Challenges

• Those with lower fixed cost base and unencumbered assets required significantly less state intervention.
• Whilst bankruptcies have been prevented, record levels of debt have been taken on with IATA estimating an additional $195bn of state aid to July-21.
• Key to managing liquidity in respect of refunds as rules and regulation set by governments are ever-changing.
• Continued liquidity pressure due to leasing commitments and working capital outlays as flight volumes recover.
• Steps to right-sizing the routes, schedules and retire ageing, less fuel-efficient fleet.
• Formal restructurings used to reduce lease obligations, re-profile debt and seek new liquidity.

What to expect

• Continue to deploy restructuring schemes to streamline balance sheets, costs, aircraft commitments, existing lease portfolios and obligations.
• Manage the reinstatement of “use or lose” rules on take-off and landing rights and monitor any further changes set by the regulator.
• Shortage of pilots in the medium term with airlines looking to find ways of circumventing the issue.
• Aviation recovery lags behind the recovery of the wider economy, including oil which has already recovered to near pre-pandemic prices. When aviation recovers, demand will increase fuels costs further increasing working capital requirements.
• Should recovery be worse than expected, debt will prove unsustainable and governments will ultimately decide to extend further support or allow airlines to fail.
• Consolidation among airlines with smaller players being targets for larger, well-capitalised airlines.
• Long term structural changes are likely to reduce higher margin business travel as a result of videoconferencing and ESG pressures. This is likely to increase the cost of travel for leisure passengers.

Challenges

• COVID-19 has had an immediate and dramatic impact on airport traffic causing a loss of revenue from ancillary services.
• Airlines renegotiating landing and parking fees continues to drive significant liquidity challenges, especially for those with less bargaining power.
• Further pressure in response to airlines right sizing their routes and schedules.
• Scaled back capacity by closing terminals and reducing workforce in order to preserve liquidity.

What to Expect

• Should recovery stutter beyond the summer, additional measures will be required to preserve liquidity and obtain new funding.
• The issue of a shortage of air traffic controllers is dampened due to obligations by government to train them, however a backlog is still expected.
• Airports will be pushing regulators to review “use or lose” rules on take-off and landing rights.
• Longer term impacts on existing orthodoxies in the airport experience will require funds for capital investment which have been absorbed during lockdown.

Challenges

• Oversupply has reduced aircraft values due to corporate failures and pipeline orders.
• Weakened yield and increased default risk of aircraft financing.
• Significant pressure from airlines as they seek to right-size their fleet and restructure their obligations, including renegotiating leases based on power-by-the-hour and deferred payments.
• Those more reliant on debt financing for aircraft have seen high levels of M&A or formal restructuring events.

What to Expect

• The ability to restructure leasehold obligations in the UK’s Part 26A Restructuring Plans will provide a mechanism for airlines to restructure their leases, with downward pressure on asset values likely to limit lessor appetite to re-possess aircraft.
• Consolidation through M&A.
• Refinancing for those without state level backers.
• Restructuring of new aircraft commitments.

Challenges

• Loss of revenue directly linked to global travel restrictions will continue to drive liquidity challenges for ancillary services e.g. ground handling, aircraft cleaning, maintenance repair and overhaul.
• Recovery is dependent upon other sub-sectors (namely  airlines and airports) and government policies.

What to Expect

• Slower than expected forecast recovery in air travel will require a re-shaping of business models to respond to right-sizing of fleets and routes, including balance sheet and cost optimisation.
• M&A activity of key services.

Challenges

• The pandemic has had a wide-reaching impact on the aviation ecosystem including the manufacturing supply chain into OEMs.
• In light of IATA’s forecasted recovery timeline, the OEM supply chain is likely to see the real impact of the pandemic in the medium to long term as a result of cancelled or delayed aircraft orders by airlines and lessors.

What to Expect

• Acceleration of aerospace and communication technologies and new materials will require sufficient liquidity to invest.
• Government support in order to protect key skills and assets.
• Diversification through servicing of other sectors and integrating or consolidating the supply chain.

We advised Management on refinancing its revolving credit facilities (RCF) as part of a broader fundraising to address the Group’s medium term funding requirements, including investment into London Southend Airport and equity raising.

Company

• Esken is a listed aviation and energy focused business (formerly known as Stobart Group), which owns London Southend Airport and Stobart Energy.
• 2.1m passengers went through London Southend Airport in the year to February 2020.

• 1,482 employees working across the Group as of February 2021.

Background

• Esken was also responsible for a number of legacy obligations in relation to Stobart Air, which underpinned the Group’s decision to reacquire it in April 2020.
• The impact of the pandemic meant that the Group’s prime aviation asset, London Southend Airport, faced a longer and greater recovery than expected.
• The combined impact meant that the Group needed to address its medium-term funding requirements.

Our role

• Engaged to advise Esken on its cash management, negotiations with its RCF lenders and assess potential options in relation to Stobart Air.
• Advised the Company on the liquidation of Stobart Air.
• Negotiated with the lenders to agree terms for its revised RCF and broader lender approvals for its complex fundraising.

Outcome

• The deal sees a £55m equity raise, £125m new convertible debt secured against London Southend Airport and substantial repayment of the Group’s RCF.
• The Group’s loss-making airline, Stobart Air, was placed into liquidation as the best outcome for the creditors. The proposed buyer was not able to secure financing to stem ongoing losses and mitigating further cash funding needs.

We advised the RCF Lenders to Virgin Atlantic Airways Ltd (VAA) in relation to the successful financial restructuring of the company, implemented via the first UK Restructuring Plan.

Company

• VAA was founded 36 years ago by entrepreneur Sir Richard Branson and carried approximately 6 million customers in 2019.
• Headquartered in London, the airline and its holiday business, Virgin Holidays, employs approximately 6,500 people worldwide, serving 25 destinations across four continents.

Background

• In May 2020, as passenger demand plummetedto unprecedented levels, VAA commenced discussions with its stakeholders to address its capital structure and generate sufficient liquidity to support the business through the pandemic and back its operational turnaround plan.

Our role

• Engaged to advise the RCF Lenders, Senior Finance lessors (SFL) and bond holders with debt of c.£1bn.
• Red flag review of the company’s business plan.
• Review of the company’s contingency plans.
• Worked closely with a group of cross-holder lenders to negotiate terms with the company on behalf of the RCF and SFL over a couple of intense weeks.

Outcome

• The deal sees a £200m shareholder injection, £170m new money and a re-profiling of debt from multiple creditor groups.
• 100% of RCF Lenders and SFL supported the deal.
• The transaction was fully executed and implemented by means of the first Restructuring Plan under the new Part 26A of the UK Companies Act and a US Chapter 15.

We advised the RCF Lenders to Nordic Aviation Capital (NAC) in relation to the successful financial restructuring of the company, implemented via an Irish Scheme of Arrangement.

Company

• NAC was founded 30 years ago by Martin Møller Nielsen and it is now the world’s largest regional aircraft lessor.
• NAC owns 490 regional aircraft which is 4x more than their nearest competitor. They serve 75 airlines in 50 countries including BA CityFlyer and Air Canada.
• Total group debt stands at $5.4bn, mainly from aircraft financing.

Background

• In April 2020, lease income collection rates for NAC were only 23% as airlines restricted cash outflows as a response to the unprecedented fall in passenger demand.
• As a result, NAC commenced discussions with its lenders in April 2020 to obtain a deferral of interest to preserve sufficient liquidity to support the business through the pandemic.

Our role

• Advised an ad-hoc group of unsecured RCF lenders (total RCF of $800m; advised $300m AHG) in respect of proposed Scheme of Arrangement.
• Our role included: advising lenders through restructuring negotiations (including secured vs. unsecured lender rights and dynamics); options analysis and contingency planning for non-consensual ”Plan B” implementation; and ultimate implementation of restructuring through Plan B (Irish Scheme of Arrangement).

Outcome

• 90% of creditors supported a deal that saw a 12-month deferral of interest and principal repayments for all debtholders.
• 100% security by aircraft book value obtained for unsecured lenders (including RCF); significant deferrals of new aircraft purchases from OEMs; and shareholder injection of $60m
• The transaction was fully executed and implemented by means of an Irish Scheme of Arrangement pursuant to Chapter 1 of Part 9 of the Companies Act 2014.

This paper marks the second industry update on forecast aviation demand. Since the Covid-19 outbreak in Q1 of 2020, Teneo has taken a leading role across multiple industries in forecasting consumer and passenger demand for products, services and transportation in the wake of political, economic and behaviour changes brought about by the pandemic. To facilitate this work, we have developed a Central Forecasting Model, which contains detailed aviation forecasts for every major country and airline in the world, taking into account a range of factors and scenarios.

Please click this link to download the full paper.