One factor that could spur the number of airline bankruptcies
As the global outbreak of COVID-19 expanded its horizons, the plethora of problems for airline executives also expanded. Carriers aimed to reduce their cash burn in every way possible, including the retirement of older or inefficient aircraft, grounding the majority of their fleets, furloughing employees – the list goes on and on. But there is one factor that airlines have no control over, which could potentially spur the number of announced bankruptcies if travel around the globe becomes limited once again due to the current pandemic.
Undoubtedly, the bread and butter of air travel is the passenger and their flight ticket. A passenger pays for the ticket, covering the airline’s expenses for the flight. If an airline seats enough passengers to cover its costs, it makes a profit. While it is a very simplistic way to look at the way the industry operates, it is no less true.
Airlines rely on passengers to make money, while passengers rely on airlines to satisfy their need to travel from point A to point B. And now, air carriers could rely on passengers not to run them bankrupt if travel is still crippled due to the pandemic.
As COVID-19 spread and governments closed down their borders in order to reduce the spread of the virus, airline revenues depleted. For some, their income was reduced to literally zero. Cargo and repatriation flights became the only saving grace to keep the rivers of revenue flowing. But without any regularly scheduled flights in the air, airlines were forced to break their promise to transfer passengers from point A to point B.
Companies had no other choice but to get creative to keep their liquidity intact. The complex combination of loans, lease payment and delivery deferrals, sale-and-leaseback transactions, and other financial measures were combined with the question of what to do with those passengers, whose flights were canceled.
Cash became the king that had to be saved – in order to save cash, airlines introduced flexible travel options, including travel vouchers in exchange for a canceled flight. While these measures are associated with the beginning of the coronacrisis, airBaltic, for example, introduced a new temporary policy on August 5, 2020, allowing passengers to change their final destination 14 days prior to departure.
The airline’s customers are able to rebook their flight onto another final destination on another date without any additional fees. But the Latvian flag carrier also highlighted another option. Passengers, booked in business and premium economy have the choice to cancel their flight and receive a refund in the form of a gift card.
It is worth pointing out that airBaltic is not offering cash, but a gift card. For regular economy passengers, the choice to cancel a flight and grab a refund in the form of a gift card costs an additional €19.99 ($23.7). So, not only the airline is looking to preserve its liquidity, but to also bolster as much as possible, by forcing travelers to pay to cancel the flight.
As of December 31, 2020, the airline had €31 million ($36.7 million) of deferred income from ticket revenue.
Incomplete flight revenues
Deferred income from ticket revenue means that the company received money from a customer for a service that is yet-to-be delivered. In the airline industry, this usually means a flight. While €31 million ($36.7 million) might not look like a lot, for a company that had €123.8 million ($146.6 million) of cash reserves at the end of 2019, it is quite a hefty sum. The same story repeats itself throughout the major airline companies and groups around the world.
Ryanair, for example, booked €546.5 million ($646.9 million) of unearned revenue as a liability at the end of FY2020 (as of March 31, 2020. The Irish airline had a liability of deferred revenue of €6.1 billion ($7.2 billion) and opening contract liabilities of €1.9 billion ($2.2 billion), partially offset by recognized revenue of €7.5 billion ($8.8 billion), making up the €546.5 million ($646.9 million) total liability related to its unearned revenue.
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