British Airways owner IAG taps UK funds to survive slump

British Airways parent IAG SA tapped U.K. government-backed loans to boost liquidity, in a sign of the damage being wrought by the Covid-19 pandemic on even the industry’s strongest players.

IAG accessed 300 million pounds ($371 million) from the Coronavirus Corporate Finance Facility in the second week of April, it said Thursday, taking state-supported borrowing to $1.45 billion including Spanish funds. The group, which initially signaled it wasn’t seeking aid, said it’s essentially grounded until July.

Chief Executive Officer Willie Walsh said London-based IAG needs to restructure in all areas as it slims down for a tougher future amid an “unprecedented” slump. British Airways is planning to slash 12,000 jobs or 30% of the workforce, and is considering plans to close its secondary hub at London Gatwick airport.

“We do not expect passenger demand to recover to the level of 2019 before 2023 at the earliest,” Walsh said. “Balance sheets are going to be very different when we come out of this. Structural reform is going to be required on an industry basis and not just on an individual airline basis.”

Air France-KLM also said Thursday that demand will take years to revive as the virus upends travel and weighs on economies. Deutsche Lufthansa AG’s Austrian Airlines is the latest carrier to plan swingeing job cuts, with 1,100 of 7,000 posts set to go over three years, the Austrian Press Agency reported.

IAG’s reserves had increased to 10 billion euros ($12.4 billion) at the end of April. That puts the company in a “very strong liquidity position” and means it should be able to “outlast many peers” in an extended slump, Sanford C. Bernstein analyst Daniel Roeska said in a note.

Fleet Cuts

IAG’s downsizing will see it take delivery of only 75 planes over the next three years instead of the planned 143. It will also assess an early retirement of inefficient four-engined Boeing Co. 747s and Airbus SE A340s, and could cut more planes with leases up for renewal in the next two years.

While the focus for the moment is on maximizing cash, much of what IAG has raised in recent months has been via short-term facilities and those will need to be refinanced, Chief Financial Officer Steve Gunning said on an analyst call.

IAG traded 4% lower as of 11:35 a.m. in London, taking declines this year to 70%. Air France-KLM fell 3% after posting a first-quarter net loss of 1.8 billion euros from “over-hedging” on fuel and is down 59%, with Lufthansa off 52%.

Walsh said the British funding, which comes after the Iberia and Vueling units tapped 1 billion euros in loans backed by a Spanish state bank, is commercial paper available because of IAG’s “great credit rating.” He said the company will make use of government-supported general facilities where available.

The CEO had initially said IAG wasn’t applying for bailouts and earlier in the year opposed a proposal to help now-defunct Flybe, one of the virus’s first airline victims. He said in March he thought airlines should be expected to “look at self-help” before calling for aid.

“What I’ve always been opposed to is where inefficient failing companies receive bailouts from governments,” he said on the analyst call. “Where airlines have been unwilling or unable to reform, they should not be bailed out by receiving free money.”

Gatwick Jobs

Governments worldwide are devoting more than $85 billion to rescue plans, including mammoth funding programs for some of IAG’s biggest rivals.

Air France-KLM has won European Union approval for 7 billion euros in French aid, with more to come from the Netherlands, and Lufthansa is in talks on a 10 billion-euro package that could see Germany take a 25% stake.

Walsh, who will leave on Sept. 24 after delaying his retirement, said British Airways is consulting with employee representatives at Gatwick after initiating a formal process there. BA’s announcement of some of the industry’s deepest job cuts has been met with hostility from U.K. politicians and labor groups, especially since it has tapped furlough funds meant to safeguard workers.

IAG reiterated that it’s too early to provide an earnings outlook. That’s after it last week reported an operating loss of 535 million euros for the first quarter even before a hit from fuel hedges, and warned that the result for the current three months will be worse again.

Walsh predicted more airline failures and consolidation as carriers fail to adapt to the new environment and struggle to repay the funding they’ve tapped.

The CEO said a letter of intent to buy Boeing Co. 737 Max jetliners remains in place and that IAG is progressing with plans to buy Spain’s Air Europa, though the deal has a price-adjustment mechanism that could be applied.