The aircraft financing market after Covid-19

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Serap Zuvin, Cakmak Law, Turkey
Onur Can Uçarer, Cakmak Law, Turkey


Aviation has been one of the most affected business sectors since Covid-19 started spreading around the world. The initial response of most countries to this pandemic has been to close their borders and restrict travel. Consequently, global air traffic dropped by 73.7 per cent in April 2020, compared to the previous year.[1] This huge decline in demand also resulted in very large losses of income for airline companies and the remaining stakeholders of the aviation sector. Although the situation started to get better during the holiday season in summer 2020, when a number of countries started to open up their borders, air traffic decreased by 50 per cent in July,[2] compared to April 2020. The future of the pandemic is still uncertain. This crisis is affecting all of the stakeholders in the aviation sector and each company has a distinct approach in dealing with the sudden loss of income.

Current developments for airline companies

The decline in the number of passengers affected the commercial airlines quite rapidly. Passenger revenues of airlines showed a very sharp decline of 89 per cent in the second quarter of 2020 globally.[3] The world’s largest airline companies are suffering from large losses as well and are desperately looking for ways to mitigate their losses in order to be able to survive this crisis. The methods and approaches used by the airline companies to manage the crisis vary, depending on the size of each company and of course the responses of their respective governments to support the companies that are badly affected by the pandemic.

Lufthansa is the official flag-carrier airline of Germany and is the largest airline company in Europe in terms of revenue. Its assets were valued at $44 billion and it employs around 140,000 employees.[4] The airline suffered substantially due to the Covid-19 disruptions and it is estimated that the company loses €500 million each month.[5] In response, the German government allocated state aid worth €9 billion to Lufthansa.[6] The company recently announced that it will decrease its fleet from 760 aircraft to 610. Furthermore, Lufthansa is planning to cut 28,000 employees, which is 20 per cent of its total number of employees. The International Airlines Group, which includes British Airways and Iberia, also reported a loss of €1,365 million in the second quarter.[7] British Airlines announced that it will cut 12,000 employees, amounting to a quarter of their total number of employees.[8] Turkish Airlines prioritised not cutting back on the number of employees, and reached an agreement with their staff instead. Although the company has cut employee’s salaries by up to 50 per cent,[9] it has reported a loss of $500 million for the first half of 2020.[10]

Not all of the airline companies were lucky to survive this crisis: dozens of airlines have filed for bankruptcy in various jurisdictions.[11] LATAM Chile, the largest airline holding company in Latin America, filed for bankruptcy in May 2020. Under severe budget restraints themselves, the Latin American governments are reluctant to bail out the airlines.[12] Virgin Australia, the second largest airline in Australia, filed for voluntary administration, which is the equivalent of bankruptcy restructuring in that jurisdiction. The low-budget airline companies have also suffered during this crisis, with Flybe and SunExpress Deutschland discontinuing their operations.

More examples can be enumerated as Covid-19 has affected all stakeholders in the aviation industry. The airlines are trying to manage their losses through different methods while expecting the business to return to normal.

Business aviation is recovering rapidly

While the demand for commercial aviation is still well behind the 2019 figures, the business aviation sector shows a demand for a rapid rebound.[13] Although this sector realised an almost 70 per cent year-on-year decrease in April when strict lockdowns were enforced, it is going through a speedy recovery: business aviation flights were down 18 per cent in September.[14] This recovery is associated with the fact that more wealthy people are choosing private jets instead of commercial flights. As a matter of fact, jet and turboprop flights within Italy, Sweden, Turkey and Russia were even higher than the previous year in September 2020.

Cargo flights are becoming an important source of income

Although the figures and statistics about the passenger travel show critical numbers, air cargo is one of the few areas in the aviation industry that has been less affected by the Covid-19 pandemic. Usually, much of the air cargo was being transported in the baggage section of passenger flights. Due to the enormous decrease in passenger travel, the prices of cargo travel increased by a three- to four-fold margin. Although the overall carried freight cargo dropped by 10.3 million tons, the higher prices resulted in the revenue reaching a near-record level of $111 billion.[15] In order to make up for their lost revenue, large airline companies such as Lufthansa and Virgin Atlantic started using their passenger aircraft for cargo flights and even passenger seats were used to haul more cargo.[16]

Out of the 30 airlines with the largest revenue, only four have recorded profit in the second quarter of 2020: Korean Airlines, Asiana Airlines, China Airlines and EVA Airways. All of these four airlines benefited from the surge in cargo demand and the rising prices of air cargo per kilogram. All of these companies are based in either South Korea or Taiwan, and the higher demand for tech components and electronic gadgets during the lockdowns have increased their business significantly.[17]

State aid

State aid is used as one of the main methods for large airline companies both in Europe and in the United States to help the airlines during this crisis. Overall, more than $85 billion has been assigned to the airline companies by governments worldwide.[18] The EU Commission approved more than €19 billion worth of state aid.[19] This state aid is given under different categories, such as state guarantees, recapitalisation and rescue loans. In the US, the CARES Act[20] provided the airline sector $25 billion in payroll support and another $25 billion in loans. A new $28 billion relief package was also proposed in the US Senate.[21]

The facilitation of state aid is important for the airlines to survive, and governments are offering this help in order to prevent the insolvency and liquidation since the airlines usually employ a lot of employees and make large investments, giving them a vital role in domestic economies. Yet, the state aid usually comes with certain strings attached. This results in less operational and financial flexibility on the airlines. For example, the French government has put ambitious de-carbonisation targets for Air France’s proposed package, and in Switzerland, the rescue package of Swiss Air came with job retention requirements.[22] Moreover, although state aid helps to boost the liquidity in the short term, it is mostly provided as loans or loan guarantees, which results in large sums of debt. The gradual resumption to higher levels of passenger travel will be useful for the airline companies to reduce the need of state aid.

Aviation financing

The effect of the coronavirus on the aviation industry is estimated to continue for the next two to three years, as the experts anticipate a return to 2019 air passenger figures by 2023 at the earliest.[23] This results in the fact that a sizeable portion of the aircraft fleet that is owned by the airlines stay on ground without being used. Due to the decreased demand, the aircraft prices are expected to decrease by five to 25 per cent depending on the qualifications of the aircraft.[24] Therefore, the aircraft owners (airlines and leasing companies) seem to be affected by this situation since their asset value will decrease. However, some claim that due to the price losses of wide-body aircraft, it is also a good time to purchase or finance the same number, if of course, one has enough capital to do so.

With respect to aircraft lease agreements, they are generally governed by English law and this legal system does not accept the force majeure principle without an explicit clause in the contract.[25] Therefore, if the parties to the lease agreement have not included a force majeure clause, the lessee cannot be pardoned for not fulfilling the duties foreseen by the lease agreement even if the lessee does not have any delinquency in the non-fulfillment of their duties. As a result, when the lessee is in default of their lease payments due to Covid-19 disruptions, this defense cannot be utilised unless there is a specific clause in their agreement. In the case of non-payment of leases, the way forward seems to be that either the parties to the agreement can negotiate on new terms to their lease agreements, or if they fail to do so, the lessee would be in default. Yet, the leasing companies are more likely to agree on more flexible terms for the lease, since the aircraft prices are expected to decrease and the aviation industry is in difficulty during this pandemic.

Aviation insurance

From the outset, it seems like grounded aircraft has reduced risks and thus, a good impact on the insurance industry. Yet, unused aircraft increase the maintenance costs and also are subject to certain risks such as weather and natural disasters. Thus, insurers are reluctant to adjust the premium rates swiftly. They require a thorough investigation of risk analysis before changing the rates. Insurers are expected to see a significant reduction in premium liquidity and a reduced income.[26] Moreover, significant decrease in passenger numbers may result in adjustments in liability premium. Also, the aircraft groundings reduce the aircraft hull premium.

Future trajectories

The International Air Transport Association’s (IATA) outlook for the next two years shows a gradual recovery that will continue until 2023.[27] They expect the recovery and re-opening of international flights to be in phases. In the first phase, which started in the summer of 2020, mainly European and Asian countries started allowing passenger travel. However, the next phases of IATA’s outlook, which projected that short-haul and long-haul flights would start gradually in the last quarter of 2020 and first quarter of 2021, already seems to face difficulties. By the time this article is being written, European countries have tightened measures and reinstated strict travel restrictions. Countries such as Belgium, France and Germany started imposing lockdowns in early October. Currently, each European country follows different guidelines in accepting foreign citizens into their country.[28] Therefore, the future of the recovery in airline industry is still highly dependent on the direction of the pandemic.

The airlines will be restarting their businesses with very high levels of debt: an additional $120 billion in comparison to the end of 2019. Most of these new debts are due to the state aid received during the lockdowns. They expect that 55 per cent more passengers will fly in 2021 than that of this year. A fast recovery is possible and promising. However, other parties in the sector, such as banks, have great responsibility as well, such as to provide credits with favourable interest rates, so that their clients during aircraft financing transactions can survive this harsh period.


To conclude, the aviation industry has been greatly affected by the Covid-19 pandemic. However, as explained above, there are various toolkits and approaches by different companies and governments all around the world as a response to this crisis. There is no doubt that the ones that figure out the better strategies will endure and strengthen in the recovery phase and in the near future. The world is getting used to the life during the pandemic, and so is the aviation sector.


[1] www.flightradar24.com/blog/scraping-along-the-bottom-april-air-traffic-statistics

[2] www.flightradar24.com/blog/pause-or-plateau-july-marks-inflection-point-in-flight-traffic-recovery

[3] www.iata.org/en/iata-repository/publications/economic-reports/airlines-financial-monitor-august-2020

[4] www.lufthansagroup.com/en/company/company-portrait.html

[5] www.dw.com/tr/lufthansada-pandemi-faturas%C4%B1-a%C4%9F%C4%B1rla%C5%9Ft%C4%B1/a-55006511

[6] www.dw.com/tr/korona-hangi-havayolu-%C5%9Firketini-ne-kadar-vurdu/g-54488779

[7] www.iairgroup.com/~/media/Files/I/IAG/press-releases/english/2020/Interim%20Management%20Report%20for%20six%20months%20to%20June%2030%202020.pdf

[8] www.dw.com/tr/korona-hangi-havayolu-%C5%9Firketini-ne-kadar-vurdu/g-54488779

[9] www.memurlar.net/haber/924661/erdogan-araya-girdi-thy-ve-hava-is-yeni-maasta-anlasti.html

[10] www.birgun.net/haber/thy-nin-alti-aylik-zarari-4-2-milyar-liraya-cikti-311929#:~:text=T%C3%BCrk%20Hava%20Yollar%C4%B1%20(THY)%2C,milyon%20TL%20net%20zarar%20a%C3%A7%C4%B1klam%C4%B1%C5%9Ft%C4%B1.

[11] www.forbes.com/sites/laurabegleybloom/2020/06/27/airlines-coronavirus-travel-bankruptcy/#5c3effb55f69

[12] www.reuters.com/Article/us-latam-airlines-bankruptcy-idUSKBN2320GT

[13] www.ft.com/content/063785d0-ed9a-4eae-b4ba-8a56cf59e905

[14] https://wingx-advance.com/covid-impact-live-updates

[15] www.iata.org/en/pressroom/pr/2020-06-09-01

[16] www.nytimes.com/2020/05/25/business/coronavirus-airlines-cargo-passengers.html

[17] www.wsj.com/articles/how-a-fortunate-few-airlines-profit-in-a-pandemic-lots-of-cargo-11600779463

[18] www.bloombergquint.com/business/coronavirus-airline-bailouts-a-guide-to-85-billion-in-state-aid

[19] www.fitchratings.com/research/corporate-finance/airlines-state-aid-risks-altering-european-aviation-landscape-30-06-2020

[20] Coronavirus Aid, Relief, and Economic Security Act passed by the U.S. Congress on March 27, 2020. www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+actualizaci%C3%B3n

[21] www.cfo.com/coronavirus/2020/09/gop-senators-offer-6-month-lifeline-for-airlines/

[22] www.fitchratings.com/research/corporate-finance/airlines-state-aid-risks-altering-european-aviation-landscape-30-06-2020

[23] www.businessinsider.com/airline-aviation-industry-recovery-coronavirus-forecast-moodys-2020-7

[24] www.muzinich.com/opinions/aviation-finance

[25] www.squirepattonboggs.com/-/media/files/insights/publications/2020/04/invoking-force-majeure-due-to-covid-19-under-english-law/invoking-force-majeure-due-to-covid-19-under-english-law.pdf

[26] www.willistowerswatson.com/en-VN/Insights/2020/05/covid-19-the-airline-industry-and-the-aviation-insurance-market

[27] www.iata.org/en/iata-repository/publications/economic-reports/airline-industry-economic-performance-june-2020-presentation

[28] www.forbes.com/sites/alexledsom/2020/10/24/eu-covid-19-restrictions-who-can-travel-in-and-out-and-whats-open/?sh=125241c952b0


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