(Yicai Global) Nov. 6 -- Asian airlines may need five years to get back on their feet after a wave of financial restructurings in the wake of the coronavirus pandemic, according to Ron Thompson, who heads up Alvarez & Marsal’s Asia restructuring practice.

“It will probably take five years for [airline] companies to recover,” Thompson, who is also managing director of the consultancy’s Asian operations, said in an interview with Yicai Global on Oct. 30. Even after they have pressed the “reset button” to go through restructuring, “it will take a long time for them to get back to profitability.”

“2021 will likely continue to be a loss-making year,” the Hong Kong-based restructuring veteran said. “Hopefully there will be profits, maybe, in 2022.”

The aviation sector is suffering its worst ever crisis as global travel restrictions and a collapse in flier confidence in response to the coronavirus pandemic has led to an unprecedented drop in demand and income. Asian airline operators have unveiled a series of reorganization plans as they burn through cash, seeking billions of dollars in government-funded rescue packages and help from creditors.

The aviation sector is a difficult business at the best of times, Thompson said. A capital intensive business with overcapacity, the sector is affected by the price of oil and subject to shocks such as economic downturns, terrorism and disease outbreaks. “In order to make a return on equity and capital, [airlines] leverage up and as soon as there’s a hit, it needs a restructure,” he said.

Excess Capacity

The current spate of airline restructurings is different from the one that followed the financial crisis in 2008 when economies slowed and travel demand fell for a while but then gradually picked up, according to Thompson. This time around “there'll be severe excess capacity for a long period of time and it'll probably take five years to work through the system,” he said.

“There’s a general willingness from creditors to support companies to restructure the debt,” Thompson said, while Asian governments are also “very interested in the survival” of their carriers because they consider them critical to the economy.

Last month, long-haul budget carrier AirAsia X announced that it wanted to restructure USD15.32 billion of debt and slash capacity by 90 percent. A request by rival Thai Airways for debt restructuring as part of bankruptcy proceedings was approved in September. The airline had sought a USD1.81 billion loan from the government to get through the crisis earlier this year.

Singapore’s state investor Temasek Holdings and others put a funding package of up to SGD19 billion (USD14 billion) together for Singapore Airlines amid the pandemic. Hong Kong’s Cathay Pacific Airways also received a government aid package consisting of the issuance of preferred shares and bridge loans. 

“The numbers are so big, and everyone is getting hurt so badly, if the government did not support these entities, basically most would be going out of business,” he said.

Debt Restructuring

Unlike other restructuring cases where poor management or even fraud was to blame, these reorganizations are aimed at debt restructuring with the help of creditors as a result of the pandemic, Thompson said. But while a financial restructuring can deal with balance sheet issues, airlines also need to perform an operational restructuring, which involves staff redundancies, he said.

Cathay Pacific announced its decision to shut its regional carrier Cathay Dragon last month, with the loss of about a quarter of Cathay Pacific’s total headcount.

Japan’s largest carrier, All Nippon Airways, has decided to suspend winter bonuses for all 15,000 employees for the first time since 1962, and proposed a voluntary retirement scheme to its labor union. Payments to crew members of Singapore Airlines and Korean Air have been cut with part of their workforces on leave.

China Recovery

Thompson said China’s aviation sector is recovering better than elsewhere. Unlike in other countries and in other industries in China, such as steel and glass, aviation is free of overcapacity because the country keeps imports of planes under control, he said.

“The only healthy airlines I know are probably the three state-owned airlines of China,” Thompson said.

Air China and China Eastern Airlines narrowed their losses in the third quarter, while China Southern Airlines had its first profit of the year. But some smaller private carriers are running out of cash and local governments have stepped in. Qingdao City Construction Investment Group bought Qingdao Airlines in September, Wuxi Communications Industry Group has said it will take a stake in Ruili Airlines, but Northeastern Heilongjiang Airline has so far failed to find a state-backed buyer.