07 Dec NAVIGATING THROUGH TURBULENCE: THE AVIATION INDUSTRY POST COVID-19
The Covid-19 pandemic has wreaked financial havoc on businesses worldwide. While its impact has varied widely by industry, there is no doubt that it has had a profound impact on the airline industry, throwing it into extreme turbulence. It remains to be seen how the industry in general will navigate these stormy skies. News reports indicate that Caribbean Airlines lost close to $100M dollars during the period March 23 to April 30, while this country’s borders were shut to mitigate the spread of Covid-19. Internationally, it has been rumoured that British Airways will be putting up for auction pieces from its valuable art collection, to raise much needed cash. Virgin Australia and Avianca are some of the better-known airlines that have filed for bankruptcy and regional carrier Liat may soon be facing another restructure.
Even as the duration and demography of the pandemic remains fluid, it is important for the airline industry to focus on recovery after Covid-19 and the likely financial, operational and legal issues to consider while it files its new flight plan.
Financial Life Support
Due to closure of borders and other travel restrictions, airlines have either been unable to operate or have seen a very substantial drop in demand. Consequently, their revenues have taken a nosedive at a time of year when they are usually quite strong. Faced with significant strain on their cashflows, airlines have taken different approaches. Some have tried to raise cash by selling off non-essential assets or by borrowing, others have approached banks for payment deferrals or waivers and lessors for rent holidays. Some have sought to reduce costs by lay-offs. Others have appealed for government relief.
In examining their existing financing arrangements, it is important for airlines to assess whether an event of default has been triggered. Where such events of default include a ‘material adverse impact’ qualification it is important to carefully review and confirm whether it applies. As airlines prepare for resumption it is likely that their operations will differ from pre-Covid and as such it would be prudent to anticipate the likely impact of such changes on the bottom line and to proactively vary financing arrangements accordingly.
Similarly, airlines will need to carefully review aircraft leases. It is likely that the terms of the lease will require Lessees to maintain lease payments. The onus will be on the airlines to seek concessions from the Lessors. If the airline has been a long-term customer in good standing with the Lessor and shows real promise of recovery post Covid-19, the response from the Lessor is likely to be more favourable. On the other hand, if dark clouds are circling an airline and prospects of recovery despite lease concessions look slim, the response is likely to be unfavourable. For these reasons, scenario planning for all airlines will be key. A good first step would be to conduct a careful analysis of the airline’s current financial situation and then craft a realistic revised business recovery plan. Such a plan would be a key tool in conducting negotiations will all key creditors including importantly, Lessors.
The ‘New Normal’ – Contract Tracing, Health Checks and Sanitisation
As 9/11 triggered a paradigm shift in international air travel so too will Covid-19.
For example, the US government is asking airlines to collect contact tracing information from incoming international passengers starting September 1 and has formed an interagency group to iron out the specifics of a Covid-19 plan. Meanwhile, GE Aviation recently launched a blockchain-enabled application that allows airlines and airports to verify employees and passengers’ compliance with Covid-19 medical screening. It is also designed to track the disinfection of objects, enabling passengers to view the cleaning history of an aircraft.
Airports too are likely to change. Airports in Hong Kong and Pittsburgh have already deployed sanitizing robots to constantly rid the floors of viruses. Experts predict that non-passengers will no longer be allowed inside airports. Passage through a disinfection tunnel and thermal scanners as a prerequisite to entry into airports is also predicted. Thermal cameras which can scan a crowd are already in use in Heathrow and San Juan Airports and security screening by appointment, as has been used in Montreal Airport for some time, is likely to become more commonplace. Luggage is likely to be fogged before entering the aircraft and the boarding process is likely to transition towards touchless options like facial recognition.
Once on the aircraft, it is likely that passengers will be required to wear facemasks. In flight janitors and regular in flight sanitisation of lavatories and other high-touch areas may become commonplace.
These measures will pose fresh logistical challenges for airlines, as well as higher costs and longer turnaround times. They may, coupled with continuing fears about the spread of the virus, also discourage some customers from travelling. Additionally, business travel is unlikely to rebound to pre Covid-19 levels as companies transition to holding virtual meetings and events.
In these circumstances, airlines will need to think critically and creatively about their pricing strategies, routes, equipment, logistics, financing and even consider mergers and alliances in order to survive.
Up In the Air?
The Aviation industry has weathered storms before, though none quite like this one. The impact of Covid-19 on the industry is unprecedented. While there is much uncertainty surrounding the future of the industry, one thing at least does seem clear. it will be very different post Covid-19.
Disclaimer: This Document Provides General Guidance Only And Nothing In This Document Constitutes Legal Advice. Should You Require Specific Assistance, Please Contact Your Attorney-At-Law.
This Article was authored by Nicole Ferreira-Aaron, Partner at M. Hamel-Smith & Co. She can be reached at email@example.com