The Evolution of Airline Financing During a Crisis

The article below is from our BRIEFINGS newsletter of 30 June 2020

The airline industry has faced its fair share of crises, but the coronavirus has pushed it into new territory. Greg Lee of Goldman Sachs’ Investment Banking Division looks at how some airlines are weathering the pandemic.

Greg, many of the transportation clients you advise—airlines, the cruise sector and railroads among others—have been among the hardest hit in the pandemic. How is the airline industry coping?

Greg Lee: The airlines are experiencing a stress environment that is, by far, the worst that they’ve ever been through—even worse than the September 11, 2001 attacks. And this is an industry that has experienced multiple black swan events that have significantly hurt it as a whole. That said, the industry is in much better shape today than it was in 2001 due to consolidation, lower fuel prices and better management.

The big concerns for airlines right now is not so much whether there will be a return of demand. There’s confidence that people will want to fly again and the industry’s already seeing pockets of recovery in places like China. Rather, the big question is whether airlines will be able to survive between now and then—and that’s a question of liquidity and self-help.

Governments have provided various forms of aid packages to airlines. What other steps are airlines taking to bolster their balance sheets?
      
Greg Lee: We estimate that governments around the world have provided over $100 billion of aid to the airline sector—with many governments encouraging the industry to supplement that aid with capital from the private sector. The International Air Transport Association, the airline industry’s trade association, has estimated the industry needs approximately $300 billion to survive the operating losses from the declines in passenger traffic over the next six to 12 months. So airlines are tapping the capital markets in a variety of ways to help them through a situation where they have little revenue coming in and significant fixed costs. 

What are the financing options that airlines are pursuing and how has the crisis affected those efforts?

Greg Lee: In less turbulent times, an airline looking to raise capital would issue debt and in certain extraordinary circumstances equity linked or equity.  And we’re still seeing these types of transactions.

But during the COVID-19 crisis, a stock or bond offering may not be enough to provide sufficient capital, so multiple securities have to be combined and executed to provide momentum and confidence that the issuer is raising sufficient liquidity. And today, many institutional investors have the flexibility and mandate to invest across equities and bonds. These so-called “big bang” financings are a complex choreography of timing and execution between different product groups that are all dependent on each other. The typical rescue package is a combination of high yield debt and equity—often a dual tranche offering of common stock and convertible bonds—that is structured in such a way that each product is executed and priced at the same time.

Airlines are also exploring innovative ways to raise capital, including tapping the value of their frequent-flier programs. Last week, we structured and executed a multi-billion financing for a major airline which—for the first time—used the stable cash flows from its mileage program as collateral. The transaction was the largest-ever capital markets offering in the airline sector.

What was your team’s role on these transactions?

Greg Lee: We were able to build on the rescue financings we executed for major cruise lines earlier this year, and customize those kind of transactions for the airline industry. While the bulk of our work has been with the airlines, we’ve also helped governments design rescue packages for the industry. In early June, our team in Hong Kong advised on the second-largest government-led industry package in Asia. For many of our clients, this is often unchartered territory where their Treasury teams could be issuing junior capital for the first time in their careers during a time of uncertainty and existential threat.

For our part, I believe our firm’s culture of communication and cooperation, as well as our “One Goldman Sachs” initiative to deliver the firm’s resources in a more holistic fashion, makes us uniquely well positioned to work on these transactions since they require precise coordination and teamwork across product groups within Investment Banking, Global Markets and Merchant Banking Divisions.

What has been the investor reception to these types of financings?

Greg Lee: We have seen deep and broad-based interest from a combination of blue-chip, long-only investors and large asset managers, as well as structured finance buyers, investors in collateralized loan obligations, pension funds, hedge funds and the credit arms of large private equity firms. In some cases, the total size and package plays a key role in investors’ decision to invest. If the transaction is successfully executed and the size is large enough, then the risk of bankruptcy is significantly reduced. That said, investors are being judicious about which deals to invest in, so you have to bring transactions to market that are smart and thoughtful.

Going forward, the industry will undoubtedly go through a difficult period and we are concerned about a weak operating environment in 2021. However, we are bullish about the industry overall as airline travel is akin to a public utility and is critically important for the economy, leisure and business over the longer term.