and Dutch governments are supporting Air France-KLM with €7 billion and €3.4 billion in order to keep them "alive and operating" during the crisis. Germany for instance has helped the Lufthansa Group with a €9 billion bailout. Nevertheless they have been in the front row of pleading with member states to reopen.
As approaching the end of the crisis phase, carriers tried to shift their focus from day-to-day crisis management to planning for restart of operations. As markets began to reopen everybody in the airline industry knew about the challenges to come - Processes that typically took weeks to complete now must run on a weekly, if not daily, basis. The classic business models were not profitable anymore and everybody was searching for other opportunities, e.g. by converting pax-transporting aircrafts to freighters. In addition to support airlines some international rules were relaxed so that airlines did not lose their route slots even if they were not able to serve them accordingly.
This crisis severely affected the most airlines worldwide. However, each operator's positioning to deal with the crisis varies in terms of existing capital structure, as well as government and shareholder support.
The lease business also was heavily impacted by the crisis. For most operators/lessees it was helpful that several lease deferrals were available, typically for a period of 2-3 months as an initial support package. I turned out that this was not long enough since lessors are now forced to provide further rent relief or early lease termination. This leads to huge revenue reductions and increased exposure to deferred income from riskier lessees.
An area of focus for lessors is revising their aircraft orders. Many lessors have deferred or cancelled their orders from aircraft manufacturers or were looking to place some of their aircraft orders with lessees in exchange for restructuring current leases.
Some flexible solutions were required in order to mitigate the resulting risks during the crisis:
- Accepting lower lease rates in exchange for lease extensions beyond the current terms. Thus result in airlines achieving short- to medium-term liquidity relief, while lessors secure further lease terms and avoid future remarketing and reconfiguration expenses.
- Replace cash maintenance reserves with Letter of Credit guarantees for airlines.
- Accept lease rate reduction or prolonged payment deferral in exchange for sale-leaseback arrangements.
The crisis shows that every player within the aviation business was facing major revenue reduction and forced everybody to overthink their general strategies and come up with never before seen flexibility. This was not only demanded by the aviation community in general but also from the respective governments. In addition it was noticed that reduced asset values and rates limited asset remarketing and caused a deceleration within the trading and MRO business as never seen before.