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Airlines To Burn Through $128 Billion In Cash By 2022

Courtesy of ZeroHedge View original post here.

By Eric Kulish of FreightWaves,

The International Air Transport Association on Tuesday warned that airlines are on track to lose nearly $130 billion this year – significantly more than the group’s June estimate of $84 billion – because of the coronavirus crisis, and that the aviation and travel sectors will be crippled for a long time unless governments increase financial aid.

The trade association said member carriers will burn through $77 billion in cash during the second half of 2020, almost $13 billion per month, despite the phased restart of many flight schedules. The slow recovery in air travel means the airline industry will continue to burn cash at an average rate of $5 billion to $6 billion per month in 2021, or $60 billion to $70 billion for the full year.

Already 30 or 40 airlines have failed or gone into bankruptcy restructuring.

The median airline has 8.5 months of cash on hand at the current burn rate, according to IATA.

The sector’s uphill climb is illustrated by the fact that airline share prices are 40% below where they were at the start of the pandemic, while investor expectations for the broader market are higher than before.

Director General Alexandre de Juniac repeated pleas for governments to provide a financial bridge for airlines during the winter season that lasts until March, a period when passenger traffic typically subsides and airlines make less money even under good economic conditions. 

Governments so far have provided $162 billion in support through direct grants, loans, wage subsidies, corporate tax relief, fuel tax abatements and other temporary tax holidays. Suppliers have also contributed $20 billion to airlines through givebacks, such as postponing aircraft lease payments and regulatory fees. IATA said government loans are not desirable because airlines are already fully leveraged and would lose years of growth potential if they had to repay the money.

“We are grateful for this support, which is aimed at ensuring that the air transport industry remains viable and ready to reconnect the economies and support millions of jobs in travel and tourism. But the crisis is deeper and longer than any of us could have imagined. And the initial support programs are running out,” de Juniac said in prepared remarks to the media. “Today we must ring the alarm bell again. If these support programs are not replaced or extended, the consequences for an already hobbled industry will be dire.”

The SOS call came after a six-month U.S. government lifeline expired at the end of September, leading United Airlines (NYSE: UAL) and American Airlines (NASDAQ: AAL) to immediately begin furloughing 32,000 employees. Domestic airlines received $25 billion in direct payroll assistance on the condition that workers would remain on the job and maintain minimum pay and benefits. Airlines had to grant the government warrants for a portion of the money and also had access to another $25 billion in federal loans. But Congress has been unable to agree on a follow-up emergency package despite bipartisan support because any legislation is being considered in the context of a broader, national economic stimulus plan stymied by political divisions.

“Historically, cash generated during the peak summer season helps to support airlines through the leaner winter months. Unfortunately, this year’s disastrous spring and summer provided no cushion. In fact, airlines burned cash throughout the period. And with no timetable for governments to reopen borders without travel-killing quarantines, we cannot rely on a year-end holiday season bounce to provide a bit of extra cash to tide us over until the spring,” said de Juniac.

Governments such as Canada, Singapore, Germany and the U.K. are extending wage subsidy support, but about 30 other programs have expired, or soon will.

Rate hikes no solution

Despite cutting costs by more than 50% during the second quarter, the airline industry blew through $51 billion in cash and liquid assets, or $17 billion per month, as revenues fell almost 80% compared to the same period last year. The industry is projected to lose up to $70 billion in 2021 and not turn cash positive until 2022, according to IATA.

Airlines are already downgrading fourth-quarter traffic forecasts, with expectations that passenger volumes will be 68% below last year’s level in December compared to June’s estimate of -55% growth. That’s only a slight improvement from the 75% year-over-year demand reduction in August. Meanwhile, fares and yields are performing even worse. The plunge in overall revenues comes despite strong increases in cargo revenues as business interest in goods transport grows.

(Source: IATA economic analysis)


 

Survival tactics included parking thousands of aircraft, cutting routes, eliminating discretionary spending, encouraging hundreds of thousands of workers to take voluntary leaves of absence, and raising billions of dollars in capital.

A big challenge for cost containment is that airlines are unable to cut fleet costs in proportion to the level of travel demand and the fall in revenue, IATA Chief Economist Brian Pearce said. The in-service fleet is only 23% below pre-COVID levels despite demand falling by three-quarters because most travel taking place now is of the short-haul variety, which requires more aircraft to meet service commitments.

Passenger airlines are suffering across the board, but financial health differs based on the ability of a few carriers to raise money in capital markets through stock offerings or mortgaging assets, and which ones receive government aid. Latin American governments, in particular, have not extended much assistance to the industry.

Airlines that depend on corporate travel or connecting flights have found the restart more difficult, Pearce said, putting low-cost airlines with point-to-point service in a somewhat better position to deal with the current environment.

Airlines are expecting a reasonable recovery in traffic and revenues in the second half of next year once a vaccine is available, with the assumption it won’t be available in all markets by then. The extra revenues and reduced costs associated with restructuring should help reduce cash burn, Pearce said.

IATA chief de Juniac said government aid is also necessary for airports and air traffic control organizations. He dismissed suggestions that the aviation sector fund itself by raising rates and fees, saying that would kill demand and precipitate a race to the bottom that many companies would not survive.

“Government support for the entire sector is needed. The impact has spread across the entire travel value chain including our airport and air navigation infrastructure partners who are dependent on pre-crisis levels of traffic to sustain their operations. Rate hikes on system users to make up the gap would be the start of a vicious and unforgiving cycle of further cost pressures and downsizings. That will prolong the crisis for the 10% of global economic activity that is linked to travel and tourism,” said de Juniac.

IATA said consumers are not willing, or able, to pay more for air travel. In a recent IATA survey, about two-thirds of travelers indicated that they will postpone travel until the overall economy or their personal financial situation stabilizes. “Increasing the cost of travel at this sensitive time will delay a return to travel and keep jobs at risk,” said de Juniac.

According to the latest figures from the Air Transport Action Group, a coalition of organizations and companies, the severe downturn this year, combined with a slow recovery, threatens 4.8 million jobs across the entire aviation sector by early next year — a 43% reduction from pre-COVID levels. Up to 46 million jobs are at risk when indirect employment in tourism, construction, catering and professional services is counted, putting $1.8 trillion of economic activity at risk.

In addition to financial rescue efforts, airports and airlines are insisting that governments loosen what they claim are haphazard and counterproductive border restrictions, quarantine declarations and travel embargoes that are hindering growth in travel. Instead, they are pushing for pre-departure testing to guide case-by-case decisions on who should travel. 

The airline industry has previously asked governments to relax slot rules at busy airports that require carriers to use 80% of their allocated takeoff and landing windows or lose them to competitors. Otherwise, many airlines will be forced to defend all-important airport access by operating money-losing flights at a time when they can least afford to do so, IATA says. 

On Monday, the U.S. Department of Transportation extended until March 27 a waiver of minimum slot rules at five major international gateways, as long as foreign countries offer reciprocal treatment for U.S. carriers, in order to give airlines maximum operational flexibility. It also waived rules at New York LaGuardia and Ronald Reagan Washington National Airport, both slot-controlled airports that primarily serve domestic destinations.


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