That’s the assessment of the Centre for Asia-Pacific Aviation, a global airline consulting and analytics firm based in Sydney, Australia.

CAPA also suggests that the potential, or even likely demise of lots of small and weakly capitalized carriers around the world could lead to a dramatic restructuring of 75-year-old legal structure that has governed global airline competition and ownership since the end of World War II.

The COVID-19-triggered run on cash at nearly every airline threatens the survival of half of the world’s 800 carriers. It also could create the opportunity for a new era of global airline competition. (Elaine Thompson/Associated Press)

CAPA’s conclusion that half the globe’s airlines are headed toward technical insolvency in less that 75 days is based off its analysis of the cash flow challenges now faced by 40 large and mid-sized airlines around the world plus projections stemming from that analysis for the rest of the global industry.

“It’s a ‘no-brainer,’ really. Most of the 800 or so airlines in the world are going to fold if they have no income for three or four months,” said Peter Harbison, CAPA’s chairman.

That’s because airlines are, from a financial structure perspective, heavily dependent on cash flow.

Because their primary assets – their aircraft – are 20-plus year assets, they must be financed via 20- to 25-year term loans or 12- to 15-year leases. Thus, airlines must continue to take in large enough streams of cash to make their substantial monthly loan or lease payments. But when planes get grounded, or have to operate with only a fraction of their normal passenger loads, carriers see their incoming cash fall instantly as their loan and lease payments continue. When that happens airlines can burn through their cash reserves quickly.

That’s why U.S. carriers on Monday asked Congress to provide $50 billion in financial aid – half in the form of outright grants and half in the form of interest-free loans or loan guarantees – plus additional forms of support to keep them alive through the end of this year. (U.S. cargo carriers, most of which also are A4A members, similarly are seeking $8 billion in grants and loans from Washington).

Somewhat amazingly, that $50 billion request for help is coming from carriers that collectively entered the current COVID-19-driven crisis with more than $25 billion in available cash.

In fact, the seven largest U.S. airlines – Delta, American, Southwest, United, Alaska, JetBlue and Spirit – ended 2019 with $24.3 billion in cash, combined.

Yet Airlines For America, or A4A, the big U.S. airlines’ Washington lobby group, originally issued a statement on Monday about their request for government assistance that included some rather breathtaking financial projections that show their members crashing financially before year’s end.

In what the A4A labeled an “optimistic” case, it said its member carriers will see their collective cash balance fall $18 billion in just six months, or roughly 45% of their collective year-end cash position of around $40 billion. And, by year’s end, under the same optimistic scenario, the group’s cash balance will have fallen by $23 billion, or 59%.

Worse, under what A4A called its “pessimistic” scenario, the seven airlines’ cash on hand would fall a staggering $26 billion, or 67%, to a thin $12.8 billion in just six months. And if they were to continue to bleed cash at the same rate through the end of this year the A4A carriers’ cash position would turn negative sometime in the fall and they would end the year with a negative cash balance of around $14.billion – assuming they didn’t all enter bankruptcy first to preserve what little cash they would have left.

Intriguingly, without explanation A4A removed that analysis from its statement and from its website by mid-day on Monday.

In part that retraction may have been in reaction to criticism from some, including members of Congress, that the industry’s bailout request appears to them to be much higher than necessary. Furthermore, the A4A’s analysis appears to have assumed that the airlines would not take steps to slow their cash burn rate and that they would not seek to raise new cash through the financial markets.

However, the so-called Big Four – Delta, American, Southwest and United – already have said or are known to be seeking to raise additional cash via new loans, drawing down on their previously existing revolving credit lines and, in some cases, exploring the refinancing of some of their aircraft. JPMorgan analysts said in a report on Monday that United and Delta both have at least $20 billion in assets – mostly planes but also some real estate – that they could be put up as collateral to raise cash, and that American has $10 billion in such unencumbered assets that could be turned into cash.

Those three, along with Southwest, Alaska and JetBlue, also have the ability to use future mileage point credits in their frequent flier programs as collateral for large loans – or, in effect, cash advances – from the banks with which they partner in those valuable programs.

Thus, while the rate of cash burn remains a very serious concern for the big U.S. airlines, for most them the possibility of running out of cash in the next few months is low. Plus, a reasonably quick recovery of global travel demand as a result of big improvements in the COVID-19 disease cycle could see that cash drain reversed by sometime in the fall.

Still, most of the world’s 800 airlines are small carriers with much weaker balance sheets than most of those based in the United States and Canada, Western Europe, Australia, and the economically stronger parts of Asia and South America.

Harbison notes that most are propped up by “almost a pyramid-selling” scheme. In many cases, such carriers have little cash of their own, but serve as marketing and service companies flying planes owned by aircraft leasing companies. In such cases, when cash stops coming in the door, there are few or no owned assets that can be used as collateral for new loans and the carriers collapse financially in a matter of weeks.

A secondary impact of such a collapse would be increased financial pressure on the leasing companies, some of which are large enough and diversified enough to survive, but many of which could be pushed into insolvency as well. And a third-level impact of that would be additional financial pressure on the aircraft manufacturers Boeing and Airbus, which could see dozens or even hundreds of “orders” for new planes wiped from their books and large numbers of existing and relatively new planes returned to the manufacturers as a result of defaults by airlines and/or leasing companies.

Harbison argues that while such events would be very painful for most parties involved, such a cataclysmic set of events also could lead to a major change in the system by which airlines are owned and operated around the world – a change he says could be positive in the long term.

The existing regime governing world airline ownership and operations dates to a conference in 1945 and 1945 that tied airlines to their “home” countries. Carriers from one nation seeking to serve any other nations must get “rights” from those other countries to do so, rights that must be negotiated between nations. Thus, an airline’s “nationality” is, in some respects, a limit on how big that carrier can get in terms of global service. Additionally, that 75-year-old agreement, called the Chicago Convention after the city where the meetings took place, effectively prohibits cross-border ownership of airlines, though changes over the last 20 years have allowed for modified cross-border ownership of certain carriers through the creation of multi-national holding companies or other legal workarounds.

Harbison sees the current crisis and the likely disappearance of many weak carriers as an opportunity to change the 75-year-old global airline ownership rules to allow for truly global airlines. As with companies in nearly all other industries, airlines would be owned by shareholders around the world without regard for the owners’ nationalities. That, in turn, would allow carriers to truly merge in order to reduce overhead costs and more efficiently align capacity and schedules with consumer travel demand.

As a result, the big global alliances – Star, oneworld and SkyTeam – would be able to evolve into (or re-order themselves) into fewer but larger airlines operating in the global marketplace. Or, alternatively, other surviving carriers could band together in a merger across one or multiple borders to form a new major carrier capable of competing against the current or even combined mega-carriers.

“The post-coronavirus chaos will alternatively offer a unique opportunity to reframe the foundations of a global airline industry,” Harbison wrote in CAPA’s analysis of the current situation, published on Monday. “But is there a will to grasp that potential? If the will is there, finding the right directions will require leadership and a recognition that there is no place for nationalist attitudes in this most international of all industries.”

Harbison suggests that the likely survivors will include the strongest of the Chinese airlines, which are all government-supported; most of the big-name Western carriers; the three big carriers based in the Persian Gulf area (Emirates, Etihad and Qatar Airlines); top-shelf discount airlines like Europe’s Ryanair and EasyJet and several similar carriers in the Americas and Asia; and several top-brand carriers in Asia and Oceana.

Problem is, he says, is that “the post-coronavirus environment has all the makings of a geopolitical standoff. The last thing the world needs post-coronavirus is a nationalistic aero-political confrontation.” Such a standoff “would have colossal implications for the entire aviation supply chain, airframe and aerospace manufacturers, lessors and financiers. It would be greatly reduced in size and would be catastrophic for many satellite activities,’’ like the business travel and tourism industries and aircraft manufacturing.

Cre: Forbes

Nguyen Xuan Nghia – COMM