Global air travel collapsed in 2020 to levels not seen since 1998, with wide-reaching implications across aviation and related sectors. This caused greater economic pain than the 2003 SARS outbreak, 2008 financial crisis and 9/11 attacks combined. The Covid-19 pandemic has delivered an unprecedented and long-lasting shock to air travel.
IATA estimate a reduction in 2020 passenger revenues by $418bn due to the global collapse in air travel. This contrasts markedly with year-on-year growth since 2003. Early signs of recovery for the aviation sector in 2021 have been buffeted by frequently changing global travel restrictions and newly discovered variants of Covid-19.
Continued travel restrictions due to surges in cases and delays in the vaccination roll-out has led to a reduction in IATA’s global forecast for 2021, with a predicted recovery to pre-pandemic levels by 2024. Eurocontrol are more pessimistic, forecasting a near-full recovery in traffic by 2025.
Recovery is inherently uncertain due to the emergence of new variants, national and regional lockdowns or restrictions, speed of global vaccination rollouts and varying consumer confidence. The continued uncertainty has wide-reaching implications across Aviation-related sectors with liquidity pressure and growing capital structures increasing the risk of failure.
Latest Financial Advisory Insights
- Short to medium term: 2022 - 2025
- Impact of pent-up customer demand.
- Risk of structural change in demand, particularly in business travel.
- High levels of refinancing, new money applications and insolvencies.
- Smaller players becoming targets for consolidation by larger, well-capitalised companies.
- Long term: 2026-2030
- Environmental regulations (in particular the Paris agreement) driving pressure to cut unnecessary travel.
- Increased taxation on the sector to reduce carbon emissions and meet targets.
Key Sector Issues
The impact of the pandemic is wide-reaching across the aviation ecosystem with the latest view on forecast recovery profile expected to challenge medium-term liquidity and create a need to re-shape business models and reset financing structures.
The Teneo sector team covers the entire wingspan of the global aviation eco-system and is split into the following sub-sectors:
- Those with lower fixed cost base and unencumbered assets required significantly less state intervention.
- Whilst bankruptcies have been prevented, record levels of debt have been taken on with IATA estimating an additional $195bn of state aid to July-21.
- Key to managing liquidity in respect of refunds as rules and regulation set by governments are ever-changing.
- Continued liquidity pressure due to leasing commitments and working capital outlays as flight volumes recover.
- Steps to right-sizing the routes, schedules and retire ageing, less fuel-efficient fleet.
- Formal restructurings used to reduce lease obligations, re-profile debt and seek new liquidity.
What to expect
- Continue to deploy restructuring schemes to streamline balance sheets, costs, aircraft commitments, existing lease portfolios and obligations.
- Manage the reinstatement of “use or lose” rules on take-off and landing rights and monitor any further changes set by the regulator.
- Shortage of pilots in the medium term with airlines looking to find ways of circumventing the issue.
- Aviation recovery lags behind the recovery of the wider economy, including oil which has already recovered to near pre-pandemic prices. When aviation recovers, demand will increase fuels costs further increasing working capital requirements.
- Should recovery be worse than expected, debt will prove unsustainable and governments will ultimately decide to extend further support or allow airlines to fail.
- Consolidation among airlines with smaller players being targets for larger, well-capitalised airlines.
- Long term structural changes are likely to reduce higher margin business travel as a result of videoconferencing and ESG pressures. This is likely to increase the cost of travel for leisure passengers.
- COVID-19 has had an immediate and dramatic impact on airport traffic causing a loss of revenue from ancillary services.
- Airlines renegotiating landing and parking fees continues to drive significant liquidity challenges, especially for those with less bargaining power.
- Further pressure in response to airlines right sizing their routes and schedules.
- Scaled back capacity by closing terminals and reducing workforce in order to preserve liquidity.
What to Expect
- Should recovery stutter beyond the summer, additional measures will be required to preserve liquidity and obtain new funding.
- The issue of a shortage of air traffic controllers is dampened due to obligations by government to train them, however a backlog is still expected.
- Airports will be pushing regulators to review “use or lose” rules on take-off and landing rights.
- Longer term impacts on existing orthodoxies in the airport experience will require funds for capital investment which have been absorbed during lockdown.
- Oversupply has reduced aircraft values due to corporate failures and pipeline orders.
- Weakened yield and increased default risk of aircraft financing.
- Significant pressure from airlines as they seek to right-size their fleet and restructure their obligations, including renegotiating leases based on power-by-the-hour and deferred payments.
- Those more reliant on debt financing for aircraft have seen high levels of M&A or formal restructuring events.
What to Expect
- The ability to restructure leasehold obligations in the UK’s Part 26A Restructuring Plans will provide a mechanism for airlines to restructure their leases, with downward pressure on asset values likely to limit lessor appetite to re-possess aircraft.
- Consolidation through M&A.
- Refinancing for those without state level backers.
- Restructuring of new aircraft commitments.
- Loss of revenue directly linked to global travel restrictions will continue to drive liquidity challenges for ancillary services e.g. ground handling, aircraft cleaning, maintenance repair and overhaul.
- Recovery is dependent upon other sub-sectors (namely airlines and airports) and government policies.
What to Expect
- Slower than expected forecast recovery in air travel will require a re-shaping of business models to respond to right-sizing of fleets and routes, including balance sheet and cost optimisation.
- M&A activity of key services.
- The pandemic has had a wide-reaching impact on the aviation ecosystem including the manufacturing supply chain into OEMs.
- In light of IATA’s forecasted recovery timeline, the OEM supply chain is likely to see the real impact of the pandemic in the medium to long term as a result of cancelled or delayed aircraft orders by airlines and lessors.
What to Expect
- Acceleration of aerospace and communication technologies and new materials will require sufficient liquidity to invest.
- Government support in order to protect key skills and assets.
- Diversification through servicing of other sectors and integrating or consolidating the supply chain.
Case Studies & Articles
We advised Management on refinancing its revolving credit facilities (RCF) as part of a broader fundraising to address the Group’s medium term funding requirements, including investment into London Southend Airport and equity raising.
- Esken is a listed aviation and energy focused business (formerly known as Stobart Group), which owns London Southend Airport and Stobart Energy.
- 2.1m passengers went through London Southend Airport in the year to February 2020.
- 1,482 employees working across the Group as of February 2021.
- Esken was also responsible for a number of legacy obligations in relation to Stobart Air, which underpinned the Group’s decision to reacquire it in April 2020.
- The impact of the pandemic meant that the Group’s prime aviation asset, London Southend Airport, faced a longer and greater recovery than expected.
- The combined impact meant that the Group needed to address its medium-term funding requirements.
- Engaged to advise Esken on its cash management, negotiations with its RCF lenders and assess potential options in relation to Stobart Air.
- Advised the Company on the liquidation of Stobart Air.
- Negotiated with the lenders to agree terms for its revised RCF and broader lender approvals for its complex fundraising.
- The deal sees a £55m equity raise, £125m new convertible debt secured against London Southend Airport and substantial repayment of the Group’s RCF.
- The Group’s loss-making airline, Stobart Air, was placed into liquidation as the best outcome for the creditors. The proposed buyer was not able to secure financing to stem ongoing losses and mitigating further cash funding needs.
Virgin Atlantic Airways Ltd
We advised the RCF Lenders to Virgin Atlantic Airways Ltd (VAA) in relation to the successful financial restructuring of the company, implemented via the first UK Restructuring Plan.
- VAA was founded 36 years ago by entrepreneur Sir Richard Branson and carried approximately 6 million customers in 2019.
- Headquartered in London, the airline and its holiday business, Virgin Holidays, employs approximately 6,500 people worldwide, serving 25 destinations across four continents.
- In May 2020, as passenger demand plummetedto unprecedented levels, VAA commenced discussions with its stakeholders to address its capital structure and generate sufficient liquidity to support the business through the pandemic and back its operational turnaround plan.
- Engaged to advise the RCF Lenders, Senior Finance lessors (SFL) and bond holders with debt of c.£1bn.
- Red flag review of the company’s business plan.
- Review of the company’s contingency plans.
- Worked closely with a group of cross-holder lenders to negotiate terms with the company on behalf of the RCF and SFL over a couple of intense weeks.
- The deal sees a £200m shareholder injection, £170m new money and a re-profiling of debt from multiple creditor groups.
- 100% of RCF Lenders and SFL supported the deal.
- The transaction was fully executed and implemented by means of the first Restructuring Plan under the new Part 26A of the UK Companies Act and a US Chapter 15.
Nordic Aviation Capital
We advised the RCF Lenders to Nordic Aviation Capital (NAC) in relation to the successful financial restructuring of the company, implemented via an Irish Scheme of Arrangement.
- NAC was founded 30 years ago by Martin Møller Nielsen and it is now the world’s largest regional aircraft lessor.
- NAC owns 490 regional aircraft which is 4x more than their nearest competitor. They serve 75 airlines in 50 countries including BA CityFlyer and Air Canada.
- Total group debt stands at $5.4bn, mainly from aircraft financing.
- In April 2020, lease income collection rates for NAC were only 23% as airlines restricted cash outflows as a response to the unprecedented fall in passenger demand.
- As a result, NAC commenced discussions with its lenders in April 2020 to obtain a deferral of interest to preserve sufficient liquidity to support the business through the pandemic.
- Advised an ad-hoc group of unsecured RCF lenders (total RCF of $800m; advised $300m AHG) in respect of proposed Scheme of Arrangement.
- Our role included: advising lenders through restructuring negotiations (including secured vs. unsecured lender rights and dynamics); options analysis and contingency planning for non-consensual ”Plan B” implementation; and ultimate implementation of restructuring through Plan B (Irish Scheme of Arrangement).
- 90% of creditors supported a deal that saw a 12-month deferral of interest and principal repayments for all debtholders.
- 100% security by aircraft book value obtained for unsecured lenders (including RCF); significant deferrals of new aircraft purchases from OEMs; and shareholder injection of $60m
- The transaction was fully executed and implemented by means of an Irish Scheme of Arrangement pursuant to Chapter 1 of Part 9 of the Companies Act 2014.
Passenger Aviation Demand Forecast 2022 – 2024
This paper marks the second industry update on forecast aviation demand. Since the Covid-19 outbreak in Q1 of 2020, Teneo has taken a leading role across multiple industries in forecasting consumer and passenger demand for products, services and transportation in the wake of political, economic and behaviour changes brought about by the pandemic. To facilitate this work, we have developed a Central Forecasting Model, which contains detailed aviation forecasts for every major country and airline in the world, taking into account a range of factors and scenarios.
Please click this link to download the full paper.
Teneo refers to Teneo Holdings LLC and its subsidiaries and affiliates worldwide. Securities products and services are offered in the United States by Teneo Securities LLC, member of FINRA and SIPC.
Details of the entity providing services, legal and regulatory information in respect of the Teneo entity are also included in our engagement letters.
Specific information relating to our regulated entities which provide services to clients is detailed below:
|Registered Name||Legal Form||Registration Location and Reference||Registered Office||Data Protection||Regulator(s)||Professional Indemnity Insurance|
|Teneo Financial Advisory Limited||Limited Company||England & Wales, 13192958||5th Floor, 6 More London Place, London, SE1 2DA||UK - ZA920639||The Institute of Chartered Accountants in England and Wales (“ICAEW”) C008873136. All insolvency practitioners are licenced by the ICAEW. ICAEW Designated Professional Body licence for a range of investment business activities.||Details of the professional indemnity insurer can be provided on request.|
|Teneo Securities LLC||Limited Liability Company||USA - Delaware||280 Park Avenue, 4th Floor, New York, NY 10017||N/A||Financial Industry Regulatory Authority (FINRA) #151256. Securities and Exchange Commission (SEC).||Details of the professional indemnity insurer can be provided on request.|
Teneo Securities LLC’s Business Continuity Planning
Teneo Securities LLC has developed a Business Continuity Plan (“BCP”) on how we will respond to events that significantly disrupt our business. Since the timing and impact of disasters and disruptions is unpredictable, we will have to be flexible in responding to actual events as they occur. With that in mind, we are providing you with this information on our BCP.
The Firm has developed and installed a BCP in the case of any business disruption that causes the Firm to have limited or no communications with its employees or customers. Our plan anticipates two types of business disruptions, internal disruptions which affect only our Firm’s ability to do business (such as a fire in our building) and external disruptions that prevent the operation of securities markets or other firms (such as natural disasters or acts of war).
The Firm intends to stay in business during both internal and external disruptions due to the fact that the Firm employees can conduct Firm related business from alternate off-site physical locations and the Firm maintains an alternate location for the maintenance of its books and records. We anticipate that the Firm will recover from internal business disruptions within 24-48 hours. An outage due to an external business disruption may be longer and is beyond the control of the Firm. However, the Firm will endeavor to resume business as soon as it is possible for the Firm to establish business operations from alternate off-site physical locations.
The Firm’s BCP specifically addresses the following areas related to Firm operations:
- Data back-up and recovery (hard copy and electronic);
- All mission critical systems;
- Procedures to test and determine the Firm’s ability to do business (i.e., financial and operational assessments);
- Alternate communications between customers and the Firm;
- Alternate communications between the Firm and its employees;
- Alternate physical location of employees;
- Critical business constituent, bank, and counter-party impact;
- Regulatory reporting; and
- Communications with regulators.
If you have questions about our business continuity planning, you can contact us (212) 886-1600.