Banking and Finance analysis: The coronavirus (COVID-19) pandemic will considerably impact the aviation finance sector. Experts from Reed Smith Asset Finance team in both London and Paris have analysed the current situation through this new analysis article. The participants are Richard Hakes, partner, Victoria Westcott, partner, Florent Rigaud, counsel, Spiros Zavitsas, senior counsel, Ashleigh Standen, associate, Rohan Soni, associate, and Deena Smith, trainee.

What impact is coronavirus likely to have on the aviation finance sector?

The impact will be like nothing we have seen before. Governments across the globe have implemented strict measures in an attempt to contain or delay the spread of coronavirus. A quarter of the world's population is now living under some form of lockdown, and the pandemic and accompanying global travel restrictions have decimated the aviation industry - not to mention of course, the human cost.

There are projections that airline revenues could drop by 70% or more during April and May 2020, and Moody’s have downgraded airlines to ‘negative’. During previous economic downturns, stakeholders in the aviation industry have often had time to adjust and to take measures to preserve liquidity and cut costs, restructure or refinance. However, to date governments have told airlines in no uncertain terms to find their own private sources of finance, and not to expect extensive bailouts.

In an environment where demand not just for travel, but also for advanced bookings, has completely evapo-rated, industry leaders had been hoping for a targeted aid package. It is now clear that this would only be considered as a measure of last resort, and even then, only on an airline-by-airline basis when that carrier has exhausted all other avenues. This poses a serious concern when the International Air Transport Association estimates that global airlines will need up to $US200bn of government support to help them survive and has warned of an ‘apocalypse’ if governments do not step in and provide support, predicting worldwide rev-enues from ticketing could drop by $US 252bn if the current restrictions continue for three months. The Centre for Aviation predicts that, by the end of May this year, most airlines in the world will be bankrupt.

On 25 March 2020, the US approved a coronavirus bill that included $US25bn of assistance for passenger airlines to pay their employees, and another $US 25bn available for loans or loan guarantees. Cargo airlines will receive $US8bn and industry contractors will get $US3bn. In the UK, the government is also discussing a package that would assist airlines and airports, and has announced VAT deferrals and grants to cover the salaries of employees - but it has also stated that financial support from taxpayers for individual airlines would only be a last resort. The Indian government is proposing a $US1.3 - 1.6bn rescue package for the country’s aviation industry. Numerous other countries have also announced measures to protect their own aviation sectors.

Coronavirus creates previously unheard of challenges - and the aviation industry faces a fight for survival of an indeterminate length.

What issues could arise in relation to aircraft leasing arrangements?

Airlines have seen a huge fall in their revenues by virtue of an almost complete inability to operate, but also because of a drop in consumer confidence around future bookings - coming at the time of year when the travelling public’s attention is often turned to summer vacations, and advance ticket sales are therefore usually strong. If fewer people are flying, it becomes harder to make lease payments. Aircraft leases are typically ‘hell or high water’ agreements (which means that the lessee’s obligations must be performed no matter what happens and regardless of any difficulties it has in doing so) - and therefore even without clear revenue streams, airlines are still liable to make lease payments. However, it is all very well for a lessor to have a contractual entitlement to be paid, but clearly if an airline does not have the liquidity to do so, it is no one’s interest for lessors to drive their customers to the wall at this challenging time (and lessors are not doing so).