The Impact of COVID-19 On the Aviation Sector

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      Podcast transcription:

      Welcome, everyone, to our seminar on Aviation Post-COVID-19. This is Frank Darlington, moderator from DMS. And we are very pleased to be hosting this event where we are looking fundamentally at the deep-rooted issues affecting the aviation, and ultimately the aviation finance sector.

      Given that we now have the crisis for around four months and globally for three months, it is an appropriate time to take stock. I am pleased to introduce our distinguished panelists. We have Phil Bolger, strategic advisor to Deloitte. Heinrich Loechteken, CEO of JLPS Ireland. Gary Fitzgerald, CEO of Stratos. Greg Byrnes, CFO of White Oak Aviation. And my colleague Niall McNamara, managing director DMS Structured Finance.

      Moving onto our first topic of our six points that we are seeking to discuss this afternoon, and probably the most fundamental issue to be addressed.

      How and when will public confidence be restored in air travel?

      May I go to you first on this, Phil?

      Thank you. Good afternoon. This is the billions of dollar question, I guess, in the industry right now. I think in the very short run, a vaccine or other therapeutic cure which would be widely distributed and may be matched with an instant test when you’re getting on board an airplane would greatly assist in rapidly restoring public confidence in flying again. However, I don’t see that happening any time in the next few months. I think if we take a quick look at what happened in the past, there might be something in there that would help put it in context.

      So, after 9/11, recovery in traffic took 12 months. After SARS, it took nine months. And after the great financial crisis, it actually took 20 months. Obviously, this particular pandemic and international lockdowns is somewhat more severe than any of those, so I think we are looking at a couple of years before traffic comes back to where it was in 2019. But in the past, confidence has been restored reasonably quickly. People tend to have short memories, and there will be a lot of pent-up demand. The question is, will fear of infection on an airplane remain high, and how will travelers assess that risk?

      I think a great deal of thought is going into this particular problem, and some action is beginning to be taken on it. Recently, IATA had some anecdotal evidence from 14 of the larger airlines who didn’t see passenger-to-passenger infections, and this area of research is being pursued. IATA has also just issued detailed recommendations on minimizing onboard contact and airport risk.

      Several countries are beginning to discuss what they’ve called travel bubbles. For example, between China and South Korea, and between Australia and New Zealand where the pandemic has been brought under a great deal of control. These travel bubbles, I think, could be a template and be extended on a wider basis as these infections get under control in different countries.

      Some airlines, obviously, are looking at their business models and looking at the implications of lower seating densities which will be problematic in terms of breakeven load factors. Airports are reexamining what they can do. But I think governments need to start coordinating and establishing protocols that are countrywide or regionwide. And I know the EU is looking at this across the 28 countries trying to harmonize the rules. Otherwise, we’re going to have a hodgepodge, and it’ll be quite difficult to figure out which country you can fly to and which you can’t.

      There seems to have been an initial rebound amongst younger more affluent travelers in China, and they’re a less-at-risk population. And maybe travel stimulation measures will get those guys on aircrafts sooner than the older more at-risk population. And vacation destinations, and I think all tourism infrastructure will be working very hard to seek ways to generate revenues. So it’s possible to get it moving again, and I’m sure the industry participants will leave no stone unturned to drive that recovery. I’ll leave it there.

      Thank you, Phil. And I think you’ve touched on some very interesting points there. One item that has stood out to me was your reference to the bias security standards with reference to airports, and the controls that will need to be developed in that region to support the industry as distinct from the aircraft itself.

      Gary, given your background and your experience, how do you see events unfolding, and what processes should be implemented to restore that confidence?

      Yeah. Thanks, Frank. It’s an interesting one because, frankly, no one’s ever had this sort of level or length of experience with this sort of pandemic before. In our view, the near term after the virus is hopefully contained, international travel may still be further constrained by economic constraints or collapse. And, obviously, some potentially still worried about the virus as Phil as mentioned.

      It seems clear that, you know, airlines and airports will have a joint mission to bring back customer confidence, so they’ll need to invest in PR advertising campaigns, you know, to support a new way of traveling defined by social distancing and increased sanitation. And they’ll probably also have to stimulate demand creating new incentives for travelers, you know, like waiving change fees and, you know, generally boosting public confidence for future bookings.

      But even once the demand is fully restored, we can see that the end-to-end experience of airports, airline passengers may have been changed forever. It’s possible that, you know, social distancing will become a much longer-term future in our lives or feature in our lives. You know, more effective queue management probably a good start. Some technology could take center stage like biometric eGates and airlines and airports taking fairly big steps in redundancies. I think the appeal of technologies that reduce the reliance on human interaction such as automation and robotics should become stronger.

      Government Restrictions the Bigger Issue

      But as we sit today, and not knowing, of course, where the future of this virus is headed. I think a big issue is probably affected by government restrictions more than public confidence today. I personally believe that individuals are mostly fairly happy to fly as long as they can see some basic sanitary steps being taken to address transmission risks. But the bigger issue, really, is for air travel or for air travel will be, you know, for governments, as Phil has said, to get aligned. You know, and many governments will take an inordinate amount of time to reopen their borders. But by that time, hopefully, travelers will be very keen to get moving again, albeit, with reduced budgets.

      And, Heinrich, with the proposed isolation periods of two weeks, and in that background, is that a primary curtailment that needs to be removed in order to, firstly, to get people traveling, but also to restore the confidence? What other items do you see that will get us flying again?

      Yeah. Frank, I think, certainly, that needs to be the case. Can you imagine you want to go on vacation, you’ve just arrived in Spain, and you have to quarantine for two weeks and then go back after the vacation is over? So, I don’t think that will fly. I think there will be a lot of trial and error in that reopening.

      What I should say what I think is going to happen is that this is… Well, let me start with this. It’s different from what we have seen before. It’s a considerably bigger issues than, for example, September 11th or the financial crisis. And, ultimately, I believe that the confidence will only be restored if they’re secure in the vaccine. And on top of that, some level of assurance that the guy next seat is not infecting me. And that does not only impact the aircraft, it will also impact the airports. So everything that has been said before with regard to security controls but also baggage. Transportation to the airport, that needs to be feeling safe again. And I said I think, ultimately, it needs a vaccine to get there.

      With regard to starting up again first. I would believe that seating will not do it because there’s no airline that can lift at least if today’s economics or yesterday’s economics are relevant on the seat and a load factor of 66%. So, the idea of a middle seat being empty, I don’t think that will fly. Even the little bit of restrictions of walking around in the aircraft. I don’t think that will ultimately do it. It might serve the purpose of getting some people back on the plane. But is that going to be the role model forward? The airline profitability will not be capable of sustaining this.

      Need for Infrastructure Measures to Ensure Social Distancing

      So, I would believe if it comes to opening, there needs to be some infrastructure measures necessary on the way to the airport, at the airport itself to ensure social distancing. And then there needs to be a phased process as to how one could get back flying again.

      So, the first that I would see opening is national travel. I’d say once the U.S. is over the hump, I would say that will come back relatively quickly. The second part is the travel bubbles that were mentioned where we have bilaterals between various countries that feel it to be safe to open the borders and international travel again. Then we’ll probably have something like trading zone coming back. So larger economic areas that have a passport arrangement amongst themselves, and then you have international travel coming back.

      But I also think that there will be an age profile of travelers. So, the younger ones will travel a lot quicker than the older ones because they will probably feel more exposed. I also think that the, what I call business travel that is non-essential. There might be essential business travel where all the persons are leasing in this way…airplanes relatively quickly again. But the non-essential or business travel, that’s where a lot of the large airlines, especially international ones, makes their money on shipping people to conferences. I think that will take quite some time to recover.

      So having said that, I think the process will be a little more cumbersome and slower than what we have seen before. And it’s also depending a little bit on what the medical professions expect to be the second or the third wave because I do not think it’s going to be over. In fall, there might be a second wave of infections. And if we haven’t gotten the cure by then, all that what we are talking about now is going to see potentially also some scroll back again.

      Thank you, Heinrich. Yes, some of the points you raised there are extremely valid. Moving on to maybe that the next item on our agenda. And, Heinrich, you referenced there that the non-essential travel being avoided even when we do come back flying regularly. And I guess that leads in nicely to the second topic which is:

      The impact of COVID-19, is it going to be a temporary event, or will it have a longer, more permanent impact on aviation and aviation financing?

      With that question, I’ll pose it for you, Greg, in terms of your views on this.

      Yeah. Thanks a lot, Frank. Listen, I think three months into this crisis as the guys have said, we’re pretty confident it’s not going to be a V-shaped recovery. It’s clearly a black swan event. And, you know, it has the potential to reshape our industry permanently.

      Where I hear, you know, commentators saying that, you know, with the combination of the environmental protection wave and the improved technology allowing people to work from home and saying that this could permanently reduce the demand for air travel. I don’t fully buy into that. I really think that, like, the underlying demographics and the macroeconomic environment saying that, you know, there’s that growing middle class with growing disposable income will allow us eventually to recover back to 2019 levels and beyond.

      The question, I guess, then is around how long it’s temporary. Like, so putting aside the, hopefully, imminent vaccine next year. I see it in, kind of, a number of phases.

      1. The Liquidity Phase

      You have this liquidity stage and this fight for survival that airlines are in at the minute where they’re really scrambling for liquidity. And this will continue, I see, for the next couple of months and there will be some casualties. And I expect there will be a fair few restructurings. Both for the airlines and for the leasing community.

      2. Right-Sizing

      The second but linked phases is the, around all of this right-sizing that’s happening. And this is happening, for the most part, in the major airlines, you know, where they’re making cancellation of orders, furloughing, laying off staff, and all of these types of things. And, really, that will lead, I think, you know, towards the end of this year, early next year, to the, sort of, final implementation of the new right-side strategy. And, frankly, I think it’s going to be a new position of, sort of, smaller fleets, you know, fewer headcounts, smaller networks. And I think the airlines that survive should be leaner and well placed with fewer, fewer competitors out there.

      So, specifically, in terms of timing. And this is not so much off the top of the head, but it’s the way I’m, sort of, thinking at the moment. You might see by the end of this year, a recovery of 40%, 50%. Next year, assuming that we get a vaccine at some stage by the end of 2021, maybe an 80% recovery. But it’s that final 20% that’s very difficult to see.

      So, really, I would be fairly optimistic. The shape of the industry may not be exactly or won’t be exactly the way it is today in terms of the split and proportion of demand discretionary business. But I think any sort of reduction in say business travel will be replaced by other demand. And this is all contingent as Gary, I think, said around the world economy recovering which is obviously key for our sector.

      Thank you, Greg. That’s quite interesting. Niall, would you have different views or do you share similar views to Greg on this matter?

      Thanks, Frank. No, I think we’re quite aligned in terms of our views here. Certainly, you know, the question of whether this is a temporary or permanent impact is very dependent on the science. If a vaccine is developed, or indeed if we end up with an effective treatment of COVID-19, these are the main drivers as to how quickly this situation will ease and ultimately pass.

      COVID-19 Impact Predictions

      I would be quite hopeful that treatments will come first. And, hopefully, we’ll get to a point where having COVID-19 is something that you live with rather than it being something critical or ultimately terminal. The vaccines, I think, are going to be more complicated because, unfortunately, viruses have a tendency to mutate and there are many mutations already of COVID-19, so I think that part will be challenging. I’m sure, ultimately, a solution will be found, but that could take quite some time.

      So, if we assume that we’re going to be living with COVID-19 for a number of probably years, then that temporary situation will have to be managed by the industry. And I think it’s quite clear we’ve already seen a lot of airlines knock out their fleets. We’ve seen cancellations or deferral of orders with the OEMs. And, clearly, airlines are planning for a gradual improvement. But in the short term, they have to resize their fleets. Re-plan the business model they operate to make that they can survive during this period. But ultimately, I think we are going to see a gradual return to normality.

      Something I expect we will definitely see is that there will be different countries treated differently in terms of international travel. I expect that countries that have managed the pandemic well and have good solutions and low numbers will open up their borders. And, unfortunately, then there may be many countries which have a major problem, and international travel to those countries will be restrict. So that is something we expect to see over the coming months. But, ultimately, I expect things will get to some degree of normality. And, ultimately, I think that the impact will be temporary. But temporary can take quite a long time.

      Thank you, Niall. That is quite interesting. And I think history also shows us that events like this can lead, not necessarily to fundamental change, but the acceleration of the change that’s undergoing within the industry as well. And I think that will be the outcome and the impact of COVID-19. We have now moved on to item number three, which the topic is:

      Can Airlines Repair Their Balance Sheets?

      Which is a very, very interesting topic. Phil, could you give us your expert opinion? Is this possible, and how will they do it?

      Thanks, Frank. Look, the answer is in relation to the survivors which is an important qualification. The answer is, “Yes, but it’s going to take time.” One estimate I saw recently from a very large consulting companies said, “To get back to 2019 levels of profitability will take until 2025. And it would take until 2030 to pay down the debt burdens they’re currently amassing.” And if you look every day, the airlines are borrowing prejudicially. Banks, bond markets, governments. They’re going to their credit card companies. And in the last couple of days, I saw some loyalty program selling where the airline is essentially taking prepayments of future obligations. And, you know, we’ve seen the numbers in the press. It seems like it’s $10 billion here and $10 billion there, which are enormous burdens for airlines to take on.

      I think the data is still very scarce on new deal pricing. But on existing issuances, I think the trading ranges you can see in the press are either double or triple their issue prices. And they’re likely to stay there for the foreseeable future. Because investors who thought risks had all but disappeared from their pricing models have had a rude awakening in the past two months, so they’re going to demand a higher price for any lending that they do.

      I did say at the beginning, the survivors, because I do think we’re in for a fundamental shift at least for the next four or five years. And that is going to cause quite a number of airline bankruptcies. Which maybe that’s what’s required. A survival of the fittest has been around in the industry for a long time. And maybe we go back to that in the short run.

      I think if we get back to 2019 travel levels, there then will be score for some debt repricing. I think cash flow will be redirected from CapEx to debt. We’re seeing the slashing of CapEx right now left, right, and center. Which probably falls mostly on the OEMs both of whom have their difficulties. And with so many orders being canceled. I think the last number I saw was 500 in April and more to come. I think we’ll see a permanent reduction in OEM output. And that restriction in output plus, I guess, the improved yields because of low fuel prices, shrunken world fleet will help drive some profitability as soon as passenger numbers get back to where we think they will. And that should then allow airlines to, perhaps, accelerate repayment of debt and get back to healthy balance sheets that they had in 2018, 2019.

      Thank you, Phil. Just one further question on that for you is just, and we will be addressing the topic shortly. But the role of government support in the repairing of airline balance sheets. You would anticipate that that will be important.

      Role of Government Support in the aviation industry

      Sorry, Frank. If you look at what’s happening right now in the U.S. and in Europe, governments have opened the purses. And I think we’ll see a change in how they run their businesses as a result of that because, certainly, in Europe, there are going to be strings attached to that bailout. And I guess Michael O’Leary will be in court for the next few years fighting it.

      Yes, indeed. Gary, your views on the airlines repairing their balance sheet and continuing to have liquidity in the current environment?

      Yeah. I hadn’t heard the 2030 to clear the debt burden before. But Phil’s comment there was quite striking. Like, you know, from our perspective, you know, clearly, airlines, they’re a high-revenue-generating industry with enormous and relatively fixed equipment and fuel charges, and very low profitability. So they’re just not geared to sustain any form of revenue hits at all. So, you know, some, hopefully, will and have to repair their balance sheets, but not for an extremely long time. And as Phil says, you know, 2030 might be the real timeframe we’re talking about here. But just to put it into perspective. You know, IATA reported last year total revenues of all of their, you know, airlines combined to nearly $900 billion, 2019. And that’s likely to be halved this year, and maybe worse. Profits last year were about $35 billion. And, you know, as Phil said, you know, it’ll take years.

      You know, most airlines, and U.S. carriers in particular, they’re dealing with this point of the crisis by adding absolute mountains of debt to their balance sheets. I mean, they’re building war chests just to outlive their competitors, which is a logical reaction given all the previous crisis, you know, that they’ve lived through. You know, repairing the balance sheets will, as we said, take many years. But they have to, otherwise they either won’t survive in the long run, or they’ll never be able to add substantial amounts of debt or continuing, you know, to make essential fleet renewals, you know?

      And the crisis has proven that, you know, in the absence of government support, very few airlines are able to withstand, you know, such prolonged hits to revenues. You know, cost can only be cut so far. So strong and short capital commitments are really essential for these airlines, you know, as is the need to be over-reliant on debts. You know, I know that’s easy for us to say today. But, you know, in the long term, all airlines, they know that they need to improve their debt-to-equity ratios, and they need to improve the liquidity ratios. And it’s obviously headed at the wrong direction today.

      Thank you, Gary. That was very clear. Item number four. Our topic is:

      The Lessor Management of Airline Lease Waiver Requests

      And I know there has been probably a first wave of those in terms of lease rentals being deferred. Heinrich, what options do the lessors have in this environment?

      I would say… You see me smiling. Not as many as one would have had over the last 25, 30 years. But I also think there’s probably less to gain. So, if I compare this to a structured request with what we have seen in the industry before, I think I can say that probably in the past, yokes were structured differently. There were more security deposits, there were more maintenance reserves. There was maybe even if adjusted for interest rate, a higher lease rate. So, if an airline comes now and says, I need to have concessions, given that we went into this with relatively what I call skinny deals. There’s not that much to take anymore.

      Obviously, what the airlines will look at if they have to, let’s say, go through bankruptcies and have to look at expenses, they will look at upcoming maintenance events. And they might, if it comes to that, select aircraft one over the other with regard to what aircraft have maintenance events in the near term and which ones don’t.

      But generally speaking, I think not a lot has really, really changed except that the optionality for the lessor wars given the magnitude of the event has changed. All the other crises were either very short term as Phil and Greg have said, or they were, kind of, regionally concentrated like SARS. September 11th was reasonably short-term, so we had V-shaped recoveries. And three months’ rent deferral, six months’ rent deferral. Was it three months to six months catch up? MPV neutral structured for the good airlines. That was a possibility.

      I think what we’ll see today in this crisis that we’ll probably have waves of restructuring that’s coming. So, I think from what we’re seeing, there is a typical three months and maybe six months with catch up relatively quickly. But the question is whether that’s enough or not?

      As a lessor, you would sit there, and you would do the same thing you have done 20 years ago. You would effectively take your airline fleet and those that come with the requests and create two buckets. You look at the survivors and those that you think that might not survive. You would historically treat them almost alike with regard to having people on the ground kicking the tires of the aircraft, making sure that the aircraft are okay. Copying records or taking the records. And if push comes to shove, take the aircraft out. All of that today, you would try to do, but given that the travel restrictions are there, it’s a little bit more difficult to organize.

      But I think what lessors have to face is the situation where the optionality around what you can do with the assets is not as great as in the past. So after SARS and problems in South East Asia, you could take an aircraft and deploy it somewhere else. Today with the vast majority of the fleet being grounded, it’s very difficult as a resort to take an aircraft back because you would know that you have to put it into storage, and you have to, kind of, wait for the market to recover to release it again. So, I think it will be every lessor’s interest, and that makes this process of, let’s say interesting, to keep the aircraft with the airline. And therefore, the airline might have a bit more leverage than they would have had in the past because the optionality that the lessor had was taking the aircraft out and saying, “I’m going to go somewhere else.” That is somewhat restricted and curtailed.

      On the other hand, airlines that will come out of this will be stronger. So, I think it’s a restructuring for the right airline. You’ve been seen as it, sort of, helps the right airline that, kind of, positions, the company nicely for additional business in the future.

      Thank you, Heinrich.

      That’s about it from me.

      Yes, that’s a very comprehensive response and insight. Niall, Phil, would you have something additional to add to Heinrich’s response?

      Non-Ideal Options for Lessors

      Yeah. If I could just mention. Certainly, among our client base, you know, we’ve all seen lessors take the approach of trying to work with airlines. Try to give them that three or six-month deferral period which is necessary. But in terms of their options. I mean, probably the worst option at the moment would be to have your aircraft trapped within a bankrupt airline where it takes a protractive period to either get your aircraft back or indeed to get any of the money that’s due to you back. But at the moment, the second-worst option is probably having your aircraft returned. Because there is no market at the moment, there is no alternative places where you can move the aircraft and find a new lessee. This is a global pandemic. It’s not going to change quickly from that situation.

      Lessors Should Work with Airlines

      So the best situation at the moment is for the lessors to work with the airlines. Hopefully, government interventions will start to see cash flow come through those airlines and back to lessors as we progress. And also, you know, the airlines there will be restructuring required. And within that context, some leases and some aircraft will be retained and some will be returned. So, I think lessors are taking, for the moment, the prudent option which is work with the airline and see how this pans out over the next 6, 12 months.

      Thank you, Niall.

      Thanks. I think Heinrich hit all the nail on the head in terms of who is between a rock and hard place here. What the airlines are and the lessors are to some extent. The lessors are anxious and eager to support their airline clients, but they can’t support them all. So, at some point, they’ll be picking winners and losers. At that point, it’s probably after the initial wave of waivers has been worked through.

      Lessors Taking Equity Instead of Rents

      On the other side, the levers the lessors have are few and far between partly because there’s no flying or very, very little flying. One of the more interesting things we’ve seen in the last few days is that lessors are taking equity instead of rents. And this was in the case specifically of Norwegian. I have not seen that in 40 years of being in the industry, and that’s an interesting development. I’m not sure whether it’s good or bad, but it’s certainly interesting. All the other usual levers, power-by-the-hour, you know, offsetting, maintenance reserves, no maintenance reserve payouts. All that kind of stuff is everyday bread and butter for the lessors.

      Termination/Repossession

      Termination/repossession is a very difficult option right now because you can’t get your technical people on the ground, you can’t get your pilots in there to take the airplanes back because all the borders are closed, and 14-day lockdowns are in place in many, many jurisdictions. So that’s an unusual and a very unwelcome addition to the problems that we have in dealing with defaulting lessees. And if there are a lot of bankruptcies, it’s going to exacerbate that problem. But, otherwise, I think Heinrich did cover all the points on this question.

      Thank you, Phil. Yes. And in the current environment, the options are clearly limited. But there is always the risk of default and repossession which has to be considered.

      Moving on to a topic we touched briefly on previously was the government’s support for airlines in different jurisdictions. In advance of the call, I was looking at an Ishka report which referenced committed state age in the region of US$114 billion. This is obviously jurisdictional specific and is not being given in every country. So, the answer to the question is probably somewhat self-evident. But it would be interesting to see how it does impact these different types of support in different jurisdictions for airlines and their competitors. And, obviously, we have heard recent noises about some airlines complaining bitterly about what’s being provided to competitors. Gary, would you like to take this one initially?

      Government Support for Airlines & Implications for Competition

      Yeah. Sure, Frank. And, yeah, I guess, again, to put it into context. You know, we talked about, you know, last year revenues of just under $900 billion across the board for airlines. So, if that figure of $115 billion, which is pretty much in line with what we’re thinking is correct, it’s still not a huge amount compared to the overall annual revenues of airlines. But still, it’s certainly welcome for a lot of airlines at this time. And the help that governments are giving to airlines is basically any monetarily quantified relief measures such as deferrals of taxes, deferring operating charges for airports, state-backed commercial loans, potentially nationalization of the airlines we’ve seen in Italy. You know, over the last week, you know, we’ve seen the tally grow by another $16 billion, so it is fast becoming high in the agenda of many governments. As the crisis, sort of, evolves, we’re actually a little worried that governments might lose a bit of focus on the airlines because, you know, the crisis is starting to encompass a lot more than just the airline industry, of course. But clearly, airlines were the, kind of, first hit, and probably the hardest hit for now.

      I mean, we’ve seen at least half of the world’s 20 largest airlines receiving some form of government support. And a whole bunch of European carriers last week got fairly hefty support. But as the big guys get this respite, smaller competitors are really left sitting on the ledge. You know, for instance, like last week, you know, in France, we saw there are airlines in the overseas territories basically insisting on the same sort of level of support that Air France got. You know, Switzerland is, you know, a very fair country, but they’ve also left the Easy Jet subsidiary out of their support package. And even Spain, you know, we’ve only really seen packages supplied to Iberia and Vueling. Which is obviously the largest homegrown airlines, but there’s at least 10 other airlines there that have applied. And, you know, in Asia we see the situation is generally the same. You know, flag carriers are getting promises of assistance, and independent carriers and especially the LCCs are being left to their own devices really.

      And doing this without distorting competition is frankly impossible, but it also may be the last thing in most government’s minds at the moment. As in competition. You know, despite very vocal protests from the likes of Ryanair as you’ve mentioned. But it’s very noticeable that say in the U.S. the Airlines for America which is an enormous trade association, they’ve certainly abandoned all discussion or notion of anti-competition discussions. So at least for now. But, you know, we do predict that government support might wear thin sooner rather than later. Not only because governments themselves may run out of resource, but airlines, you know, they’re going to use taxpayer support to belittle the law. And in the U.S. in particular, you know, we’re expecting on October 1st when basically the limits on staff retention expire on the airlines, it’s likely to emerge as probably the worst day in U.S. airline labor history as so many people are likely to get laid off, you know? So, this is a very interesting and deep topic. And, obviously, some airlines are winners, and some are losers. But in the long run, it’s not so clear if you’re really on the winning side if you do have a big government sitting behind you, and now suddenly part of your board, you know? But I’d welcome anybody else’s view on this topic.

      Yes. Greg, would you like to give us your views on this item?

      Yeah. Thanks, Frank. Yeah, I’d agree with the vast majority of what Gary has said there. Like, you know, it cannot be done without distorting competition. Having said that. Where we’ve come from initially with antitrust and European competition, it was imperfect as well. But we’re in a totally different place now altogether. Like, the way I see it is, you know, it has been pure, pure impulsive. You know, it had to be impulsive, and it had to be speedy. This crisis hit like a bolt, and revenues dropped, you know, off a cliff completely. So especially with the larger airlines, you know, they were hemorrhaging so much cash daily that the governments had to sacrifice the proper joined-up thinking and forward-looking planning to essentially save what they see as systemic and strategically important airlines for them.

      But on the flip side, then I think, you know, the covenants and the restrictions that come with all of these bailouts are not without their pain as well. And I think the airlines that are in better shape from a liquidity perspective are thinking very carefully, certainly in Europe, about the depth of bailout that they want to accept where it’s been offered.

      I think the unfortunate thing, but probably just the reality is that with this sort of unstructured targeting of bailout, you’re going to have a lot of, sort of, poorer run, poorer managed airlines that might survive. And on the flip side, you’re going to have, you know, well-run airlines that are going to probably be challenged restructured or go under. So completely what Gary is saying, it’s hard to see the structure within all of these bailouts. But at the same time, there’s probably going to be plenty of political and legal fallout from this short term.

      Yeah, that’s… I think there’s not many on the panel that would disagree with that analysis. I thought it was interesting, Gary, you made one reference to whether the government’s complete on the commitments that are being made with what will happen in the broader economy. And it’s not an item on our list today, but that is a big factor in terms of recovery of the airlines. Is going to be the overall global economy turnaround, and how quickly we can get back to normality, and for business to recover, and for fleets to the business traveler traveling, and the leisure traveler, and so on.

      In terms of the finalizing. And we could continue this conversation all evening. It’s very, very informative and very interesting to hear your expert views. If we were, and maybe to go through the panel individually.

      What solutions are available to the aviation industry?

      What supports, what solutions are available to the industry either from a government support or within the industry? What actions can be made to help the airlines and ultimately the aviation finance industry to weather the storm and come through to the other side?

      And maybe I’ll ask you, Heinrich, to lead off.

      Heinrich’s Take

      All right. Thanks, Frank. It’s, kind of, an interesting difficult one. So, I think we all have seen the only thing that would come to mind. I mean, we have the government stepping in already, and they will support, as everyone else have said, they will support some airlines, but maybe not others. And we’ll have winners emerging. And I have no doubt that those winners will be stronger after the crisis, than they were before the crisis.

      I also think that the airline industry will recover. So, what we’ll need, and the matter is how long will it take? So, what we’ll need is a bit of a bridge into this. So, I know we have government support in form of direct equity investments or short-term loans. But I think the next thing that the government should look at, and I believe there’s a bit of a revival in the ECEA market or the European Credit Export Agency market. The long-term debt financing for aircraft is nonexistent at this point in time. So, if governments can stimulate that supply in providing guarantees and it can be done through EXIM ECEA, I think that would help a great deal.

      They might need to relax some of the standards because in the past that has been awfully difficult if you work, kind of, not very long-established or didn’t have the right asset, then it would be awfully difficult to get that type of financing. But that would be one way of bringing more liquidity for longer-term capital that is sensibly priced to the market.

      That is interesting, and something that was quiet a thing in its time. And, yeah, I think it’s a good suggestion, and, hopefully, something that will be followed through on. Greg, would you like to make a proposal that you would like to see put in place?

      Greg’s Take

      Yeah. I think from existing lessors with existing exposure we’ve touched on that fully in terms of what they can do to support the airlines. I also would mention that, you know, there’s still a lot of investors out there who, maybe, were sitting on the sidelines who hadn’t invested, and so I think there is a fair bit of money out there to still invest in the market to support lessors and support airlines with liquidity.

      So, like, from our perspective, from White Oak’s perspective. Not only are we looking at the previously deemed great credits and potential sale/leaseback opportunities and where you can support there, but there is still a lot of a good number of smaller airlines. Very well-run airlines that, you know, perhaps were playing in the niche markets. And, you know, these airlines have, you know, not tried to grow too fast too quickly over the last decade or two. They have a small fleet; they have a number of unencumbered aircraft. And, you know, they’re well placed and just need that liquidity bump to push them through the next out 9, 12 months. So, I think there’s a lot of things where new investors into the market can support existing airlines and lessors as well, so we would see that as one potential inroad to support.

      Greg, I just want to also jump in from my side. You know, again, just looking at very ballpark figures. If you look at the full value of all aircraft flying around today, it’s probably $750 billion to $800 billion worth of metal with the majors. We all know about half of that is already on operating lease. Is owned by lessors or investors. And the balance is, you know, between unencumbered or financed and unencumbered. So… Sorry. Encumbered/financed and unencumbered.

      So basically, leaves about probably $150 billion to $220 billion worth of aircraft equity in effect sitting on airlines balance sheets. And that, for me, seems to be a fairly obvious area. The airlines can pull the ripcord and start selling the silver, you know, to investors. As you said, there’s a whole bunch of lessors and other investors who are happy to take net risk. So this, for me. You know, if you’ve extinguished all of your government support, sort of, channels, you know, you’ve managed to tap into Heinrich’s ECEA, sort of, EXIM support which is absolutely essential. I totally agree with that. But I think the next thing on the list has to be, “What’s on your balance sheet?” And try and liquidate those aircraft and put everything on up lease or as much as you can.

      You know, again, airlines are in survival mode. Which is an incredibly unfortunate situation given, you know, this is the perfect storm that’s hit them. But, you know, they need to use every tool in their artillery to survive this, and that surely must be one of the big ones on the agenda. Phil, I don’t know if you have any further views on that, or…

      Yeah. Yeah, I think there’s actually a bit of a bigger picture here. Because what we’ve seen in the last two months is a rapid withdrawal inside national boundaries, and yet airlines are amongst the most global of businesses. And we have an enormous impact on world economies, on travel and tourism, and on job creation. So, I think it’d be really good to see some high-level governmental responses to how aviation emerges from the crisis. You know, maybe using IKAO. But the major players need to, kind of, galvanize the establishment of a 21st-century response, otherwise we’re going to have a very, very choppy disorienting response to the emergence from the crisis.

      The erection of national boundaries has surprised me looking at Europe that they came up so quickly and so definitively. I thought there was an EU, and there really isn’t. There’s 28 individual countries here all protecting themselves. So I think they need to tackle that in some kind of high-level way.

      And, I guess, I agree with Gary’s point on, you know, the 1st of October, we’re going to see huge layoffs in the U.S. I think the good side of this is, if there are bankruptcies and restructurings, you know, airlines will get recapitalized and they’ll retool their fleets. OEMs will right-size their production which I think the whole industry has been banging on about for 5 or maybe 10 years at this point. So, you know, out of this crisis will emerge a leaner more hungry aviation industry better aligned in terms of resources to what’s needed. But I do think some coordination at the very top is required, and we’re not seeing that yet.

      Yeah. Thank you, Phil. Yeah. Niall, I’m sure you’ve got a number of ideas.

      Niall’s Take

      Absolutely. I wouldn’t disagree with anything that’s been said so far. Among our own aviation clients and particularly our aviation fund clients, there is certainly liquidity available for transactions whether they be selling leasebacks or whether they be portfolio sales. So, you know, within DMS, we are certainly trying to support those clients. The fact that we have that multi-jurisdictional offering is very helpful because quite often these assets need to be housed within SPVs and different jurisdictions.

      Something we expect to see more of is distressed debt, and particularly distressed aviation debt as this progresses. And we actually have a particular product to deal with that scenario. And, finally, you know, within the group, we have a well-experienced management team. A lot of aviation knowledge and history there which our clients have been able to leverage off and help them to navigate through the perils of the current situation. And we expect that to continue and hopefully help them through to the other side.

      Conclusion

      Thank you, Niall. And I think that’s an important point. This crisis will bring opportunities. And no doubt, all the participants on this call on the panel, and people that will be joining will identify some of those opportunities and develop their business by so doing. As a wrap-up, we have totally run over in terms of time. We have received a number of questions which we can address offline. But I would firstly like to thank all the participants. I have found this really interesting, and it’s a pity we didn’t have more time. And, secondly, more importantly, it’s a pity we couldn’t do this in person given the current restrictions.

      Being someone that has been in the industry for quite some time now, I love aviation, I love the opportunities it has given the world, the breaking down of borders, the travel, the career it has given me. I think we are all committed to contributing to the return of this industry. And it will return because its benefits economically and socially are just huge.

      So, with that, I will bring the webinar to a close. And again, just to remind everyone, should you have specific questions, please submit them and we will address them offline. Thank you very much.

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