Government intervention “seems an inevitability” for the European airline sector but “there will be no free lunch”, Citigroup said as it downgraded British Airways owner International Consolidated Airlines Group (LON:IAG) and easyJet PLC (LON:EZJ).
Europe’s airlines are “simply less well-capitalised” compared to other historical crises, Citi’s analysts said, “and arguably worse prepared for such demands than in previous cycles”.
Looking back to the financial crisis of 12 years for lessons of what bailouts look like, the analysts said that, aside from the conversion of equity into debt and/or dilution of shareholders, “any government aid is likely to be mired in punitive covenants…that potentially last for multiple years”.
These could include high rates of interest, subordinating current senior bondholders and future restrictions on pay and dividends, the analysts suggested.
The UK governments may take the hardest stance, according to a report from Sky News, with an expectation “that all companies [pursue] all possible actions to preserve cash and maximise liquidity, including engaging with shareholders, lenders and the markets and utilising all available assets and facilities”.
IAG and easyJet, both “by no means free of capital risk”, were both downgraded to ‘neutral’ from ‘buy’, with share price targets slashed to 230p from 600p for IAG, and to 590p from 1,400p for its budget rival.
IAG and EasyJet are in the middle of the pack, with Lufthansa and Air France-KLM possibly both requiring their market cap equivalents in the form of cash injections.
Citi used the following assumptions to make its new forecasts: assuming an 80% fall in traffic in the second quarter and 30% in the third; an average 5% fall in yields and 3%; companies removing all variable costs but also partially lowering fixed staff costs 50% and 35% in the two quarters.