The IBA’s response to the war in Ukraine
Aviation: sector experiences ‘worst year in history’
The Covid-19 pandemic has had a devastating impact on the global aviation industry. The International Air Transport Association (IATA) categorised 2020 as ‘the worst year in history’ for air travel demand, with global passenger traffic declining by 66 per cent compared with 2019.
According to the International Civil Aviation Organization, this means that, worldwide, the sector has lost $371bn of gross passenger operating revenues. Consultancy business McKinsey notes that turnover has fallen so far that it will be at least 2024 before it recovers.
For some airlines, the impact has been too much to bear. Canada’s Island Express Air, Hong Kong’s Cathay Dragon, Turkey’s AtlasGlobal and the UK’s Flybe were among those to fold in 2020. Others, including Air Mauritius and LATAM Airlines, are undergoing significant restructurings to survive.
Over the last year I haven’t spoken to anyone who believes there will be a long-term downturn in the requirement for travel
Website Officer, IBA Aviation Law Committee
Though every airline in the world was hit by the same set of external circumstances, Ben Graham-Evans, Website Officer of the IBA Aviation Law Committee and a partner at Smith Gambrell & Russell, says those that failed did so because they had entered the pandemic from a position of weakness.
‘The airlines that started off in a cash-rich position, like BA [British Airways], didn’t have an immediate problem because they had reserves and airline profitability has fared well,’ he says. ‘A lot of businesses that weren’t so well set up – generally smaller, privately held airlines – are more vulnerable to perturbations and they haven’t come under state support so they have either failed or will fail or should have failed.’
State aid has been a significant feature during the pandemic, with the IATA estimating that by the end of 2020, governments around the world had provided $173bn in support to the sector. The European Commission eased its state aid rules in March 2020, enabling governments across the bloc to bail out struggling airlines.
The largest package was agreed by the German government in May 2020, when it forwarded €9bn to Lufthansa, taking a 20 per cent stake in the business as part of the deal. Another multi-billion-euro bailout was signed by the governments of France and the Netherlands, which respectively made loans of €7bn and €3.4bn to Air France-KLM.
Serap Zuvin, Chair of the IBA Aviation Law Committee and a partner at Turkish firm Cakmak Law, notes that the moves made by governments have taken many different forms. For example, there have been capital injections, such as in Croatia to Croatia Airlines, or in the US under the Coronavirus Aid, Relief, and Economic Security Act.
‘There have been government equity stakes, like Germany’s contribution to Lufthansa,’ she explains. ‘There have been government loans and loan guarantees as with Air France-KLM, and in Turkey there is one in the pipeline.’
There has also been general taxation relief, which, she adds, ‘was the first relief that governments provided when the pandemic started – and there has been relief on aviation taxes.’
Zuvin says such measures have been ‘essential’ for the industry’s survival. However, Neil Montgomery, Diversity and Inclusion Officer of the IBA Aviation Law Committee and Managing Partner of Brazilian firm Montgomery & Associados, says they are not necessarily going to be in customers’ best interests in the longer term.
In Brazil, for example, the Aeronautical Code has been amended to protect airlines from certain claims made by passengers.
‘Previously Brazil was quite infamous for the number of passenger claims filed in court – it’s the number one country for passenger claims in the world,’ says Montgomery. ‘Whether it’s a lost bag or a delayed flight they go to court and besides receiving material damages they can also get moral damages for their pain and suffering. The Aeronautical Code was changed to make it harder to prove moral damages.’
It’s due in part to these measures that, given the circumstances, there have been relatively few airline failures since March 2020. Indeed, since the start of the pandemic it is thought that only around 45 airlines have gone out of business.
For Graham-Evans, another reason the number is so low is that airlines have been insulated by some lenders taking a light-touch approach to calling in their debts.
‘The market was universally broken because there was no demand for passengers, but if you own an aircraft the last thing you want to do is anything that will crystallise a valuation event,’ he explains.
He says that while there’s been a rescheduling of debt and deferring of debt, to his knowledge lenders, and particularly banks and fund managers, ‘haven’t really done anything aggressive unless they’ve absolutely had to or they’ve been forced to by another creditor moving. They don’t want the value of their asset long term to be compromised by what should be a short-term problem’.
The problem airlines now face is whether the pandemic is going to be seen as a short-term problem or not. Despite ongoing concerns about when and if it will be brought fully under control, Graham-Evans says he is cautiously optimistic about the longer-term outlook for the sector.
‘There’s a demand for travel, which is rearing its head,’ he says. ‘Over the last year I haven’t spoken to anyone who believes there will be a long-term downturn in the requirement for travel, it’s just taken a haircut.’
Zuvin agrees, though cautions that many more airlines are likely to fail before the sector is able to return to growth mode.
‘The best hopes [for recovery] are for 2024,’ she says. ‘The flag carriers will gain support from their governments, but there are rich governments and there are countries [whose governments] won’t be able to give support, plus many sectors need support at the moment.’