The Covid-19 outbreak has imposed some of the most severe financial difficulties seen in over a decade on the aviation industry. The unprecedented travel restrictions imposed by governments globally to manage and alleviate the spread of the Covid-19 virus have resulted in airlines facing economic hardships, with many requiring government bail outs.
The number of Covid-19 airline casualties is increasing, from Flybe declaring bankruptcy to Norwegian’s share price dropping still further having already lost around 80% of its value between 2016 and 2019. Many airlines are scaling back capital expenditure by deferring purchase of new aircraft as well as deliveries. IBA expects to see more airlines ground their fleet as easyJet, the latest victim, grounds its entire fleet of 337 aircraft comprising Airbus A319s, A320s and A321s. IBA anticipates the sharp drop in airline revenue to be hard hitting on airlines globally, with the likes of Qatar Airways and Virgin Atlantic already indicating they will seek government aid. Loganair, the Scottish regional carrier, and easyJet are expected to follow suit.
IBA has updated 62 of the 120+ airlines in its Operator Score Index to encompass airlines with 2019 financial year-ends. The revision has resulted in a rating score downgrade for 23 of the total and an upgrade for 24 of the airlines reported. This compares to our last update in September 2019, where 28 airlines were downgraded and 8 were upgraded. The biggest downward movers among the airlines covered were Avianca Holdings, Qatar Airways and Interjet, all of which saw significant decreases in net/comprehensive profits. Four airlines or airline groups have ceased operations since our last update: Thomas Cook Group, Aigle Azur, Flybe and Air Italy.
The most significant change to the Operator Scores this time around has been the adoption of IFRS 16 accounting standards and their variants by airlines across the globe. 25 of the 62 airlines we updated have switched to IFRS 16 which has resulted in the removal of operating lease expenses from the income statement, the capitalisation of lease liabilities on the balance sheet and the addition of right of use assets. These changes have the added effect of making lease expense related ratios or metrics unnecessary. Though each airline should be considered on a case-by-case basis and airline performance needs to be accounted for, we would suggest that of the 25 airlines which have adopted IFRS 16, there has been no significant change in debt-to-equity ratios or EBITDA/EBITDAR margins. We do however note a substantial adjustment in the switch from a fixed charge coverage ratio to interest coverage ratio, as lease expenses were removed from the calculation.
Increasing Revenues, Decreasing Losses
FY19 appears to have been a broadly positive year for the majority of airlines covered in IBA’s Operator Score Index. Of the 58 airlines with a financial year-end in 2019, the average revenue increase was USD 322 million, while the average net/comprehensive profit increase was USD 28 million. 17 of the 58 airlines displayed a net loss, the largest of which was suffered by Qatar Airways as a result of the Gulf blockade on the country’s national carrier. The average net margin stood at 2%, showing little change from the previous year. EBITDAR margins averaged 18% in the latest financial year.
Increasing Debt Levels
Average debt relative to equity stood at 5.1 times for the 58 airlines with a financial year ending in 2019. This represented a modest decrease of 0.4 times. Cash as a percentage of liabilities on average stood at 13%, an average decrease of 1%.
The above metrics paint a picture of an airline industry that was improving incrementally up until the end of 2019. However, the Covid-19 pandemic will undoubtedly reverse the gains made across the board by many airlines last year. The extent of this setback is impossible to accurately ascertain until airlines with financial years ending in March 2020 have posted their year-end or Q4 results starting around April/May. As has been well documented in the media, many airlines across the globe are having to cut flight frequencies or to ground all flights outright, with airlines reporting cuts of between 50% and 100% of their network, most tending to be closer to 100%. Revenue and profit guidances have been withdrawn, replaced instead by dire predictions of losses in the hundreds of millions of dollars at individual airlines and hundreds of billions across the entire industry. Mitigants range from lease rental deferrals and government intervention or airline nationalisation to even pausing the global economy for a few weeks. The application of these mitigants will of course be key in determining which airlines survive the pandemic.
To that end, we have used the IBA Outlook section of our Operator Score Index to speculate which airlines will be worst hit by the Coronavirus-19 pandemic and indeed may not make it through. We also identify those more resilient to the current crisis. We note that 49 airlines are extremely high risk due to a mixture of key factors such as low cash reserves, weak past performance and unclear governmental support. We would consider smaller, privately owned regional operators to be most at risk. We anticipate greater security for state owned airlines and private airlines with significant cash reserves such as Wizz Air, Ryanair, easyJet, Singapore, IAG and Spirit Airlines among others.
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