More Airlines Collapse: Jet Airways India, Alitalia, WOW Air

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And the 217 planes that Jet Airways has ordered from Boeing?

By MC01, a frequent commenter, for WOLF STREET:

Today, another major airline collapsed. Jet Airways, India’s largest private airline, announced “with immediate effect” that it was “compelled to cancel all its international and domestic flights.” It suspended operations on a “temporary” basis. It said: “Since no emergency funding from the lenders or any other source is forthcoming, the airline will not be able to pay for fuel or other critical services to keep the operations going.”

Last year, Jet Airways “suddenly” discovered serious financial issues, which led to a highly dramatic rescue effort by the main creditors (chiefly state-owned State Bank of India and private-sector ICICI Bank) and minority shareholder Etihad under the new Sashakt legislation introduced by the Indian government to deal with the chronic “sudden liquidity problems” of the giant Indian economy.

Etihad injected $35 million into the ailing Indian airline, and the State Bank of India and ICICI Bank provided $218 million emergency line of credit to meet immediate liquidity needs, such as paying salaries and keep alarmed lessors from immediately repossessing aircraft.

Apparently Jet Airways burned these fresh funds in no time, as the company’s financial situation was spinning out of control. Cabin crews, pilots and office staff went on strike over unpaid salaries. Suppliers of goods and services started cutting off deliveries “until debts are repaid at least in part.” Dutch authorities seized a Jet Airways Boeing 777-300ER at Schiphol Airport on April 12 following a court ruling over unpaid handling fees.

Unpaid lessors scrambled to get their aircraft back: According to India’s Directorate General of Civil Aviation (DGCA) in the April 8-14 week alone, 22 of the company’s leased 737-800’s were deregistered and handed back to lessors. Between leased aircraft being repossessed and others being grounded for financial issues, Jet Airways’ operational fleet has gone from 124 planes in February to just 14.

This presented a major problem, as the DGCA requires a bare minimum of 20 aircraft for an airline to operate internationally. This led to a wave of flight cancellations while Jet Airways tried to work out a “temporary” agreement with the DGCA over international licensing. In short, the company was falling apart.

Jet Airways presently has 217 aircraft of various models on order from Boeing. How many are going to be paid for and will be delivered remains an interesting question and raises even more questions about the feasibility of the maxi-orders placed by many other Asian airlines with vulnerable financials.

The Indian government was publicly asking state-owned banks to step in and “invest in Jet Airways,” but the banks raised their hands: They have already lost too much money and they don’t want to lose more, at least not without direct guarantees from the government.

And the Indian government’s desperate efforts to privatize chronic loss-making Air India promises to be a very interesting show.

This follows the Alitalia fiasco. On March 31, the deadline imposed to Alitalia by the Italian government and the EU to present a recovery plan passed with only a press release from the bankruptcy administration: As no financially feasible plan could be put together by the deadline, the administrators asked for a two months extension. They got one, so the new deadline is April 30.

Alitalia, Italy’s air carrier, has a long history of poor financial performance, but the present troubles started in 2008 when the Italian government finally decided to privatize the airline. Initial talks with the Air France-KLM Group fell through due to politics and the 2008 Financial Crisis forcing the Franco-Dutch group to considerably cut new investments. This failed sale sent Alitalia into bankruptcy protection almost immediately, until a sale could be arranged to a group called Compagnia Aeronautica Italiana (CAI).

CAI was a peculiar creature, nominally a consortium of investors who upon closer scrutiny turned out to be a motley collection of Italian banks, economic godfathers, and Poste Italiane, the state-owned Italian Post Service. Make of this what you want.

As the Euro Bubble started to deflate and the receding tide showed who was swimming naked, the investments needed to effectively rebuild Alitalia from scratch vanished into thin air, and the embattled airline found itself savagely slashing costs to survive. These cost-cutting measures started with the sensible (spinning off the loss-making maintenance division and allowing it to fail) but quickly turned into desperation (selling aircraft to leasing companies such as APF for quick cash and leasing them back) and finally became downright grotesque (abandoning the profitable Milano Malpensa hub, MXP).

By 2014, CAI had run out of steam and funds, so Poste Italiane (read: the Italian government) directly stepped in with a €75 million cash injection to avoid an immediate bankruptcy. At the same time, the Italian government started negotiations with the Abu Dhabi flag carrier, Etihad, to bring the Gulf airline on board. The deal was sealed in 2015, with Etihad buying 49% of Alitalia, the maximum share allowed under EU airline ownership rules.

The euphoria of having a partner loaded with oil money and willing to spend it with complete abandon was short-lived however, as Etihad was soon discovered to be yet another “naked swimmer.”

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Once forced to cease shady accounting practices and presenting honest financials, Etihad was found to be losing enormous sums of money, to the tune of $1.8 billion in 2016 and $1.5 billion in 2017.

In 2016, the first full year of the Etihad partnership, Alitalia lost an unprecedented €600 million. It was immediately apparent Etihad lacked both the ability and resources to turn Alitalia around.

So in May 2017, Alitalia entered bankruptcy administration again, and it has resided there ever since. So far, the Italian government has extended two “bridge loans” totaling a €900 million just to keep the company alive. The EU approved this direct state aid under the condition that a recovery plan be presented by March 31, 2019. So here we are again.

The bankruptcy administrators have tried very hard to find if not a buyer at the very least a committed financial/technical partner for Alitalia, but so far this has proven extremely hard. The only interesting assets Alitalia has left are 60% of the slots at the highly constrained Milano Linate (LIN) airport; Europe’s two largest-low cost carriers, Ryanair and Easyjet, expressed interest in them. Both have since withdrawn from talks citing the impossibility of reaching a satisfactory deal.

The only potential partner remaining is Delta Air Lines, but too many open questions remain: Apparently their interest in buying 20% of Alitalia needs the approval of shareholders, and airline shareholders and investors these days are becoming increasingly cautious when buying ailing airlines, as proven by the WOW Air fiasco.

Iceland-based ultra-low-cost carrier WOW Air ceased operations on March 28, and at the time of this writing all of their remaining aircraft are still parked at various airfields around the Atlantic, awaiting a decision by a Reykjavik bankruptcy court.

WOW Air started operations in 2012, but their business model proved unprofitable. By 2018, the company was accumulating losses at an alarming pace. In November 2018, Sigurdur Helgason, chairman of the Icelandair Group, announced “a done deal” to buy WOW Air. However, this “done deal” was shot down by Icelandair shareholders rightly worried about the financial resources needed to turn WOW Air around.

A similar deal was announced shortly after by Indigo Partners, but again the deal was scuttled by investors fretting over the financial viability of the operation.

WOW Air is yet another former darling of the financial media which praised the “aggressive expansion plans,” “cool image,” and “appeal to key demographics” without bothering with niceties such as the financial viability of the airline or market saturation. By MC01, a frequent commenter, for WOLF STREET


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