MIAMI – Bloomberg News this week noted the eight airlines most likely to go bust due to the COVID-19 pandemic. The airlines are based in countries where the government is unable – or unwilling – to provide financial assistance.

Using the Z-score method developed by Edward Altman to predict bankruptcies, Bloomberg sifted through available data on listed commercial airlines to identify those most prone to financial strife.

Changes Since March

The same analysis was conducted in March when the virus was just starting to spread beyond China. The comparison shows a clear swing to the West in the current analysis. At least four of the 10 airlines named in March have restructured in some fashion, and all but one were in Asia.

Africa, Asia, Latin America

Now, the list has more carriers in Africa and Latin America, where some have already folded or entered administration. Representatives from Medview Airlines Plc (VL), Precision Air Services Ltd. (PW), Grupo Aeromexico SAB (AM), and Gol Linhas Aereas Inteligentes SA (GOL) didn’t respond to Bloomberg when it sought comment.

A spokesman for Pakistan International Airlines Corp. (PK) said while data may show the airline’s liabilities exceed assets by around four times, “in reality it’s different because those liabilities are extended on sovereign guarantees and servicing is done through the government budget. In that sense, the situation isn’t as it shows. Pakistan International has been managing its resources. We’re comparatively doing okay.”

The results of the current analysis does not mean that the Asian airlines are financially secure. AirAsia X Bhd. (D7), AirAsia’s long-haul budget arm, is restructuring more than $15 billion of debt. The future of state-run Malaysia Airlines Bhd. (MH) remains uncertain. The director of aviation development at the Malaysian Aviation Commission, Germal Singh, said recently the government is unlikely to intervene to help out, according to Bloomberg.

A321PFC Maiden Flight. Photo: Aircraft Precision Solutions

Cash Burn

In Latin America, Grupo Aeromexico SAB last month received a $1 billion bankruptcy loan, while Colombia’s largest airline, Avianca Holdings SA (AV), is awaiting court approval for a $2 billion financing plan as it reorganizes under Chapter 11. Mexican President Andres Manuel Lopez Obrador has ruled out bailouts for large companies. A Colombian court in September temporarily blocked a $370 million government loan to Avianca after a citizen expressed concern about a lack of guarantees.

Things have gone differently in some parts of Asia. Singapore Airlines Ltd. (SQ) cut around 20% of its workforce, but it also raised S$11 billion ($8 billion) from loans and a rights issue supported by state investor Temasek Holdings Pte. Cathay Pacific Airways Ltd. (CX), also slashed jobs and raised billions of dollars in a restructuring in June. Part of that deal was that the Hong Kong government got a stake and two observer seats on its board.

Azul ATR 72-600. Photo: Rafael Luiz.

Government Support Is Key

“Many governments have done a good job in financially supporting aviation jobs,” International Air Transport Association Director General Alexandre de Juniac said last month. “Where this has not happened, in Latin America for example, we see bankruptcies. Airlines continue to burn through cash, and that is expected to persist into next year. Without a second tranche of financial aid, many airlines will not make it through the winter.”

The Z-score method uses five variables measuring liquidity, solvency, profitability, leverage and recent financial performance. The model has an accuracy rate of between 80% and 90% the year prior to insolvency, Altman said in a 2018 interview. A score below 1.8 indicates danger of bankruptcy within two years while a number closer to 3 suggests a company is on solid ground.

Among those airlines found to be most vulnerable in March were Virgin Australia Holdings Ltd. and Thai budget carrier Nok Airlines Pcl. Virgin Australia is now going through an A$3.5 billion ($2.5 billion) restructuring under its new owner Bain Capital LP, while Nok Air has applied to the nation’s Central Bankruptcy Court to undergo debt rehabilitation.

Featured image: Wiki Commons