While the COVID crisis has seen the bottom knocked out of the aviation industry, there have been far fewer bankruptcies than might have been expected. The reason for this is the high levels of financial support the industry has raised, inflating the global debt burden to more than $650 billion. Chairman of ALC Steve Udvar-Hazy noted just how much has been lost, and how lessors are providing a route to recovery.

Singapore Airlines Aircraft in Australian desert storage
Photo: Getty Images

Mortgaged everything

Speaking at a recent CAPA Live event, Executive Chairman of Air Lease Corporation (ALC) Steve Udvar-Hazy commented on the impact that COVID has had on the industry. He said,

“The airline industry as a whole on a global level has lost everything they've earned since World War II. I mean, everything, all the profits that were hard-earned are gone.

“If it was not for government support, either in the forms of guarantees, equity, loans, all kinds of medicine government agencies have put forth, the airline industry would have been crippled.”

Indeed, the crisis has prompted an unprecedented reaction from the governments of many nations to put their hands in their pockets and lend support to their airlines. While this has ensured the survival of many carriers who would otherwise have been bankrupt, it has also created a difficult scenario for the future.

KLM 777
Although most airlines survived COVID, many are leaving with a heavy debt burden. Photo: KLM

IATA estimates that the industry’s debt burden as a whole has ballooned by $220 billion to a total of $651 billion. Although more people are likely to travel in 2021, the Association still believes that airlines will burn through an additional $81 billion of cash by the end of this year. On the flip side of this is the widespread reduction in assets that airlines have had to make, as Udvar-Hazy explained,

“The balance sheets of airlines today compared to where they were, say, 18 months ago is vastly different. And many, many airlines have mortgaged everything, their planes, their slots, their airport terminals, their ground facilities, their frequent flyer programs. They've borrowed against every possible asset or even virtual assets that they don't even have.”

In the first quarter of 2021, airlines raised $16.6 billion, just shy of the record $17.5 billion raised in the second quarter of 2020, through IPOs and bond issuance as well as loans. Overall, in 2020, airlines raised $42.6 billion in the debt markets, the largest amount in history.

Frontier A320neo
Frontier Airlines recently completed a successful IPO. Photo: Vincenzo Pace | Simple Flying

Lessors continue to play a vital role

With airlines heavily indebted, many have had previously glowing credit references reduced to Cs and Ds. That impacts their ability to get new credit, and puts them in a precarious position in terms of future development.

The leasing community has provided some cushion to the blow the pandemic has dealt. Companies such as ALC have been vital in stepping up to undertake financial transactions, thanks to their excellent credit ratings and powerful position. Udvar-Hazy commented,

“Airlines more than ever need third parties, such as the leasing community, to be able to continue with fleet modernization and fleet replacement.”

That shift in power balance has never been more evident than it is today. Aircraft leasing has grown over the decades, from around 15% of the global fleet in 1990 to more than 45% at the start of 2020. But as we moved into 2021, a key milestone has been crossed.

“At the end of last year, we crossed that threshold where more than 50% of the aircraft are leased, either on an operating lease or a finance lease or on a sale-leaseback. That is a huge change from where we were even five years ago,” said the ALC boss.

It’s no big surprise that the leased fleet has ballooned. Barely a week goes by without hearing about another airline undertaking sale-and-leaseback transactions to raise capital. That trend is set to continue, as airlines will remain in a precarious financial position for some years to come. Udvar-Hazy concluded,

“We continue to see the leasing community being really a much more critical component of the airline industry, being able to finance expensive capital goods, while airlines are going to have limitations on how much money they can borrow.”