Boosting Financial Stability: How Airlines Can Improve Liquidity

As domestic, regional, and international seat capacity rebounds beyond pre-pandemic levels, airlines face new challenges. Overcapacity and yield dilution threaten margins and profitability, while potential demand recalibration could necessitate fresh measures to protect liquidity. This article explores strategies for airlines to improve liquidity, ensuring financial stability amidst fluctuating market conditions.

Navigating Financial Pressures

The increase in scheduled airline capacity in the latter half of 2024 prompts questions about the impact on fares, yields, and net margins. Rising costs, coupled with personal debt increments affecting disposable income and leisure activities, further complicate the financial landscape for airlines. According to Federal Reserve Economic Data’s Consumer Price Index for All Urban Consumers, average fares in the US experienced a 5% correction from March to May 2024. Meanwhile, labor costs and other expenses have escalated, shrinking the revenue-cost spread and impacting margins.

Strategic Capacity Growth

In response to these pressures, many airlines are adopting lower-risk capacity growth strategies. These include:

• Seat Gauge Adjustments: Targeting niche markets with appropriate seat configurations.
• Expanding Premium Cabins: Increasing premium seat offerings to extract higher revenue.
• Core Network Focus: Reevaluating and refocusing on core networks, especially for carriers that have over-expanded.

Enhancing Liquidity

To bolster financial performance, airlines must implement robust internal cost-cutting plans and explore various avenues to enhance liquidity. Here are several proven strategies worth considering:

• Asset Evaluation and Collateralization: To raise cash, airlines should evaluate tangible assets such as aircraft, spare parts, engines, tools, equipment, and real estate for their potential as collateral, while also leveraging intangible assets by exploring partnerships within frequent flier programs and co-branded credit cards.
• Banking Facilities: Airlines should utilize revolving credit facilities and letters of credit to maintain financial flexibility, ensuring they have access to necessary funds and can manage cash flow effectively during fluctuating market conditions.
• Sale and Lease Back (SALB) Transactions: Selling assets and engaging in Sale and Leaseback (SALB) deals can provide airlines with immediate liquidity. SALB deals also offer predictable monthly fixed payments and eliminate residual value risk, while providing tax advantages and improving the balance sheet.
• Contract Adjustments and Commercial Renegotiations: Negotiate more flexible payment conditions and potential price adjustments, reevaluate aircraft financing conditions and seek refunds on deposits where possible. Similarly, explore opportunities to defer payments, taxes, and fees by leveraging force majeure clauses while understanding the implications of contract defaults.
• Cash Flow Management: Manage and prioritize key supplier payment obligations, potentially deferring payments or negotiating extensions, while understanding supplier concerns and negotiating terms that align with your financial needs, leveraging the potential impact of market conditions on lessors.
• Workforce and Human Capital Strategies: Benchmark Full Time Employee (FTE) ratios per aircraft against competitors to identify operational improvement opportunities. In addition, be forthright about productivity in the workforce including pilot rosters, technician capacity, performance management and so on. Offer voluntary, unpaid leave and incentives such as health benefits and travel privileges, where applicable. For shoulder months, evaluate headcount flexibilities, including work hour adjustments, to elevate capability and capacity, whilst containing cost and maintaining positive workforce engagement.
• Executive and Board Compensation: Implement temporary executive salary cuts, potentially ranging from 15% to 50%, and suspend dividend payouts and annual bonuses to preserve cash.
• Reviewing Capital Projects and Seeking Cash Injections: Postpone new equipment purchases where feasible, seek cash advances, subsidized state guarantees on loans, and grants, and explore public and private loans with subsidized interest rates. Additionally, investigate opportunities for business tax deferrals or holidays and evaluate the implications of government equity stakes.
• Continuous Cost-Cutting: Improving liquidity requires ongoing efforts, potentially involving multiple rounds of cost-cutting. Airlines must be aggressive and firm in decision-making to avoid competitive disadvantages or potential closures.

In the ever-evolving aviation landscape, maintaining liquidity is essential for survival and competitiveness. At AviaPro Consulting, we help airlines navigate these challenges with innovative solutions and expert guidance. By adopting some of the strategies listed above and leveraging our expertise, airlines can strengthen their financial stability and focus on what they do best – getting customers to their destination safely and smoothly.