Airlines Facing Rapid Cash Burn

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The International Air Transport Association (IATA) has published new analysis showing that airlines may burn through $61 billion of their cash reserves during the second quarter ending 30 June 2020, while posting a quarterly net loss of $39 billion. This analysis is based on a scenario in which severe travel restrictions last for three months. In this scenario, full-year demand falls by 38 per cent and full-year passenger revenues drop by US$252 billion compared to 2019. The fall in demand would be the deepest in Q2, with a 71 per cent drop.

The impact will be severe, driven by the following factors:

– Revenues are expected to fall by 68 per cent. This is less than the expected 71 per cent fall in demand due to the continuation of cargo operations, albeit at reduced levels of activity.

– Variable costs are expected to drop sharply – by some 70 per cent in the second quarter – largely in line with the reduction of an expected 65 per cent cut in second quarter capacity. The price of jet fuel has also fallen sharply, although IATA estimates that fuel hedging will limit the benefit to a 31 per cent decline.

– Fixed and semi-fixed costs amount to nearly half an airline’s cost. IATA expects semi-fixed costs (including crew costs) to be reduced by a third. Airlines are cutting what they can, while trying to preserve their workforce and businesses for the future recovery.

These changes to revenues and costs result in an estimated Q2 net loss of US$39 billion.

On top of unavoidable costs, airlines are faced with refunding sold but unused tickets as a result of massive cancellations resulting from government-imposed restrictions on travel. The second quarter liability for these is a colossal US$35 billion. Cash burn will be severe. IATA estimates airlines could be burning through US$61 billion of their cash balances in the second quarter.

Alexandre de Juniac, Director General and CEO, IATA SAID, “Airlines cannot cut costs fast enough to stay ahead of the impact of this crisis. We are looking at a devastating net loss of US$39 billion in the second quarter. The impact of that on cash burn will be amplified by a US$35 billion liability for potential ticket refunds. Without relief, the industry’s cash position could deteriorate by US$61 billion in the second quarter.”

Several governments are responding positively to the industry’s need for relief measures. Among countries providing specific financial or regulatory aid packages to the industry are Australia, China, Colombia, New Zealand, Norway, Singapore and the United States. Most recently Canada, Colombia, and Netherlands have relaxed regulations to allow airlines to offer passengers travel vouchers in place of refunds.

de Juniac added, “Travel and tourism is essentially shut down in an extraordinary and unprecedented situation. Airlines need working capital to sustain their businesses through the extreme volatility. Canada, Colombia, and the Netherlands are giving a major boost to the sector’s stability by enabling airlines to offer vouchers in place of cash refunds. This is a vital time buffer so that the sector can continue to function. In turn, that will help preserve the sector’s ability to deliver the cargo shipments that are vital today and the long-term connectivity that travellers and economies will depend on in the recovery phase.”

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