Faith Trisha T.

Cercado
British Airways, which was established in 1974 and the flag carrier airline of the
United Kingdom, has been facing challenges brought by the pandemic. Because travel
demand plummeted late last year, industries such as hotels, tourism, and air travel were
greatly affected. In fact, British Airways announced the immediate retirement of their
entire Boeing 747 fleet (retirement initially dated 2024) after suffering from the sharp
travel downturn. With 31 747s in fleet, the Queen of the skies’ high operating costs
aren’t compensated with the revenues that the airline is earning recently, also
considering the additional costs that are being incurred with the “new normal” air
travelling. The same way that industries like British Airways are suffering, so are
banking institutions. Clients struggle to pay off loans and banks must make adjustments
and think of strategies on how to handle worsening credit positions of clients and still
accommodate possible increase in new credit.
If I was a part of a banking institution with substantial financial exposure to British
Airways, I would be considering the effects of possible default of the airline’s repayment
of loans and credit. With this, Impairment allowances must be recognized due to
expected losses. The airline is facing financial difficulty therefore significantly increasing
the credit risk on the loan. In IFRS 9, to reflect time value, expected losses should be
discounted to the reporting date using the effective interest rate of the asset (or an
approximation thereof) that was determined at initial recognition. A “credit-adjusted
effective interest” rate should be used for expected credit losses of purchased or
originated credit-impaired financial assets. 
Because of credit impairment, there would be a restructuring of the terms of the
credit. British Airways possibly having a weak capacity in meeting its contractual cash
flow obligations means that the bank must be flexible enough in making loan payments
easier for the airline despite incurring losses in the bank’s end. If the bank will not
restructure the credit, the airline will be having a harder time paying the debt and thus
extending the time that the bank’s cash flow will remain stagnant when it comes to cash
coming in. Restructuring of loan terms with British Airways can be through writing off
accrued interest income, extending maturity dates, reducing the amount of the principal,
etc. It can also be through taking a hold of some of the company’s assets, both financial
or non-financial. Along with the estimates and provisions that the company is reviewing,
their ability to pay off liabilities must also be evaluated. They must see to it that their
operating costs don’t exceed the already decreasing revenues that they are earning.