Three actions to deal with the aviation industry’s unprecedented debt
For the aviation sector, the year 2021 is looking more like 2020 than 2022. Airlines will continue managing cash burn through this year, even if air travel picks up. Retraining pilots who have not flown for a considerable time and getting aircraft flight-ready will cost money. We forecast the industry could accumulate as much as between $870 billion and $1.1 trillion by 2024, when air travel is expected to recover fully.
In this video, Alex Dichter, McKinsey’s senior partner leading the Travel, Logistics & Infrastructure Practice, talks about the implications of airline debt. Our analysis suggests the pandemic’s debt burden could lead to median credit-rating drops of five or more notches, increasing annual finance costs by $10 billion. Meanwhile, leverage ratios will likely not return to 2019 levels until 2030.
The time to act, therefore, is now. We suggest three industry actions:
- Deep restructuring. Break glass to aggressively reduce operating costs and increase free cash flow. Most airlines are already evaluating costs granularly to manage cash burn, but fundamentally altering long-term cost per available seat kilometer will create long-term winners from the pandemic.
- Raising equity. Raising equity is difficult and expensive, but current leverage levels are fundamentally unhealthy. This may be an opportunity to attract equity from new sources—or, thinking of different structures, to attract cash once revenues stabilize.
- Growth-driven investment. Airlines tend to take large, capital-intensive, R&D-led, long-term positions. These are often cash consuming. This time, a focus on profitability at both the company and industry levels may be required.
Watch the video to learn more.