Will the Effects of COVID-19 Cause Irreversible Damage to the Aviation Industry?

24 Dr. Batuğhan Karaer Chairman of the Finance Association,

The pandemic-induced uncertainty After the turbulent summer season, it is now makes predicting almost impossible. News widely believed that aviation may not return about the vaccines developed against the to normal for many years. Even if there is a coronavirus in the last quarter of the year glimmer of hope, airlines find it difficult to set raises hope that there’s light at the end their strategies because the fog of uncertainty of the tunnel. Health experts and officials still surrounds us. How the industry will develop say the problem will be almost over by the in a post-pandemic world is still one of the big winter next year. But even at this point, unknowns. the uncertainty and unpredictability in the tourism and aviation industry still persists.

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SALES In Millions of USD Table-1 Sep-18 Sep-19 Sep-20 Değ.18/20 Değ.19/20 figures for the related year are generated at the end EasyJet plc 2.421 2.485 405 -83% -84% of September. Thus, we Gol Linhas Aéreas Int. S.A. 716 893 174 -76% -81% can see the effects of the Limited 2.971 3.055 599 -80% -80% pandemic more clearly over Holdings, Inc. 11.003 11.380 2.489 -77% -78% the September-end data. , Inc. 11.953 12.560 3.062 -74% -76% I would like to present some Group Inc. 11.559 11.911 3.173 -73% -73% points in order to evaluate Deutsche AG 11.561 11.018 3.119 -73% -72% the course of the industry with 15 publicly listed Pegasus Airlines 603 726 206 -66% -72% companies whose financial Co. 5.575 5.639 1.793 -68% -68% data was published at the -KLM SA 8.759 8.294 2.960 -66% -64% end of September. I also Ryanair Holdings plc 3.203 3.355 1.232 -62% -63% wanted to include some 3.954 3.990 1.526 -61% -62% other companies such as and Cor. Ltd. 4.871 4.844 2.529 -48% -48% , but I couldn’t Limited 5.625 5.284 2.770 -51% -48% access their financial Co.Ltd. 6.018 6.119 3.886 -35% -36% data. I will try to outline the TOTAL 90.793 91.553 29.922 -67% -67% changes in the activities and fiscal structures of the As I mentioned in my airlines as of the end of June the northern hemisphere companies through some previous articles, airline in order to understand their is of great significance in tables and graphs. companies are the common financial situation during terms of evaluating their When we look at the component of the industry. the pandemic. performance in figures. The activities of the companies Therefore, like many others, real success of companies As we all know, September only in Q3 (not cumulative) I believe it is necessary to shows itself during this marks the end of the of the last three years, focus on airlines in order period of high travel peak season both in we can see in Table-1 to see the impact of the demand. In the following tourism and the aviation how company sales pandemic on the industry. quarter, there is a decline industry. Generally, the show a change in years. For this reason, I tried to in sales and profitability. In third quarter financial Accordingly, the total examine the figures of some general, the most positive outlook of the airlines in sales of the 15 companies

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decreased by 67% EBITDA Margin.% Table-2 Sep-18 Sep-19 Sep-20 compared to September Pegasus Airlines 33% 49% 35% turnovers both in 2018 and 2019. EasyJet, GOL Turkish Airlines 27% 26% 26% and Singapore Airlines are Ryanair Holdings plc 40% 39% 16% the companies with the China Southern Airlines Company Limited 20% 23% 10% highest losses of 80% or Air China Limited 26% 29% 9% more in their sales. While China Eastern Airlines Corporation Limited 26% 28% 5% US airline companies have the highest turnover among Delta Air Lines, Inc. 19% 21% -15% these airlines in 2019, we Deutsche Lufthansa AG 19% 19% -21% see that this has changed Air France-KLM SA 19% 17% -28% after the pandemic. In Singapore Airlines Limited 14% 17% -45% 2020 Q3, the company Gol Linhas Aéreas Inteligentes S.A. 12% 29% -55% with the highest turnover among 15 companies was Southwest Airlines Co. 20% 20% -70% China Southern Airlines EasyJet plc 19% 21% -75% with US$ 3.9 billion, while United Airlines Holdings, Inc. 16% 18% -83% American Airlines was the American Airlines Group Inc. 15% 15% -94% second with US$ 3.2 billion and Lufthansa was the of 2018 and the sharp we see that the EBITDA profit of US$ 2.7 billion in third with US$ 3.1 billion. decline since June 2020 profit of airline companies 2019 Q3 among 15 airlines, As can be seen from the are clearly seen in Chart-1. decreased by 138% in total Delta Airlines recorded a table, Chinese airlines compared to September loss of US$ 459 million in have the lowest decline in When we examine the 2019. This loss is greater than 2020 Q3. The profitability turnover compared to other comparison made in similar the rate of decline in sales. ranking among companies companies. The course of periods in sales over the real Realizing the highest EBITDA has also changed compared turnover since the beginning operating profits (EBITDA),

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to the previous year with the such profitability. On the Chart-2 that the companies the substantial profitability effects of the pandemic. other hand, while Turkish with high EBITDA profits in loss. We can also say that With an EBITDA profit of companies maintained Q3 of the previous year the pandemic causes over US$ 1 billion in the same the EBITDA margin, it were the airlines with the permanent damage to airline period of the previous year, is seen in Table-2 that highest losses in Q3 after companies that encounter the profitability of Turkish other companies' margins the pandemic. While these high EBITDA loss. It will be Airlines declined by 62% to declined considerably and companies (except Ryanair) difficult to compensate for US$ 399 million in 2020 Q3. some of them took dropped appear as US and European this loss over many years, However, Turkish Airlines has into negative figures. airline companies, it is seen with the damages to occur achieved the best results that Chinese companies in the coming winter season. It is also noteworthy in among 15 airlines with do not incur losses despite Many of the airline companies, the sales and EQUITY In Millions of USD Table-3 Sep-18 Sep-19 Sep-20 operating profitability of EasyJet plc 4.214 3.670 2.450 which declined or even Gol Linhas Aéreas Int. S.A. -1.115 -1.826 -2.517 turned into losses, strived Singapore Airlines Limited 10.550 8.825 11.460 to endure this tough period United Airlines Holdings, Inc. 9.469 11.301 7.003 through funds generated in the past and/or through Delta Air Lines, Inc. 13.704 15.068 3.357 borrowing. As a natural American Airlines Group Inc. -568 160 -5.528 outcome, their working Deutsche Lufthansa AG 13.287 9.801 3.925 capital and fiscal structures Pegasus Airlines 743 842 761 weakened. Southwest Airlines Co. 10.153 9.931 9.769 The total level of debt of the Air France-KLM SA 3.822 1.933 -5.480 15 companies increased Ryanair Holdings plc 6.335 6.929 5.838 from US$ 377.6 billion in 2019 Q3 to US$ 464.8 billion Turkish Airlines 6.012 6.637 5.710 in 2020 Q3 with an increase China Eastern Airlines Cor. Ltd. 8.985 10.036 8.809 of 23%. Chart-3 illustrates Air China Limited 15.038 14.233 12.913 the funds borrowed by China Southern Airlines Co.Ltd. 11.591 11.000 12.376 companies in Q3 in the last TOTAL 112.218 108.539 70.847 three years.

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As the debts of Singapore Current ratio - Table-4 Sep-18 Sep-19 Sep-20 +/- Airlines and China Southern Airlines increased during Southwest Airlines Co. 0,71 0,65 2,07 + the pandemic, their equities Singapore Airlines Limited 0,72 0,41 1,30 + also increased. While the equities of other companies Delta Air Lines, Inc. 0,37 0,34 1,27 + significantly depleted, the United Airlines Holdings, Inc. 0,63 0,54 1,04 + equities of some turned negative. The equity changes Pegasus Airlines 1,76 1,37 0,96 - of the companies in the last Ryanair Holdings plc 1,25 1,27 0,86 - three years can be seen in American Airlines Group Inc. 0,58 0,49 0,74 + Table-3. In general terms, the distribution of liabilities has EasyJet plc 0,97 0,79 0,67 - changed in favor of debts Air France-KLM SA 0,78 0,68 0,62 - as a result of the increase in the borrowing of companies Deutsche Lufthansa AG 0,78 0,68 0,62 - and/or the depletion of their Turkish Airlines 1,05 0,74 0,61 - equity. China Southern Airlines Co.Ltd. 0,37 0,19 0,34 + In other words, I think there Air China Limited 0,33 0,33 0,28 - is an effort to overcome the impact of pandemic by Gol Linhas Aéreas Int. S.A. 0,46 0,47 0,24 - financing assets through China Eastern Airlines Cor. Ltd. 0,27 0,26 0,24 - borrowing. This shows us that the financing costs in the next period. On the current assets, it is seen above in favor of borrowing that will arise as a result of other hand, companies that that there are increases in US in Chart-4. It is possible to the high indebtedness of have to overcome the crisis companies and Singapore say that the fiscal structures companies in the medium by investing in short-term Airlines and decreases in of all companies are and long term will pose a assets through long-term many other companies. In negatively affected, except significant challenge in borrowing may have low other words, we can say the for Singapore Airlines, whose compensating their losses profitability in the future. significant portion of the resource structure is sound during the pandemic period. This means that the loss funds, which US companies in terms of equity, and The financing costs to be will be compensated over a acquired through borrowing China Southern, which has incurred while trying to longer period than expected. and Singapore Airlines not undergone a significant recover in the future should Needless to say, we assume through equity increase, change compared to also be managed well. that companies will not was used in short-term previous years. The fact Another drawback may undergo another crisis in assets. Although China that companies prefer to arise regarding the maturity the future. Southern Airlines' current overcome the pandemic structure of borrowed ratio increased compared through borrowing (some of funds. Maturity mismatch Looking at the adequacy of to 2019, when we look at which comprises state aid) between assets and liabilities companies' working capital the average for the last two actually means that they may also cause trouble in after the equity increase years, no significant increase defer the problem in a sense, corporate cash management and / or borrowing can also has been recorded. as we previously stated. in the medium and long term. give us an idea on maturity The more deterioration in Although it is a solution to matching. When we look When we also look at fiscal structure compared overcome the difficulties in at the data of the current the change in the fiscal to previous years, the the short term, borrowing ratio in Q3 over the last structures of companies more severe the problems with an inappropriate three years, which shows after borrowing due to the and their duration will maturity structure (short- the capacity of companies pandemic, we can clearly become in the following term borrowing) may lead in Table-4 to pay their see the change in the period. Fulfilling part of to more severe problems short-term liabilities with resource structure stated

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the resource needs by industry, based only on the of these companies did do not make any strategy increasing equity will balance sheets and income not show a considerable mistakes and do not suffer make it easier to solve the statements of the 15 airline change or were stronger any significant damage problems and will enable companies of which we are than the pre-pandemic during the winter season. companies to return trying to examine changes period. Therefore, it is Chinese companies are to their pre-pandemic in their sales volumes, quite positive for these also in an advantageous situation (number of operating profitability, companies that there will position, but the negative passengers, market share, borrowing, fiscal structure be no problems in terms outlook on their working etc.) sooner. Despite the and working capital before of cash management and capital adequacy creates fact that borrowing is a and after the pandemic. managing short-term the impression that they solution in the short term, However, the figures of liabilities. may have difficulties in it can lead the related some companies, which The remaining companies cash flow management in company to lag behind its have an important place in will possibly recover the short term. Among the strong competitors in the the global aviation industry much more quickly in 15 companies, we can easily post-pandemic period. and in their own region, give the aftermath of the say that the companies us the opportunity to make On the other hand, as it pandemic. We see that with the potential to make some comments and draw will be difficult to put any these companies are the the biggest moves after the inferences. other securities in place ones that entered into the pandemic are Singapore except share transfer in I don't want to make a pandemic process with a Airlines, the second is return for unpaid debts, generalization, but it strong financial structure Turkish Airlines and the we will probably see seems that American and and / or successfully have third is Ryanair, and they partial nationalization European network airlines managed their operating are followed by low-cost and / or airline companies have been suffering more profitability in this carriers. to be owned by financial from the pandemic than process. Turkish Airlines Note: Sources used institutions in the future. other companies and it and Pegasus Airlines also for financial data of will be difficult for them are included in this group. Certainly, it would be companies: https:// to overcome the impacts We can also say that the quite assertive to make seekingalpha.com/ and of the pandemic for a Turkish companies will have a definitive judgment Bloomberg long while. On the other the competitive advantage on the overall aviation hand, the working capital after the pandemic, if they

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