The expedited retirement of the iconic aircraft from BA's fleet is the latest signal of the crisis gripping the global aviation industry since worldwide coronavirus-related lockdowns cut passenger traffic to levels unseen since the 1930s. The turmoil in the industry has required intervention from governments around the world to avert widespread distress in the sector, with billions of dollars injected to keep businesses afloat.
Banks with aviation exposure may be looking on nervously. Among the major U.K. 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 businesses, while Standard Chartered has $7.6 billion.
Joseph Dickerson, a bank equity analyst at Jefferies, said in an interview that, while both banks' exposure to aviation as a percentage of their total loan books is "not huge," the outlook for the sector will be a worry.
"The loss content among those loans could be quite high," he said. "So it's not insignificant for either bank."
Airlines face a long road to recovery amid continuing restrictions on travel to and from many countries, public unease about sharing transport, and the economic impact of the pandemic on personal and corporate budgets.
As of June, total scheduled flights in Europe were 10% of prior-year levels, according to air traffic management company Eurocontrol, although it expected a 50% to 75% increase from those levels in late June through to July. Data for air traffic in North America and China in June also showed both markets still some way off a full recovery.
The crisis is having a disastrous impact on airline balance sheets. By the end of 2020, airlines are forecast to have burned through around $60 billion in cash, which includes $35 billion worth of ticket refunds, according to the International Air Transport Association, or IATA. Government support has helped, but 55% of the $123 billion of state support is repayable, according to IATA. The additional debt, along with further borrowing from the private sector, will see the airline industry owe $550 billion by the end of 2020 from $430 billion at the start of the year.
"The industry is going to have to live for longer with higher leverage," said Stephen Furlong, senior equity analyst for transportation at wealth management group Davy. "And, eventually, it is going to have to deleverage, which means these companies with large debt burdens are going to have to generate free cash flow over the next couple of years."
Many airlines could become "zombiesque," like banks following the 2008 global financial crisis whose profits were swallowed up by debt payments, Furlong said.
HSBC's exposure to the aviation sector is spread across five regions, with Asia making up more than 60% of its total exposure. While the impact of the pandemic has generally been less severe on Asian countries, the aviation industry in the region has still suffered, said Furlong.
Domestic air traffic in China had recovered to 88% of 2019 levels by June, up from 63% in April to May, according to data from the Center for Asia Pacific Aviation. Still, international air traffic volumes remained very low in June, at 5% to 10% of 2019 levels, it said.
"We don't know who HSBC and Standard Chartered lend to," said Dickerson. "But we can assume that probably both are lenders to an airline like [Hong Kong-based] Cathay Pacific because of the banks' large presence in that region."
The crisis has particularly impacted long-haul, intercontinental network carriers, said Furlong.
"If you're an airline focused on more domestic markets, more leisure markets, passengers visiting friends and relatives, you're probably less exposed," he said. "For intercontinental, globally-focused airlines that facilitate a lot of business travel, it looks very challenging."
The fragmentation of Europe's airline industry means that it is more vulnerable to distress than markets like the U.S., which is 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-U.S. routes, according to travel industry data and analytics firm Cirium.
"If you want to fly in and out of, or within the U.S., with a U.S. airline, you've around 10 airlines to choose from," said Furlong. "In Europe, you have 120."
Even before the COVID-19 crisis, most European airlines struggled for survival. In recent years, Flybe Group PLC, Thomas Cook UK Ltd. and Monarch Airlines Ltd. have been among the casualties of the region's fierce competition for passengers.
Similarly, small to medium-sized operators are further exposed by the coronavirus crisis, said Furlong.
"If you're not a flag carrier like an SAS or Norwegian or an Alitalia, but you're a smaller player, you are vulnerable," he said.
Major banks should be largely insulated from any airline bankruptcies that result from the current crisis due to the smaller scale of those likely to be affected, and a reluctance among governments to see larger "flag carriers" go out of business, said Furlong.
"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 shakeout of the European airline industry that will result from the COVID-19 crisis could in fact be beneficial for lenders to the sector in the long run, Furlong added.
"We're going to have consolidation in Europe, whereby the stronger grow and the weaker contract," he said. "It possibly makes the industry stronger in the end."
Still, such a positive outcome for the industry and its lenders depends on a swift resolution to the COVID-19 health crisis, Furlong added.
"The industry can just about survive empty beaches this summer," he said. "But if you're getting empty beaches next summer, that's a big problem. At some stage things become unsustainable."