Adam Smith

If you want to talk about numbers from that presentation... It’s very late at night here, so I’m going to do some stream-of-consciousness financial analysis.

The pending refund number is $35 billion. Governments have already provided $123 billion of assistance to the airline sector, i.e. 3.5x the amount owing in refunds. Is it not reasonable to expect that some of that money go towards refunds?

Slide 3 talks about the median airline having about 2 months worth of cash. For a volatile, cyclical industry, that's probably on the low side, suggesting airlines haven't been doing a great job of managing their cash. But when we dig a little deeper, it appears that may significantly understate airlines' liquidity position, because it only measures "cash and cash equivalents" on balance sheets. However, there may be other, substantial sources of liquidity on balance sheets, without even looking at undrawn credit lines. Take the LH group. Cash and cash equivalents at YE19 were €1.4 billion (IATA's measure). But there was another €1.9 billion invested in money-market funds, short-term debt securities, and other liquid securities. So LH group's position is actually more than 2x as good as IATA's measure would suggest (although at 0.5 months of revenue on IATA's measure or 1.1 months of revenue on my measure, they probably were holding too little liquidity before COVID anyway).

Over at AF, much higher cash balance, both absolute and relative, at €3.7 billion, or 1.6 months' sales. There's probably about another €1 billion and change of solid liquidity stashed around the balance sheet in short-term debt securities, AAA bonds (which sit in long-term investments on the balance sheet, but can be easily monetized), and so on, which would take the ratio to 2.1. So the French/Dutch seemed to be managing themselves much more prudently than the Germans... Mon dieu! Meanwhile, IAG (those cavalier Brits and Spaniards!) had €4.1 billion* of cash and cash equivalents (1.9 months of sales), but a whopping €2.6 billion of other short-term deposits, for a 63% increase in total liquidity, increasing the ratio to 3.2 months. Blimey! They’re also beating the Germans at the game of Vorsicht!

Presenting the cash position in terms of months of sales also makes it sound like airlines are going to run out of cash imminently. It ignores the fact that their costs are down substantially, so those cash reserves will go farther than they look like, based solely on revenues (as you acknowledged). And even once we included other sources of liquidity on the balance sheet, we didn’t look at undrawn credit lines. LH had €0.8 billion of those available at YE19 (which, again, is probably lower than was prudent, but adds further to its liquidity).

Also, that presentation cites total airline industry debt at year-end 2019 as $430 billion. Processing refunds owed to customers would add less than 10% to that number.

It’s far from clear, from that presentation alone, that the refund issue is the killer that the airlines are claiming it is.

*That's right, IAG does its financial statements in euros.... will BoJo force IAG to Brexit its accounting from the euro?

Has LH really not received any subsidies? They've placed a huge amount of their staff on kurzarbeit, which means the government is picking up a very large chunk of Lufthansa's wage bill at the moment. That's a program that has been available since the financial crisis to any company in Germany, so it's not a COVID-specific airline measure, but it has certainly generated billions of support for the LH group. (I’m not sure whether kurzarbeit is included in IATA’s numbers for government assistance, by the way; it’s unclear)

Also, it seems that on May 25th, LH agreed the terms of a bailout with the German government (according to this press release). The deal still needs to be voted on by LH shareholders, but has been agreed to between LH management and the German government.

I will admit that LH’s liquidity position is poor relative to AF and IAG. And I don’t dispute that providing customers with refunds puts a strain on their balance sheet and lessens their flexibility. But as I laid out extensively in my previous post, why should customers be the only ones forced to prop up the airlines, and to do it for free?

If airlines are of such national importance that they need to rescued, the government should be pushing them to take expensive capital from the private sector, or if that’s not available, providing the money themselves, with a steep cost (the German government is getting a 20% equity stake in the LH group as part of the bailout I mentioned above). We, as taxpayers or consumers, are ultimately going to pay for it. So let’s at least get something out of it by doing a formal bailout rather than a stealth one (via lack of refunds).

As with the cash chart, I question the consistency of those figures from IATA. A large chunk of that US assistance that’s in those numbers was in the form of payroll subsidies. But Canada has also offered a substantial payroll subsidy program which, like kurzarbeit, is available to any company that has suffered from this crisis. That program has been worth far more than 1.3% of revenues to AC (and WS, our 2nd biggest carrier).

The US DOT also cracked down on the airlines’ failure to provide refunds before that bailout package was passed, so they were being forced to repay customers well before any funds were made available.

AC also may have entered the crisis with more liquidity than any airline in the world. They had a massive cash position plus undrawn bank lines as true short-term liquidity. They also had a whole bunch of unencumbered aircraft and other assets available to pledge for secured financings. Yet they’ve been extremely aggressive in not providing refunds. Then again, perhaps those are both born of the same prudent mentality...

They certainly have the power to change LH/LX’s behaviour. If they want to.

If you want to argue that giving customers refunds now will drive the airlines to need state aid or become insolvent sooner (not necessarily tomorrow), I would agree. But again, if other creditors have their rights violated (i.e. don’t receive payments on time), they won’t stand for it. They will either force the airline in to insolvency, or trade concessions. If they can extract some or all of their money today, rather than wait around, they will absolutely do it. So consumers should do the same. Request refund. Initiate chargeback. File complaint with regulators. Whatever recourse is available, take it and don’t feel bad about it. The lessors, bondholders, etc, certainly won’t.

And if you ultimately end up having to finance LX or LH group via your tax dollars, at least the government will get some interest payments, equity, etc as compensation, whereas you as a consumer are getting absolutely nothing in exchange for your financing.