It Just Doesn’t Let Up With Airlines.
By MC01, a frequent commenter, for WOLF STREET:
Here’s an example of what should happen to an airline which has become unprofitable and failed to turn around its financial situation. On May 7, the assets of Avianca Brazil, formerly Brazil’s third-largest airline, will be auctioned off to pay creditors. To streamline sales and maximize proceeds, Avianca Brazil has been broken up in seven lots.
The best assets are prime slots at the Congonhas and Guarulhos airports (both in the São Paulo megalopolis) and will no doubt attract a few interested bidders.
But not much remains in the way of a fleet as Avianca Brazil has been ordered to return leased aircraft to the owners already last year following their failure to keep up with payments. The company’s financial situation has deteriorated to such a point the few aircraft still allowed to fly as part of the bankruptcy protection plan are required to pay landing and handling fees in advance.
At the time Avianca Brazil filed for bankruptcy protection in December 2018, it had debts amounting to $130 million, a drop in the bucket compared to those accumulated by other collapsed airlines. As it always happens, the problem is not so much the size of the debts but the ability to service them, and especially the creditors’ willingness to keep lines of credit open: If there’s no turnaround, sooner or later something breaks.
Avianca Brazil’s demise is also causing troubles for sister company Avianca Argentina: Both airlines are owned by São Paulo-based Synergy Group, which caused a stir in 2012 when the owner, Bolivian-born billionaire Germán Efromovich, made a serious bid to purchase’s Portugal’s flag carrier TAP.
Avianca Argentina was created to take advantage of the recent modest liberalization in the aviation market in Argentina but the original plan to use a fleet mostly subleased from Avianca Brazil fell through in the wake of the aforementioned mass repossession and “unexpected” financial difficulties following the now customary political chaos in Buenos Aires. This left the fledgling company with just two ATR72 regional airliners, and any expansion plans have been put on hold.
As is always the case when airlines stand on the brink of bankruptcy, Synergy is blaming “leasing costs” and “fuel prices” but fails to mention its competitors are able to break even or even turn a profit in the same environment.
Korea’s Asiana Airlines
On April 24 the nine main creditors of Asiana Airlines, Korea’s second largest airline, approved a rescue plan for the ailing airline, and also approved a deadline of December 31, 2019, for the company to find a new owner.
Asiana is yet another “fictionally robust” company whose seemingly solid corporate façade and big order book – presently standing at 47 Airbus of various models – hide a grim financial situation: in FY2018, the company assured creditors and investors it would dramatically cut operating costs and projected a loss of just $9 million, with 2019 likely to be profitable.
Asiana had a terrible 2018, managing to lose $92 million, over ten times as projected. Seoul-based tax advisory firm Samil PWC also raised the questionAsiana may not be fully reflecting aircraft leasing costs in their financials.
Asiana presently sits on a pile of debt of $3.5 billion and the main shareholder, the Kumho chaebol, is running out of options. But as it always happens in Corporate Korea, help is on the way in the form of the ever-suffering taxpayer.
The state-owned Korea Development Bank will provide a $1.4-billion lifeline, just like it has been doing with the money-losing mega shipyards since 2016, and Kumho will be allowed to unload to somebody else the money-losing carrier and its two subsidiaries, Air Busan and Air Seoul.
Kumho presently wants $1.4 billion for their share in Asiana alone, a hefty sum which is highly unlikely to reflect the value of a company which hasn’t turned a profit in over a decade, and to complicate matters, the Korean government is unlikely to allow any foreign firm to place a bid for Asiana.
Korean Airlines (KAL), majority-owned by the perpetually financially troubled Hanjin chaebol, is unlikely to ride to the rescue as at last count it sat on a truly phenomenal $13 billion in debts. This of course hasn’t stopped KAL from having a big order book: as of April 30, 2019, it stood at 66 firm orders plus 70 options almost evenly split between Airbus and Boeing.
The Aekyung chaebol, owner of Jeju Air, is widely rumored to be the only potential buyer for Asiana. But with Jeju Air only moderately profitable and not exactly swimming in cash, the operation will require either a very large discount on Kumho’s part or state-owned banks such as the Korea Development Bank to perform more of their magic. When and how Asiana will be restructured to become profitable remains an interesting question.
State-owned Air India
Air India is rumored to be “close” to defaulting on about $1 billion in loans due in FY2019, but the looming general election in India is making the situation murky. The present government has promised to sell part of Air India’s oversized real estate holdings to raise much needed liquidity and reduce debts, but how, when and even if this will ever happen is a question we should be asking in a few months once the electoral chaos is over.
The Indian government is also still trying to find a buyer for Air India. In spite of all the hype and the many “rumored” buyers, nobody has stepped forward with a serious offer yet.
A big part of the reason is the fact Air India is in such chronic bad financial shape it puts even Alitalia to shame. It has lost money every single year since 2007 — with government-appointed executives routinely blaming everything from fuel prices to leasing costs while their competitors made money in exactly the same environment. And despite being at the receiving end of semi-regular government bailouts, its debts have ballooned to an unsustainable $7.4 billion.
Any buyer would face a veritable uphill battle: Horrible financials, the need to take over at least $3 billion in debts and meeting a long series of requirements, chief among which is that any foreign partner should be “preferably state-owned” and that any staff layoff and internal route cancellation should be approved by the government beforehand.
This grim financial situation makes the recent interest displayed by Air India to take over a part of semi-defunct Jet Airways’ overseas routes somewhat between comical and grotesque.
It seems everybody is sure that Jet Airways is just biding its time and will soon be back in full cash-burning form, but I beg to differ. Aircastle and GECAS have already signed an agreement with Indian low-cost carrier SpiceJet to lease 38 of the recently repossessed Jet Airways’ Boeing 737-800.
Despite the loud protests by competitors such as IndiGo — who no doubt expected to lease the aircraft for themselves, perhaps at a large discount — the aircraft are already being rebranded as we speak: All parts involved have every interest in seeing those aircraft back in revenue-generating service as soon as possible.
SpiceJet will use the aircraft to temporarily replace their grounded 737MAX and to cover the former Jet slots in Mumbai and New Delhi the company obtained from the government on a “temporary” basis.
In short leasing companies and domestic competitors alike don’t seem to think Jet Airways will return in business soon, at least not in anything resembling its old shape. By MC01, a frequent commenter, for WOLF STREET