The International Air Transport Association on Tuesday warned that the airline industry’s liquidity crisis due to the Covid-19 outbreak will see half of all carriers running out of cash within two to three months without intervention from governments. Speaking during a conference call with journalists, IATA chief economist Brian Pearce and director general Alexandre de Juniac called on governments to allow airlines to provide vouchers for canceled flights rather than direct refunds as a way to help mitigate the problem. Some governments, such as Canada and Brazil, have already done so, said de Juniac, who, while acknowledging the hardship to customers, called the situation a “matter of survival” for the airlines. In fact, he noted, airline bankruptcies leave ticket holders with little recourse to recover their fares.
In general, de Juniac applauded governments in general for their “open attitude” toward monetary support of their airlines, mentioning specifically the U.S., Singapore, New Zealand, Colombia, China, Norway, and “also in Europe.” Still, the IATA director asked for more cooperation in allowing for vouchers to help mitigate the $35 billion in ticket refund liabilities the airlines will accrue in the second quarter—a figure that amounts to more than half of the $61 billion in cash burn IATA projects for the period.
The third quarter could prove just as dismal given that IATA expects recessionary pressures to fully activate even as governments begin to lift travel bans. Even in the most optimistic scenario, not until the fourth quarter will a recovery start to take place due to the effects of government stimulus, followed by a full-fledged upturn in 2021, said Pearce. “The issue for the airline industry is they might not be able to last that long,” added Pearce. “If you look at the numbers we released recently, at the beginning of the year the typical airline had about two months of cash in its balance sheets…Our focus now is how quickly those airlines are burning through those cash balances.”
Of course, airlines have come under criticism lately for their failure to preserve cash in favor of executing stock buybacks to raise share prices and enrich executives. On the suggestion that governments require airlines to hold more cash reserves as a condition of their bailouts, similar to what they did for banks after the financial crisis more than a decade ago, de Juniac said any such mandate would be “very strange.”
“Perhaps there would be a conclusion that the airline business…should have a stronger balance sheet,” he noted. “I think we should do that, probably, but to see that imposed by governments would be a bit weird.”
For his part, Pearce highlighted the differences between the banking industry’s situation and that of the airlines. “With the banking system, there was a systemic problem in which credit collapsed,” he explained. “And so I think there was a reason for regulation on capital requirements. I think the competitive airline industry is a bit different. But as Alexandre says, one of the results of this crisis is that airlines will strengthen their balance sheets. We have seen a group of leading airlines do that. But there’s a long way to go for the rest of the industry.”