Payment Periods in Europe - Euler Hermes

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Euler Hermes Economic Outlook n° 1182 | Special Dossier | Payment periods Air transport: an instrument of globalisation but marked by regional differences The air transport sector in our studies is comprised of passenger transport and airfreight traffic. From the data we can observe a number of sectoral and regional characteristics. Relatively short payment periods in air transport compared to other sectors. ▶ Two factors explain this feature, for example on accounts receivable > The passenger segment (78% of turnover in the sector worldwide in 2011) is a B2C (business-toconsumer) activity, and, due to a high proportion of payments being made prior to travel, does not generate significant accounts receivables in airline accounts. > Freight transport is subject to legally mandatory payment periods of no more than 30 days (legal constraints). Also note that when carriers buy their aircraft, this is carried out through medium to long-term financing which allows them to make staged payments to aeronautics constructors during the course of the production of aircraft and then finalise payment once the aircraft are delivered. ▶ Client payment periods structurally longer in Europe (44 days’revenue) than in the United States (22 days). This is due to two fundamentally different economic models. The major United States airlines, following the difficulties encountered in the previous decade, have clearly refocused on the passenger segment and heavily reduced (or abandoned) related activities, to the benefit of domestic or foreign specialist operators. This nearly ‘pure player’strategy of the United States companies, looking to concentrate their resources to optimise their core business, stands in contrast to the broader operational portfolios of their European counterparts. Of the latter, the major players can, to varying degrees, shelter operations as diverse as passenger traffic (a minimum 75% of turnover) as well as freight, maintenance (to other airlines, in addition to their own fleets), catering and IT services. This (highly relative) diversification is part of a very different economic model – one designed in order to, among other things, ‘saturate’the use of their existing infrastructure (generally very costly material assets) via diverse operations, and in order to ensure good maintenance of sensitive equipment, as well as to integrate activities that are less cyclical and/or new avenues of profitability. This partial orientation towards buoying B2B activities automatically translates into lengthened payment periods for the airlines’accounts receivable. ▶ During the 2008-2009 crisis, very substantial fluctuations in accounts payable in the United States (from 46 days in 2008 to 29 days in 2009); less in Europe (from 35 days’revenue in 2009 to 38 days in 2009). In a widespread context of falling activity, inherently stemming from the world economic downturn, the difference of magnitude in these two markets can be explained by the concomitant variations in oil prices. We have to remember the crucial impact of kerosene prices at that time on the fortunes of airlines. Indeed, fuel prices account for 30% to 35% of their operating costs and thus a significant share of their accounts payable. In face of the sector’s intrinsic exposure to this factor, different choices were made on opposite sides of the Atlantic. European carriers, for their part, chose to use financial instruments to cover a generally large part of their fuel purchases, which explains the relative stability – or more correctly the more limited scale – of the changes their accounts payable, despite the turbulence in oil (and thus jet fuel) prices. In the United States, by contrast, financial cover was undertaken far less – or in cases not at all – being deemed too expensive, and supplies were obtained on spot markets, thus explaining the size of American businesses’accounts payable following the course of oil prices. 18
Economic Outlook n° 1182 | Special Dossier | Payment periods Euler Hermes Client payment periods: air transport 60 Client payment periods in days’ revenue, 2010 Supplier payment periods in days’ revenue, 2010 50 40 30 20 10 80 70 60 50 40 30 20 10 0 ES 34 IT 58 IT 29 GB 17 0 Change -50% -40% -30% -20% -10% 0% 10% Supplier payment periods: air transport US 22 FR 44 DE 31 -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% Source: Euler Hermes FR 44 DE 29 US 21 GB 25 ES 62 Change Indicator of change in client payment periods: air transport 100 80 60 40 20 Cash flow Tension Indicator: air transport 20 15 10 5 0 -5 -10 0 -20 -40 2007 2008 2009 2010 France Germany Spain United States United Kingdom -15 -20 -25 -30 2006 2007 2008 2009 2010 France Germany Spain Italy United States United Kingdom Source: Euler Hermes Source: Euler Hermes Since then, the strategies have evolved, with European companies generally having reconsidered the extent and especially the duration of their cover operations. ▶ A North-South divide in Europe. The air transport sector reflects the characteristics of a country’s domestic economic environment, and hence is no exception to showing longer payment periods in the south of Europe than in the north. Thus, supplier payment periods are 25 days’revenue in the United Kingdom, 31 days in Germany, 44 days in France, 58 days in Italy and 63 days in Spain. ▣ 19
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