Poor visibility hits HSBC, Standard Chartered’s aviation lending business

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British Airways PLC announced the end of an era of aviation on July 17th. The airline withdraws its entire Boeing 747 fleet
known as the “Queen of Heaven”
as it scrambles to cut costs in response to the coronavirus pandemic.

The accelerated withdrawal of the iconic aircraft from BA’s fleet is the latest signal of the crisis hitting the global aviation industry since global coronavirus lockdowns reduced passenger traffic to levels not seen since the 1930s The turmoil in the industry has required the intervention of governments around the world to avert widespread distress in the industry, with billions of dollars injected to keep companies afloat.

Banks exposed to aviation may look nervous. Among the major UK banks that have lent to the sector, HSBC Holdings PLC and Standard Chartered PLC stand out. HSBC has a total of $ 9.4 billion in loans to aviation companies, while Standard Chartered has $ 7.6 billion.

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Joseph Dickerson, bank equity analyst at Jefferies, said in an interview that while the two banks’ exposure to aviation as a percentage of their total loan portfolios is “not huge,” the outlook for the sector will be concerning. .

The loss content among these loans could to be quite high, ”he said.So it’s not insignificant for either bank. “

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Airlines face a long road to recovery amid persistent restrictions on travel to and from many countries, public unease over transport sharing and the economic impact of the pandemic on budgets. personal and corporate.

In June, the total number of scheduled flights to Europe was 10% of the levels of the previous year, according to the air traffic management company Eurocontrol, although it expects an increase of 50 to 75% compared to these levels from late June to July. Air traffic data in North America and China in June also showed that both markets were still far from a full recovery.

The crisis is having a disastrous impact on the balance sheets of airlines. By the end of 2020, airlines are expected to have spent around $ 60 billion in cash, including $ 35 billion in ticket reimbursements, according to the International Air Transport Association, or IATA. Government support has helped, but 55% of the $ 123 billion in state support is repayable, according to IATA. The additional debt, along with new borrowing from the private sector, will see the airline industry owe $ 550 billion by the end of 2020, up from $ 430 billion at the start of the year.

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“The industry is will have to live for longer with upper leverage, “said Stephen Furlong, senior transportation equity analyst at Davy Wealth Management Group.” And, finally, he is Go To have To deleveraging, which means that these companies with big the debt burden is will have to produce free cash to flow more the Following pair of years. “

Many airlines could become “zombies,” such as banks in the aftermath of the 2008 global financial crisis whose profits were swallowed up by debt payments, Furlong said.

HSBC’s aviation exposure is spread across five regions, with Asia accounting for over 60% of its total exposure. While the impact of the pandemic has generally been less severe on Asian countries, the region’s aviation industry has always suffered, Furlong said.

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Domestic air traffic in China had returned to 88% of 2019 levels in June, down from 63% from April to May, according to data from the Center for Asia Pacific Aviation. Yet international air traffic volumes remained very low in June, at 5% to 10% of 2019 levels, he said.

“We not know to whom HSBC and Standard Chartered lend, “Dickerson said.” But we can presume that probably the two are lenders to an airline like [Hong Kong-based] Cathay pacific because of the strong presence of banks in this region.

The crisis has hit long-haul intercontinental network carriers particularly hard, Furlong said.

Yes you are beautiful a Airline company concentrated to Following national markets, Following Hobbies markets, passengers to visit friends and relatives, you are beautiful Probably less exposed“, he said.” For meintercontinental, global airlines that facilitate many business trips, this looks very hard.”

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The fragmentation of the European airline industry means it is more vulnerable to distress than markets like the United States, which are much more concentrated and profitable, Furlong added. The market share of the top five airline groups on specified intra-European routes is 63%, compared to 85% for specified intra-US routes, according to data from the travel industry and analysis firm Cirium.

“Yes you want to To fly in and outside of, Where within the WE, with a we Airline company, you have about ten Airlines companies choose, ”Furlong said.In Europe, you have 120. “

Even before the COVID-19 crisis, most European airlines were struggling for survival. In recent years, Flybe Group PLC, Thomas Cook UK Ltd. and Monarch Airlines Ltd. were among the victims of the region’s fierce competition for passengers.

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Likewise, small and medium operators are at greater risk from the coronavirus crisis, Furlong said.

“If you are not a flag bearer like an SAS or a Norwegian or an Alitalia, but you are a smaller player, you are vulnerable,” he said.

Large banks should be largely immune from any airline bankruptcies resulting from the current crisis due to the smaller scale of those likely to be affected and the reluctance of governments to see the largest “carriers”. flag “close their doors,” Furlong said.

“For there to be a major problem for one of the big bank lenders, there would have to be a problem with one of the big airlines,” he said. “And that’s unlikely.”

The inevitable disruption of the European airline industry that will result from the COVID-19 crisis could actually be beneficial to lenders in the industry in the long run, Furlong added.

Were Go To have consolidation in Europe, by which the stronger to grow and the weaker contract, ”he said. ” He may be makes the industry stronger in the to finish. “

Nonetheless, such a positive outcome for the industry and its lenders depends on a swift resolution of the COVID-19 health crisis, Furlong added.

The industry can only In regards to to survive empty beaches this summer, ”he said.Corn if you are beautiful get empty beaches nearby summer, it’s a fat problem. TO some things on the scene to become unsustainable. “

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