WHAT LESSONS CAN AIRLINES LEARN FROM BANKS POST THE FINANCIAL CRISIS OF 2008/2009

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by Aradhana Khowala

Crises have happened throughout history; inevitably, we forget the lessons and repeat the same mistakes. The fall from grace for Banks post the GFC is still fresh in our minds– it was a mess the Banks created and they suffered for it. And, it led to a significant and prolonged economic slowdown and it took a long time for the system to heal and the economy to recover to its potential (I am talking five to seven years!).

The crisis ended a period of strong growth in banking sector assets in many advanced economies. Banks were over-leveraged going into the crisis and were forced to raise capital, improve leverage, reduce business complexity, and become more resilient. As a result, they and the global financial system are significantly less at risk of a liquidity crisis than before.

RAISE LIQUIDITY AND CAPITAL QUICKLY During the GFC, Banks which raised a lot of capital and liquidity faster than others survived and came out of the other side much stronger. For example, US Banks went harder and much quicker to raise capital and liquidity than their European counterparts and the results are there to see in their stock performance. Today US banks are in such a strong position that they have provided $230bn in liquidity at very attractive rates to companies across all industries in March in response to the virus.

Airlines need to learn this from Banks and raise capital and liquidity fast to get through this crisis as they should plan for continued disruption for the next 12-18 months. So far, Airlines worldwide have raised more than $17 billion in bank loans in March to shore up their finances amid the coronavirus outbreak. U.S. carriers have been the most active, borrowing $12.5 billion, according to data compiled by Bloomberg. But this is clearly not enough. They need to do much more and quicker either through loans or equity issuance, otherwise, it will get more expensive as time goes by as more and more participants come under duress. This could also mean taking state aid like in the US where the industry has received $50 billion as grants and loans.  Global airlines should follow suit and ask their individual governments for aid, or tap their shareholders and bondholders to provide liquidity as soon as possible.

CLEAN BALANCE SHEETS AND SIMPLIFY  BUSINESS MODEL The Global Financial Crisis came after a period of a significant uninterrupted boom that led to excessive lending and risk-taking by Banks unsupported by adequate capital and liquidity buffers. As a result of the financial crisis, regulators imposed demanding capital and liquidity standards, stronger supervision, and more explicit resolution frameworks on Banks. This resulted in significant shifts in the Bank’s business models like them tending to reorient their business away from trading and more complex activities, towards less capital-intensive activities like commercial banking.

Airlines have been overly dependent on growth in travel and overleveraged themselves rather than depend on productivity gains to deliver growth in the last ten years. We can see this in the huge order book of aircraft with Boeing and Airbus prior to the crisis. We will likely witness many changes in the Aviation sector as a result of the current crisis some forced other voluntary like re-assessing and adjusting their business strategies, revising growth plans, balance sheet positions, cost bases, organizational structures, the scope of activities, geographic presence and improving governance.

MERGE, CONSOLIDATE TO BECOME MORE EFFICIENT

The number of U.S. banks has been continuously reducing from 14,500 Banks in the mid-1980s to 5,600 Banks today. The Global Financial Crisis accelerated this consolidation and simplification of the banking sector. The subscale players in the business had only 2 options post the crisis – declare bankruptcy or consolidate into bigger players.

We expect to see the same level of consolidation in Airlines. Owners of Airlines that are less profitable, less efficient, and in weaker condition (in the sense they are more susceptible to future financial problems) need to make significant decisions – either fold or exit the industry by selling their businesses, while profitable and efficient Airlines may look for opportunities to expand. Airlines struggling with legacy asset problems; Airlines with weak income generation capacity; and Airlines suffering from a combination of cost and revenue-side problems all will make great acquisition targets. The common cost inefficiency problem seems most pronounced for the largest and smallest players. In addition to potentially increasing revenue, a merger can generate substantial efficiency gains.