During the Covid-19 imposed disruption to air travel, many airlines responded by tapping shareholders for cash but many also raised money in the debt markets to cover losses. US airlines in particular took on significant levels of debt during the past two years.
While for many of the low cost carriers servicing short-haul routes, passenger numbers have now matched or exceeded 2019 levels, the recovery of passenger numbers for the larger airlines operating long-haul routes has been considerably slower. With airlines continuing to operate on notoriously small operating margins of around 5%, an airline's fortunes are vulnerable to small changes and for many, being able to service this ballooning debt may be difficult.
While the global oil price has fallen in recent weeks, airlines continue to face significant disruption from staff shortages and strikes. The inevitable increase in claims for compensation arising from delays and cancellations and the inability to service customers' demands will inevitably hit margins. With fears of a global recession looming and with changes to general working practices, the prospect of a return in volume of highly lucrative business travel is also likely to remain subdued.
While inflation may help airlines to service their debt, for many, a drop in passenger numbers from a probable global recession will likely put the finances of many airlines under significant strain. In the years ahead, we expect many airlines will inevitably need to restructure their debts and corporate structures to avoid insolvency. The recent Chapter 11 filing by SAS AB is likely to be a taster for many more bankruptcy filings in the months and years ahead. As always, we recommend that the boards of airlines look to restructure their debts before their debt burden becomes unsustainable particularly in the face of rising interest rates.
Reed Smith is one of very few international law firms with dedicated aviation and restructuring teams with experience in US, English and European restructuring tools and techniques.