Cashflow challenges loom for airlines as travel demand rebounds, Iata boss says

Global aviation will be a smaller, more cautious industry after the Covid-19 pandemic, Willie Walsh says

Willie Walsh, director general of the International Air Transport Association, said airlines will have a smaller appetite for deal-making. Reuters.

Global airline chiefs must be even more careful about cash management as they revive operations amid signs of a recovery in air travel, the International Air Transport Association’s director general said.

Operators were urged to take a cautious approach to rebuilding their networks as they balance rising costs with lower revenue, Willie Walsh told aviation consultant John Strickland during an online session of the Arabian Travel Market conference in Dubai.

Mr Walsh said a cash crunch looms for some airlines, with the real challenge expected to start when they ramp up operations as “they don’t have the traditional cash reserves from sales in advance of carriage”.

The Covid-19 pandemic hit the aviation sector particularly hard, forcing airlines to conserve capital. Airlines were able to tighten their belts as fuel expenses declined due to fewer flights and wage bills fell because of staff furloughs and government payroll support.

Demand is beginning to recover in fits and starts due to the increased pace of vaccinations in many countries around the world. However, airline costs are expected to increase rapidly as operations resume.

“If you get an imbalance between the cost ramp-up and revenue build-up, then the cash burn will be quite significant,” said Mr Walsh.

“For undercapitalised, cash-poor airlines, they have to be really cautious as they see evidence of recovery in the industry.”

The airline industry’s debt burden is up by $220 billion and expected to increase further, according to Iata estimates.

Annual industry losses are expected to reach $47.7bn this year as airlines burn through a further $81bn of cash.

However, Mr Walsh is optimistic about a recovery in air travel demand in the second half of this year, once government-imposed restrictions are removed or relaxed.

“The amount of additional liquidity airlines had to raise has been phenomenal, which will play a significant part in how the industry develops post-crisis.”

The aviation industry will emerge from the global crisis smaller and more cautious, the Iata chief said, citing its reduced capacity, laid off or furloughed employees, grounded aircraft and lower potential for acquisitions, he said.

“It will be a smaller industry. It will not [be a] recovery of all of the capacity; it is just impossible,” he said. “They cannot build back up to the scale of 2019.”

Airlines will be also less willing to spend their money on acquisitions and mergers.

“I do not expect to see M&A activity, principally because people will be very guarded about the cash that they have,” said Mr Walsh.

“It is just risky to spend your valuable cash resources.”

However, consolidation will take place through some airlines shrinking and others failing, with stronger companies growing market share by filling any gaps left, he said.

In the short term, airlines will not be able to take the risk of operating unprofitable routes, he said.

“That caution is just right because no one wants to survive this crisis, only to fall over after the recovery starts,” said Mr Walsh.

“People have to be very careful about the pace at which you build up your network again.”

Demand is expected to outstrip capacity over the next few months, which will be a boon for airlines, he said.

Their immediate priorities will be to repair their balance sheets, strengthen their cash position and be “in a place to survive what may be a couple of cold winter months ahead”, said Mr Walsh.