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Tuscar's Knowledge Series: Part 1 - Short term impact of Covid-19 on the Aviation Industry.



If there's a positive that can be taken from this difficult situation we find ourselves in, it’s that we are reminded of the importance of loved ones, family and friends.


In our business of Commercial Aviation, the engagement required to keep this large machine operating 24 x 7 has resulted occasionally in our families and friends having to take a back seat. This unprecedented time has allowed us to take stock of what’s most important to us, to look towards the future post Covid-19 and consider how we can begin to rebuild our lives and our industry.


Due to the restrictions imposed upon us during this period, it allows the Airline executives time to review their business strategies. Many who entered this period with underlying financial difficulties may not survive and those who avail of Government aid will need to examine their business model carefully, to determine how such funds are to be distributed.


I’m reminded of a quote from Warren Buffet:


“only when the tide goes out do you discover who is swimming naked”.


This is not only a case of survival of the fittest, but also those who adapt quickly.


Now is the time for Airlines to invest in revisiting their respective business strategies. Prior to Covid-19, expectations were that passenger numbers would grow to 8.2 billion by 2037 and that circa 37,000 new aircraft would be required to meet this demand. Whilst the industry will recover and traffic numbers will increase, I don’t believe any commentator will disagree that future growth predictions will be more conservative.


Over a series of blogs we will briefly examine the Short, Medium and Long term issues that the Airlines will need to explore, as part of their Post Covid-19 recovery phase.


Today’s blog examines the Short term issues:

  • Managing the Crisis

  • Aircraft Storage

  • Credit Options

  • Engagement with the Leasing community


Managing the Crisis

Most crisis management guides will reiterate the importance Leadership plays during a crisis; how imperative it is that roles and responsibilities are clearly defined, a direct line of communication is established, etc. However the strength of the leadership decisions made during this period in addition to how they engage with its staff, stakeholders and client base will directly impact the Airline’s reputation post Covid-19.


The benefits of operating Humanitarian and Repatriation flights is two-fold, in both maintaining brand awareness and enhancing the airline’s reputation during this period.


Airlines are re-purposing their passenger planes to fly cargo thereby tapping into much needed alternative revenue streams.



Aircraft Storage

Latest reports indicate that approximately 80% of the worlds fleet are currently in storage, with any remaining parking spaces in high demand. Whilst is preferable to store aircraft in warm and dry climates in long-term storage facilities, unfortunately airlines based in certain jurisdictions do not have this luxury and media images show aircraft parked on unused runways and taxiways.


One issue Airlines face is determining whether to place Aircraft into short term parking; or long term storage programs and if so, which Aircraft ? This has created an opportunity for independent CAMO’s, MRO’s and other technical service providers to supply engineering support to assist the Airlines during this period.

Airlines should use this opportunity to reassess their fleet requirement, as many will have surplus to requirement post crisis. Some operators will use this opportunity to bring forward retirements of older aircraft types; particularly Widebodies, others in long-term storage could be utilised as a source of spares.


Credit Options

IATA believes that the Airline community requires $200 billion in financial aid to support them through this crisis. Whilst a number of Government’s are engaging with Airlines to discuss stabilisation packages, questions are being asked regarding the distribution of these funds and what conditions are attached.


Opinions are varied with respect to providing blanket industry bailouts to Airlines which may have had underlying financial difficulties pre Covid-19. Should they be allowed to fail as opposed to delaying the inevitable?


Concerns are also being raised with respect to providing aid to airlines whose substantial profits over the last number of years have enabled the payment of shareholder dividends, executive bonuses and stock “buybacks”. Should the investors provide the urgently needed liquidity?


A number of relief options being explored are as follows:

a) Direct Financial Support.

b) Loans – loan guarantees and support for the corporate bond market by governments or central banks.

c) Tax relief – Rebates on payroll taxes and a waiver on other government imposed levies.


Engagement with the Leasing community

Not only is this crisis impacting the Airlines, it has also heavily impacted the leasing and financing fraternity. With approximately 50% of the world’s aircraft fleet leased, the relationships between the Airlines and the Lessors has never been tested to this extent.


Whilst Lease agreements contain legal wording such as “Hell and High Water” and “Force Majeure,” a compromise needs to be found between both parties. It’s not in a Lessors interest to repossess an aircraft in the current climate as a result of a lease default due to non-payment of rent. Airline executives have been approaching their lessors and financiers seeking rent holidays/deferrals, or alternative forms of relief.


Pressure is also being felt by the Lessors, the larger of whom have negotiated revolving credit facilities with various financial institutions to help them weather the storm.


Whilst we as an industry find ourselves in un-chartered territory and the final impact of this crisis is yet unknown, the industry will recover. It affords Airline’s the opportunity to plan their recovery which will be contingent on developing strategies to recover lost revenues, re-build customer/client base, whilst continuously engaging with stakeholders.


Success going forward may require developing an entirely new service offering, examining where new growth opportunities lie, targeting new customers and continuously evolving to generate new revenue streams.

In the next blog, we will discuss the Medium term impact of Covid-19 on the Airline

community.

To explore the best route to recovery for your Airline please contact david.aher@tuscar.ie

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