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By Judson Rollins

Introduction 

April 22, 2021, © Leeham News: COVID-19 has forced every layer of the commercial aviation supply chain, apart from cargo airlines, to streamline their businesses and raise cash to survive. Nowhere has this been more true than for passenger airlines, the end-customers for most aviation products.

Before the pandemic, passenger carriers were taking advantage of cheap capital to invest in both new and used aircraft. However, most have stretched their balance sheets beyond imagination by pledging every unencumbered asset – even frequent flyer programs – to raise additional debt.

International Air Transport Association (IATA) economist Brian Pearce said in a February webinar that governments provided $101bn of repayable loans and tax deferrals in 2020 alone. Another $125bn was raised from banks, capital markets, and lessors. More will be required this year.

Governments and markets backstopping the world’s airlines, aided by central bank money printing, are why fewer than 50 have ceased operations since the start of the pandemic. This is not materially worse than a typical year, but it doesn’t begin to reflect the scale of the ongoing financial shock to airlines.

Summary

• Airline demand recovery is prolonged in most regions; new tax and cost pressures loom.
• Debt loads will continue to grow this year; interest expense is mounting.
• High leverage may depress airline capital expenditures through 2030.
• Governments may finally ground loss-making state carriers, adding to used aircraft inventory.
• Aircraft production cuts are already impacting the supply chain.