The Lex Newsletter: Europe’s aviation forecast looks gloomy

{"text":[[{"start":11.67,"text":"Dear reader, "}],[{"start":13.879999999999999,"text":"I have just undertaken my first trip overseas since the start of the pandemic, flying from London to sunny Spain. "},{"start":21.497,"text":"It is a good vantage point from which to assess the state of the European travel industry. "}],[{"start":27.64,"text":"While my journey was unaffected by cancelled flights, lost bags or lengthy queues, not every traveller has been so lucky. "},{"start":36.094,"text":"Customers and shareholders in Scandinavian Airlines (SAS) were at the front of the queue on Tuesday as the airline filed for bankruptcy protection. "},{"start":45.799,"text":"The restructuring would not have an impact on service levels, the company said. "},{"start":50.842,"text":"But a pilots’ strike, which was blamed for the urgent need to restructure, could affect up to 30,000 customers. "}],[{"start":58.519999999999996,"text":"Shares in SAS fell as much as 14 per cent in response. "},{"start":63.062,"text":"That leaves the company’s equity valued at just under $400mn, down from almost $2bn a year ago. "}],[{"start":71.8,"text":"A sector that was previously hailed as one of the best ways to trade the pandemic recovery is going rapidly downhill. "}],[{"start":null,"text":""}],[{"start":79.82,"text":"Customer demand is still high: pandemic-era travel restrictions have eased and travellers are booking holidays. "},{"start":87.137,"text":"In most countries (excluding China) passenger numbers have either returned to or surpassed 2019 levels. "},{"start":94.74199999999999,"text":"Bookings data suggest the trend will continue into the third quarter of the year. "}],[{"start":100.47,"text":"But for SAS pilots, British Airways’ ground crew and Ryanair’s cabin staff, the problem is pay. "},{"start":107.824,"text":"Airline staff who accepted cuts during the pandemic to help preserve jobs want to claw back those losses and be compensated for rising living costs. "}],[{"start":118.09,"text":"Along with higher wage bills, airlines are contending with more expensive fuel costs as the price of oil climbs. "},{"start":125.494,"text":"With interest rates rising, heavily indebted airlines must also consider the prospect of higher debt servicing charges. "}],[{"start":133.49,"text":"As part of its restructuring, SAS hopes to cut $716mn in costs. "},{"start":140.519,"text":"It will also raise about $900mn in new equity with further plans to swap or pay down almost $2bn of liabilities — about one-third of the total. "},{"start":151.699,"text":"An existing $741mn of cash on hand will help to smooth the process. "},{"start":157.87900000000002,"text":"The current consensus is that SAS will yield a small operating profit by 2024. "}],[{"start":164.86,"text":"Unlike AirFrance-KLM, which is undergoing its own $2.3bn state-backed rights issue, the Swedish and Danish governments have already ruled out contributing to an SAS rescue plan. "}],[{"start":178.41000000000003,"text":"Elsewhere, debt and equity fundraisings over the past two years have kept airline bankruptcies to a minimum. "},{"start":185.63900000000004,"text":"Airlines have largely been able to hold on to the cash that has been raised. "}],[{"start":190.61,"text":"The latest cash balances at IAG, easyJet and Ryanair stood at €8bn, £3.5bn and €3.6bn respectively. "},{"start":202.27700000000002,"text":"If growing fears of a recession in Europe prove true, these will be needed — particularly in the stagflation scenario that many are expecting. "}],[{"start":211.88000000000002,"text":"Airlines are only just expected to return to operating profit this year. "},{"start":216.79700000000003,"text":"Stress testing shows that interest cover for IAG and easyJet falls below expected operating earnings if interest costs double and ebit is one quarter less than current expectations. "}],[{"start":229.55,"text":"A less indebted airline such as Ryanair would hold up better, with interest covered five times even in a stagflationary scenario. "},{"start":237.917,"text":"Along with better fuel hedges and growing market share, there is reason to think Europe’s best-performing airline will be able to hang on to its title. "}],[{"start":247.65,"text":"Fuel costs are already high and interest payments are likely to rise. "},{"start":252.679,"text":"Staffing overheads remain the only real lever for cost-conscious airlines. "},{"start":257.347,"text":"That does not bode well for shareholders or air passengers. "},{"start":261.164,"text":"Wish me luck for my return journey to London. "}],[{"start":264.75,"text":"Andrew Whiffin "}],[{"start":266.58,"text":"Lex writer "}],[{"start":null,"text":""}],[{"start":267.85999999999996,"text":""}]],"url":"https://creatives.ftacademy.cn/album/76469-1657178988.mp3"}