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December 16, 2021

Airlines are close to breaking the corporate credit card. Since 2019, the top six network carriers in the United States and Europe have loaded up with an additional $44 billion of net debt, more than their pre-pandemic EBITDA. Even with a return to normal in 2022 – an increasingly unlikely scenario – paying that off will take years.

Alongside flogging planes, laying off staff and asking shareholders for money, airline bosses have borrowed vast sums from banks and capital markets. Taxpayers have also chipped in, with the U.S. Congress approving, somewhat controversially, $54 billion to cover salaries of grounded staff for 18 months. To a large extent, the survival techniques have worked. Only Air France-KLM (AIRF.PA) is close to nationalisation, with the French and Dutch governments holding 29% and 9% stakes respectively.

That said, the industry’s debt levels are unsustainable. Since 2019, the three big U.S. carriers Delta Air Lines (DAL.N), American Airlines (AAL.O) and United Airlines (UAL.O), and their European counterparts Air France-KLM, Germany’s Lufthansa (LHAG.DE) and British Airways owner IAG (ICAG.L) have increased net debt by 63% to $112 billion, according to analyst estimates compiled by Refinitiv. That equates to a whopping 4.7 times next year’s EBITDA. In 2019, the year before the pandemic started, the absolute figure was $69 billion, just 1.7 times that year’s EBITDA.

Getting back to 2019-style amounts of leverage will involve years of pain for shareholders. Government support packages in the United States and Europe preclude the payment of any dividends until state loans are repaid. Even after that, there’s the issue of affordability. During the global financial crisis, Delta’s net debt shot up from $6 billion to $12 billion, and it took five years to normalise even though demand for air travel bounced back strongly.

Since 2019, it has risen 2.5 times. Negative EBITDA for 2020 and 2021 mean traditional financial sustainability metrics are for the birds. The Omicron variant may yet wreak havoc on forecasts for 2022, and even airlines executives questions whether business travellers will ever fully return.

Another solution is to pass the hat around to shareholders once again. But Omicron has squashed share prices anew, increasing the burden on equity investors. The additional net debt taken on board in the last two years amounts to two-thirds of the six’s current market value, which itself could be inflated. Even when the viral storm clouds eventually pass, the outlook for airline shareholders looks bleak.

The chief executives of major U.S. airlines were due to appear before Congress on Dec. 15 to defend a $54 billion government lifeline that covered most of the industry’s payroll costs for 18 months. Similarly, Britain’s major airlines have called for more economic support to offset the impact of travel restrictions aimed at curbing the spread of the Omicron coronavirus variant, the Financial Times reported on Dec. 13.

Industry executives would request the extension of pandemic loans issued by the government, and potentially another furlough scheme for aviation workers. However, Air France-KLM said on Dec. 13 it had paid back 500 million euros of a 4 billion euro loan backed by Paris, and had negotiated to extend the maturity of the outstanding debt by two years to 2025.