European airlines obtained direct financial support from governments of more than $25 billion.

European airlines obtained direct financial support from governments of more than 25,000 million euros after the start of the coronavirus crisis at the beginning of this year, according to data from Scope Ratings, which assures that the reduction of travel and the increase in debt put to the test the European airline sector’s limited capacity to generate cash.

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Government support has helped major European Tour Operators avoid a liquidity crisis in the face of a drop in air traffic of at least 50% by 2020, according to an analysis of the outlook for the European airline sector by Scope Ratings, with analyst Werner Stäblein leading the way, who believes that deleveraging after the Covid-19 crisis will be a challenge for a sector with low free cash flow generation.

“The liquidity reserves of most airlines were insufficient to deal with a crisis of the magnitude of that caused by the pandemic, which led to the grounding of almost all aircraft in April and May,” says Scope analyst Werner Stäblein.

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In his opinion, financing is now stabilized thanks to state aid, “but future deleveraging and operational restructuring – including the decline in operations – will be a challenge for some industry players”.

The report notes that the airline industry has a poor track record in generating operational free cash flow. The three major network carriers – Deutsche Lufthansa (BBB-/Negative), Air France-KLM, International Airlines Group – had combined revenues of about 90 billion euros before the Covid-19 crisis, but the combined operational free cash flow before the crisis was only about 2.5 billion euros, reflecting the low margins and high investment in the sector.

Looking ahead to 2020, negative first half operating free cash flows suggest that the destruction of cash for the whole year may prove less severe than expected during the height of the crisis.

“Much of the cash requirements in 2020 depend on levels of flight ticket reimbursement, the continuation of part-time working arrangements and a surge in travel demand,” Stäblein adds.

For now, the visibility of air traffic recovery is low. Customers of long-haul and short-haul flights continue to book at very short notice. Business travel is recovering only slowly.

Passenger traffic is also closely linked to economic activity, tending to increase faster than economic output in good times, but falling faster when economies collapse.

By contrast, air freight is a sector which has done well, but the gradual increase in passenger traffic will lead to an increase in cargo capacity on passenger aircraft. This will reduce the high performance of freight transport.

In addition, the air freight business is also too small to compensate for the decline in revenue from passenger travel.

“A recovery of air traffic to pre-Covid-19 levels is unlikely before 2024,” estimates Stäblein who believes that the industry will have to reduce its capacity.

The Covid-19 crisis has led to the closure of some airlines, such as Flybe, a regional operator based in the United Kingdom, and the end of operations in others, such as Lufthansa’s Germanwings unit. The three largest European companies have announced a combined capital expenditure cut of more than 4 billion euros for the next few years.

The report concludes that direct state financial assistance to major airlines should give them a breathing space to adjust operations to the new market environment and to organize alternative sources of financing to repay shareholders and government loans.

By EuropaPress