AIR TRANSPORT Post-Covid-19 airline business

Covid-19: an opportunity to reset and restructure for airlines?

PAUL ZALKIN, restructuring and insolvency partner at Quantuma LLP, and PETER DAVIES FRAeS, Chief Executive of Airline Management Group, share their thoughts on the fundamental shift in the structure of the sector and consider the impact of measures to support aviation businesses and their supply chains as the industry start to emerge from lockdown.

​​There are many adjectives describing the current Covid-19 situation within the aviation sector and specifically the airline industry. One word that is not often used is predictable. Yet, pre-Covid-19, the industry suffered significant losses over many years. Despite the sector being profitable in 2018, fewer than 20% of International Air Transport Association (IATA) airlines made a positive contribution towards such profitability. These losses manifested themselves through a myriad of reasons but today they all clamber on the Covid-19 bandwagon, conveniently forgetting that, for many airlines, their position was dire before January this year.

Tough times

It begs the question as to why the shareholders and boards think that post-Covid-19, providing they can solve their immediate liquidity issues, these airlines can bounce back to a new normality which will be vastly different from what they experienced preCovid-19. The truth is they will not. Apart from the obvious gearing problems, they will face a reduced market size due to bio-security regulations and an economic downturn and, no doubt, restrictive regulations, affecting consumer demand.

It is implausible to believe that the issues that bedevilled these failing airlines pre-Covid-19 will simply go away. The issues ultimately result in poor financial performance and are key to the reasons behind this. In our experience with airline turnarounds there is consistency in the reasons for such financial failure, including:

• Sustained losses
• A distinct lack of management
• Lack of coherent decision making
• Ineffective implementation
• A demotivated workforce

If senior management was the architect of failure, then often middle management exacerbated it. While there are always individuals within management who provide beacons of hope, they are unfortunately the exception. Many fail to realise that the prime competition is, in fact, themselves, instead of blaming others for their demise. Predictable? Yes. Foreseeable? No. Management teams are particularly good at burying their heads in the sand and adding cement.

The current crisis provides us all in the aviation industry with a unique opportunity to reset the dials and create the change needed for a future with financial and environmental responsibility, understanding that:

• Revenue needs to be ahead of cost.
• Customers expect an honest value proposition - increasingly with a demonstrable focus on environmental sustainability
• A brand position that sings the values and ethos
• A work force that represents and demonstrates those values, in each and every customer encounter
• Finally, and crucially, a management team that creates the environment that allows the workforce to perform to those values

Profit and loss, cashflow statements and balance sheets are all vital signs of performance and are necessary to provide stakeholder confidence. However, the numbers are collated after the event. It is management’s responsibility to pilot the organisation internally and externally, as well as to effectively implement change.

There’s no doubt that, post-Covid-19, we will still see millions of people wishing to travel, yet, the size, shape and feel of the industry will be different. There will be a market and, as always, the market will have a choice. It is therefore critical for shareholders of poorly managed airlines, both government and private, to take an honest look at themselves, reassess their position and, with courage, reset the dials for their future.

Teetering on the edge of insolvency

For industries whose lifeblood is the interaction and movement of customers in close proximity, be it in a restaurant, in an airport, or at 38,000ft inside the cabin of an airliner, Covid-19 has caused a crisis whose knock-on effect within the supply chain has been unparalleled. The world’s aerospace and aviation industries rely upon commercial, military and private aircraft being in the air as much as possible, so the grounding of commercial airline fleets, in particular, has been devastating.

That said, there is little doubt that a significant proportion of the assets deployed by the global airline, aviation and aerospace sectors will survive this crisis and go on to thrive through reorganisation, consolidation, redundancy, acquisition, divestment and investment. The same cannot be said for many of the organisations that currently own or fund those assets. Corporate failures are inevitable, and, at the time of writing, there are several global airlines and related businesses in the supply chain teetering at the edge of insolvency.

A fundamental issue which will dictate which organisations will recover from the consequences of the Covid-19 pandemic was summed up by Willie Walsh, the outgoing CEO of International Airlines Group, in an interview over the summer:

“It doesn’t matter how strong your balance sheet was when you came into this. If you’re spending money and not generating any revenues, eventually you’re going to lose all your reserves.”. 
Sunday Times, Business, 28 June 2020.

Financial restructuring and insolvency specialists will attest to the fact that Walsh’s truism applies to companies large and small across all sectors. The first principles of business success are universal, and so simple, they sound almost flippant:

• Maintain a positive balance sheet
• Deliver profits
• Generate free cashflow

While understanding these objectives is incredibly easy, working out how to get there is often incredibly hard, which is why the brightest minds, with the best of intentions, and the right resources, do not always get it right. Now, more than ever, for the turnaround and recovery of the global airline, aviation and aerospace sectors to be effective, national governments, regulators, governing bodies and corporations must first collaborate in order to establish stable foundations upon which businesses can be rebuilt.

Governments across the world have already implemented programs of economic stimuli on a scale comparable to the Marshall Plan of 1948, used to rebuild Europe after WW2. In addition, in the G7 and other free market economies, there have been various policy responses designed to facilitate an easing of tension between debtors and creditors, all in the somewhat vain hope the ‘market’ will resolve the working capital consequences of the coronavirus, such that normal service can resume. Of course, some governments – notably in the US, France Germany, Sweden, Italy and Norway – have resorted to the use of direct financial stimulus to prop up ailing airlines and aerospace companies via the provision of state aid. In many ways these measures would appear to be little more than a means of kicking the can down the road.

State to the rescue?

The role of state aid in business has confounded economists since the days of Adam Smith but it seems difficult to argue that a nation’s scarce resources would be best used in propping up an airline (for example) which was in financial difficulty before the Covid-19 pandemic. An easier argument is that the state should protect workers from the consequence of corporate failure and help create the right conditions for assets to operate effectively, or for them to be redeployed in a manner which matches nascent demand and takes account of the prevailing economic conditions.

Of course, this is not an argument that shareholders would favour. However, if they are unwilling to invest capital themselves to rescue their otherwise worthless equity, they should not be surprised if they do not garner much sympathy from taxpayers if asking them to do so.