Headwinds remain for airlines as mountain of debt mounts – Insolvency/Bankruptcy

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During the Covid-19-imposed disruption to air travel, many airlines responded by appealing to shareholders for cash, but many also raised funds in debt markets to cover the losses. American airlines, in particular, have gone into deep debt over the past two years.

While for budget airlines passenger numbers have now matched or exceeded 2019 levels, for many large airlines the recovery in passenger numbers has been slow. With airlines continuing to operate with notoriously low operating margins of around 5%, an airline’s fortunes are vulnerable to small changes and for many, being able to repay this burgeoning debt can be hard.

As the global price of oil has fallen in recent weeks, airlines continue to face significant disruption from staff shortages and strikes. The inevitable increase in compensation claims arising from delays and cancellations and the inability to meet customer demands will inevitably affect margins. With fears of a global recession looming and changes in general working practices, the prospect of a return to highly lucrative business travel volumes should also remain muted.

While inflation may help airlines service debt, for many a drop in passenger numbers due to a likely global recession is likely to put many airlines’ finances under pressure. In the coming years, we anticipate that many airlines will inevitably have to restructure their debts and corporate structures to avoid insolvency. The recent Chapter 11 filing by SAS AB is likely to be a taste of many more bankruptcy filings in the months and years to come. As always, we recommend that airline boards seek to restructure their debt before their burden becomes unsustainable, particularly in the face of rising interest rates.

Reed Smith is one of the few international law firms with dedicated aviation and restructuring teams and experience with restructuring tools and techniques in the United States, England and Europe.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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