A global blueprint in saving airlines

Vaibhav Saxena, CEO of NV Global Group

In 2020, Vietnam Airlines suffered a heavy loss but still survived because of sufficient financial strength. The national carrier also developed a plan to respond to the pandemic last February which included cutting costs, unpaid workers, and other measures.

However, the average revenue still decreased by half because the international market accounted for around 65 per cent of the airline’s total revenue. The lifebuoy of VND12 trillion ($521.7 million) plays an important role for Vietnam Airlines to be able to pay fixed costs, overdue payables, and short- and long-term debts to overcome the pandemic damage in 2021. Moreover, it would reinforce Vietnam Airlines’ balance sheet and make it easier to obtain further funds.

The difficulties faced by Vietnam Airlines are resulting from the restrictions on international flights. However, it is not possible to predict the end of the pandemic. If the pandemic keep ticking on and the airlines continues to suffer further losses, the lifebuoy will evaporate soon and it could be difficult to handle the situation.

It essentially is a transitional phase for Vietnam Airlines and a global concern for the aviation market. As soon as the pandemic fades away, airlines will see clear skies to fulfil their deterred ambitions. Vietnam Airlines should see it as a life support and aim for refined business strategies to drive the market in the future.

There are some lessons from other countries to save national airlines. In the US, Southwest Airlines received a $2.2 trillion government loan under the CARES Act in 2020, along with $3.2 billion in emergency assistance earlier this year.

So far, Southwest Airlines is the first major US airline to report a profit since the pandemic started, as federal payroll aid helped boost the company to net an income of $116 million in the first quarter.

Without the federal money, Southwest Airlines would have lost $1 billion in the same quarter but instead posted revenues of $2.05 billion.

Last May, the German government agreed on an extensive €9 billion ($10.1 billion) rescue package for Lufthansa. The government planned to provide financial aid in a number of ways, including through loans and a 20 per cent stake in Lufthansa’s capital. It was the first aid package that included a recapitalisation of the airline beneficiary.

To ensure that effective competition in the market would be preserved, the EU Commission intended to make the approval of the package conditional on slot divestitures at Lufthansa’s hubs of Frankfurt and Munich. The Lufthansa package included a significant capital injection and would provide the company with a strong shareholder.

This, the EU Commission said, would reinforce Lufthansa’s balance sheet, making it easier to obtain further funds and strengthening Lufthansa’s position as a competitor in the market. To ensure that the proposed package would not have an unduly unbalanced effect, the EU Commission took measures to increase competition at Frankfurt and Munich, where Lufthansa holds a very strong position.

Lufthansa has now passed the low point of the crisis. It expects operating cash flow to be positive in this quarter already and has mapped out a path to new profitability. The German bailout also supports liquidity and solvency in low-interest loans and shares to help cover the labour costs and pay short-term debts.

In Indonesia, shareholders of the country’s flagship carrier Garuda approved the issuance of bonds to a maximum amount of 8.5 trillion rupiahs ($600 million) in a bid to save the company, which was badly struggling with the pandemic.

The issuance is part of the government’s rescue plan for the airline. The bonds will be purchased by Indonesia’s Ministry of Finance and be mandatory convertible bonds with a tenure of seven years, ideally meaning that after that period, they will be converted to stocks.

From public sources it is learned that proceeds will be used to support liquidity and solvency of the company with the aim of improving its financial position, as the airline already has negative net working capital and liabilities exceeding 80 per cent of its assets.