1. Park aircraft (e.g. LH is parking 150 aircraft. HKG tarmac is full of CX/KA parked aircraft too) and reduce flights (e.g. CX is only operating 60% of original schedule)
2. temporary layoff
3. issue new bonds - now that interest rate has dropped, it's a good time to issue new bonds to raise cash. Investor may demand a higher premium for travel industry issuers, but it would be offset by the overall interest rate drop. Note that bond price is essentially priced by the mechanism of (US Treasury yield + risk premium of the issuer relative to US Fed Govt with same duration). Since US Treasury yield is now at 150-year lowest, it's a good time to raise cash by borrowing, and lock in to that interest rate for the next 5 to 10 years
4. buy some long term oil forward - oil price has dropped 20% in the last month. While the airline doesn't need the fuel now. They will need it next year. It's good time to lock in to some of those at current price level. Of course this carry investment risk but I am sure airline knows how to do it. However, note that this does not help on current cash flow. At worst, it will negatively impact current cash flow (e.g. if you lock on to a contract of $45 for Jan 2021 now, and tomorrow the price for the same contract drops to $43, you essentially will need to pay the counterparty $2 tomorrow as collateral). So this needs to be evaluated carefully against current cash availability
It's not that simple.
1. OK, obvious first step.
2. Temporary layoffs still cost money. Severance pay may be due if not rehired (within X months).
3. If the whole market goes South, investors will be holding on very tight to their wallets. Another problem is that no one would lend to an airline that isn't making any kind of revenues. In most cases, as we saw in 2008/2009, rating companies will downgrade even the best of companies or countries to junk status rather quickly, making borrowing prohibitive even in a low interest environment.
4. Buy oil, ok, with what money? As I explained a few posts back, even DL only has 3 billions of cash on their balance sheet and if you check their earnings reports, you will realise that their monthly payroll cost alone is 3 billions... Sell airplanes to save cash? To whom? All airlines will be in the same boat.
This is what happens when corporate-run airlines don't know what saving for bad times is. In good times, they distribute huge earnings to shareholders, employees and themselves (management) and then when things turn soar, they expect Uncle Sam to come to the rescue.
Is it not capitalism then? Yes, Capitalism of the State. And then suddenly they join the ranks of subsidised basket cases like AZ... AZ may even fare better, they already know who to call for money. Our friends at Flybe can attest to that.
If this goes bazooka as it is lined up to go right now, airlines also have other big problems.
-How are they going to finance aircraft deliveries? Ask Airbus and Boeing to defer deliveries? What are the OEM's going to survive on? Bail them out too?
-Lessors. Some will be lenient and will grant a suspension if the aircraft is stored properly, others lessors who are tight on money will expect to be paid. We are talking 8 to 9 digit monthly bills.
-Many one-off expenses to suspend contracts (handling, catering, airports, etc...)
-Maintenance, parking, insurance, essential staff, leases, listing costs, etc... are costs that keep running.
So bail-outs will be inevitable.
Last edited by Waterbomber2
on Thu Mar 05, 2020 5:35 am, edited 1 time in total.