Air transport is severely affected by the coronavirus and the airlines have successively announced drastic reductions in flight programs of up to 90% cancellations.
So the French government could even consider nationalizing Air France-KLM to help it overcome the crisis, probably with the help of the Dutch government.
In Italy, the nationalization of the national company, Alitalia, already in bad shape, seems moreover acquired.
Even before this crisis, the aviation sector was in poor health due to the high price of fuels and an uncertain economic context (Brexit, US-China trade war, etc.). No less than 23 companies went bankrupt in 2019 including, for France, Aigle Azur and XL Airways.
More recently, the British company Flybe closed its doors in early March due to the difficulties caused by the coronavirus. These bankruptcies became inevitable when these companies ran out of cash.
Given this extremely troubled environment, we have attempted to assess the ability of major airlines to withstand the shock in the weeks and months to come.
We selected the three main European airlines Air France-KLM, IAG (which includes British Airways and Iberia in particular), Lufthansa (which includes Swiss and Austrian Airlines among others), one of the largest American companies, American Airlines, one of the largest Chinese airlines, Air China and one of the largest low-cost airlines, EasyJet.
Insufficient cash
The main cause of business bankruptcy is their inability to pay their bills on a day-to-day basis, that is, their illiquidity, due to insufficient cash flow.
To assess liquidity before the crisis, we selected several indicators. The general liquidity ratio (current assets / current liabilities) should “normally” be greater than 1, as companies are expected to be able to pay all their short-term maturities with their short-term assets.
The immediate liquidity ratio (cash / current liabilities) measures the company’s immediate capacity to meet its short-term creditors. The number of days of revenue represented by cash is a rough estimate of the number of days the business can hold without cash inflows.
Companies’ annual reports as of December 31, 2019 except for Air China, December 31, 2018 and EasyJet, September 30, 2019
The observation of liquidity ratios for all companies is relatively worrying, as they are well below standards in this area, with two particularly bad situations, American Airlines and Air China.
This observation is reinforced when it is noted that the cash flow of companies represents few days of activity in particular at Air France (37 days) and EasyJet (39 days).
All in all, all the airlines present a fragile liquidity situation before the crisis. Even if the fall in activity will translate into a drastic drop in spending, notably on fuel (with a drop in the price, moreover) and with the possibility of putting a large part of the staff into partial unemployment, there are none left. unless the cash of these companies remains very reduced.
Companies’ annual reports as of December 31, 2019 except for Air China, December 31, 2018 and Easy Jet, September 30, 2019
On the other hand, while activity in the first quarter is generally weaker, the second and third quarters which are just ahead of us are also the most important for the airlines.
Quarterly company reports
Debt capacity already very limited
Faced with this liquidity risk, airlines may wish to consider borrowing. But the banks and the markets are likely to show a real and understandable timidity towards requests for new financial assistance, while the debt capacity of the airlines was already well underway before the crisis and their prospects are poor. .
The debt ratio (financial debts / total assets) exceeds the generally accepted standard by 33% for four of them (Air France-KLM, IAG, American Airlines and Air China) and if the net debt ratio (the cash is deducted from the debt) is more reasonable, this exercise is theoretical insofar as the cash is being consumed accelerated by the companies to make their current maturities.
Companies’ annual reports as of December 31, 2019 except for Air China, December 31, 2018 and Easy Jet, September 30, 2019
Simple nationalization is not enough
To allow airlines to survive, the idea of their nationalization is gaining ground in the various countries, given the likely illiquidity situation which they will have to face more or less quickly.
Companies’ annual reports as of December 31, 2019 except for Air China, December 31, 2018 and Easy Jet, September 30, 2019. Stock market area for market capitalizations
Looking at the capitalization ratios, we can see the very low valuation of these companies. Air France only “worth” 6% of its assets and only 7% of its turnover. This situation, which affects all airlines (to a lesser extent for EasyJet and Air China), could make nationalizations inexpensive for the States and without real risks, the subsequent privatization operation should make it possible to record solid capital gains. .
However, a simple nationalization is not enough, because buying back the shares of current shareholders does not bring any liquidity to companies. Rather, it is capital increases subscribed by the states that will be necessary to provide a breath of fresh air to these companies. In addition, one could also consider that the States lend money to companies, but this track would lead to give up the return to better fortune.
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