It sounds like a lesson learned, but we shouldn’t forget!

Cash Flow and balance sheet management have been the main focus area for any airline CEOs during the past 3-4 years, not to say the major focus and headache. Aside from government and shareholder support regarding fresh money invested, what measures were crucial to light the money-blinding period? 

Fuel Hedging Position

Immediately investigate your fuel hedging position as the situation may worsen, and it might be time to adjust your position drastically to reduce your exposure to market volatility. As all numbers turn red, a pre-agreed credit line from banks will support your immediate cash needs and may give you extra time to implement corrective action and start negotiations with other partners.

As a good father and as the financial market has changed since the crisis began, it is also time to openly talk about renegotiating and consolidating ongoing contract loans with all of your creditors. There is no better time than a crisis for this. 

Aircraft Maintainance

Once this first pure finance phase is done, focus on your next biggest cost, aircraft. Owned aircraft must be, as much as possible, securely stored and maintained in the safest and most economical place to be available when needed at the cheapest cost. 

Leased aircraft is a more complex issue to manage. Open negotiation must start immediately with all your lessor for early termination of less fuel-efficient aircraft, and you may not need to end of the crisis, if possible. 

Contract Transformation

Another contract must be investigated with the possibility of PBH [Power by the Hour] contract transformation, or contract extension with an on-hold period, last possibly lease payment in shares, instead of cash, attached to a “Buy-Back’s program” over a certain period of time, following exit from the crisis, based on measurable criteria. The last Finance-lease contract may need to be renegotiation with an extended period.

Keep close eyes on your cash flow and balance sheet, like milk on fire!

Next, prepare for the future, and have several scenarios ready for your teams to restart stronger from the crisis.

 

This article was contributed by our expert Ivan Chemtob

Frequently Asked Questions Answered by Ivan Chemtob   

Q1. What are the financial factors in the airline industry?

The airline industry is a capital-intensive industry that involves significant financial factors. Here are some of the key financial factors that affect the airline industry:

Fuel Costs

Fuel costs are one of the most significant financial factors in the airline industry, as fuel expenses can account for a significant portion of the total operating costs of an airline. Fuel costs are influenced by the global oil price, which can be volatile and unpredictable.

Labor Costs

Labor costs, including wages, benefits, and pensions, are another significant financial factor in the airline industry. Union contracts, government regulations, and competition from low-cost carriers can influence labor costs.

Aircraft Acquisition and Maintenance Costs

Aircraft acquisition and maintenance are significant financial factors for airlines, requiring significant capital investment. Airlines must consider the cost of purchasing or leasing new aircraft and the ongoing costs of maintenance, repairs, and upgrades.

Revenue Management

Revenue management is a critical financial factor in the airline industry, as it involves optimizing ticket prices and seat availability to maximize revenue. Effective revenue management strategies can help airlines to increase revenue and profitability.

Economic Conditions

Economic conditions, such as GDP growth, inflation rates, and exchange rates, can affect the financial performance of airlines. Economic downturns can reduce demand for air travel, while currency fluctuations can affect the cost of fuel, aircraft, and other expenses.

Competition

Competition from other airlines, including low-cost carriers, can affect the financial performance of airlines. Airlines must be able to offer competitive fares and services while maintaining profitability.

Q2. What are the factors affecting financial results in airlines?

A complex interplay of factors, including fuel prices, competition, economic conditions, labor costs, capacity utilization, ancillary revenues, and regulation, influences the financial results of airlines. Airlines must carefully manage these factors to maintain financial stability and profitability.

Q3. What are the current assets of airlines?

Current assets for airlines are assets that are expected to be converted into cash or consumed within one year or the normal operating cycle of the airline. Some examples of current assets for airlines include:

Cash and Cash Equivalents

This includes cash on hand, checking and savings accounts, and short-term investments that can be easily converted into cash.

Accounts Receivable

This refers to money owed to the airline by customers or other businesses for goods or services provided on credit. For airlines, this can include revenue from ticket sales or cargo shipments.

Inventories

This includes goods the airline holds for sale or uses in its operations, such as food and beverages, fuel, and spare parts.

Prepaid Expenses

This includes expenses the airline has paid in advance, such as insurance premiums, rent, or taxes.

Marketable Securities

This includes short-term investments in stocks, bonds, or other securities that can be easily bought or sold.

Other Current Assets

This includes other assets expected to be consumed or converted into cash within one year, such as security deposits or prepaid contracts.

Q4. What are some of the hedging strategies during the crisis?

During a crisis, such as a financial market crash or a geopolitical event, hedging strategies can help companies to manage risk and protect against potential losses. Here are some of the hedging strategies that companies can use during a crisis:

Options

Options give the buyer the right, but not the obligation, to buy or sell a financial asset at a specified price and time. Companies can use options to protect against adverse price movements, such as a drop in the value of a currency or a stock market index.

Futures

Futures contracts are agreements to buy or sell a financial asset at a specific price and time in the future. Companies can use futures to hedge against fluctuations in commodity prices, such as oil or gold, or to manage foreign exchange risk.

Swaps

Swaps are agreements between two parties to exchange cash flows based on different financial instruments or indexes. Companies can use swaps to hedge against interest rate, credit, or currency risks.

Forward Contracts

Forward contracts are agreements to buy or sell a financial asset at a specified price and time in the future. Companies can use forward contracts to hedge against foreign exchange risks, such as the risk of a currency devaluation or exchange rate fluctuations.

Diversification

Diversification involves investing in a range of different assets or markets to reduce risk. Companies can diversify their portfolios by investing in different countries, currencies, commodities, or industries.

Contingency Planning

Contingency planning involves developing strategies to manage unexpected events and minimize potential losses. Companies can develop contingency plans for different scenarios, such as a market crash, a natural disaster, or a cyber-attack.

However, hedging strategies involve costs and risks, and companies must carefully consider their objectives, risks, and costs before implementing a hedging strategy.