Next Chapter in Bankruptcy & Restructuring Saga of European and Asian Airlines

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The fate of the A380 is sealed.

By MC01, a frequent commenter, for WOLF STREET:

On February 5, German low-cost carrier Germania announced it has filed for insolvency in Berlin and that all flights will be suspended indefinitely. According to the press release, this was due to unfulfilled “short-term liquidity needs,” meaning the company was struggling to raise the cash needed to pay for obligations coming due in the short term, such as fuel bills/hedging, landing fees, maintenance contracts, and even wages. The bankruptcy court will take over from here.

This filing doesn’t affect operations of subsidiaries Bulgarian Lynx and Swiss-based Germania Flug, at least for the time being.

This is just the latest in a long string of airline bankruptcies, defaults and debt restructuring deals that started hitting the industry in 2017, the product not of a conventional financial crisis but of overambitious expansion plans, unsustainable debt loads, and cutthroat competition fueled by capital looking for any scrap of yield.

Another chapter of this saga is unfolding in India. Asia has been at the forefront of airline growth over the past few years, but this growth came at a price, with airlines having to work on paper-thin margins to continue offering low fares to fuel double-digit year-on-year growth.

This resulted in massive aircraft fleets and equally massive debt loads, which are now starting to take their toll.

Jet Airways, one of India’s largest carriers with a fleet of 124 aircraft (and orders for a further 230), has been flirting with cashflow issues for some time, but lately these cashflow issues have become downright worrying.

On January 29, Jet had to ground six of their aircraft due to defaulting on their lease payment, and nobody has an idea of how large the debt load is right now. The last available figure is for March 2018, when it stood at over 94 billion rupee ($1.3 billion). By contrast share capital on February 12, 2019 stood at a paltry 2 billion rupee ($30 million). This was after Jet Airways shares soared throughout January, buyers apparently blissfully unaware of what’s building up on the horizon.

Jet Airways will be the first Indian company whose dire financial situation is to be addressed under the new Sashakt legislation.

Sashakt is another attempt by Indian authorities to solve the chronic bad-loan issues of their gigantic economy through a mixture of new measures (the introduction of the concept of “Debtor in Possession” for example) and old measures (state-owned banks and asset management companies “eating” the losses, for example).

What exactly will happen to Jet Airways is unclear. But it’s beyond doubt that present shareholders will be at best be left with much diluted equities: In the latest stock exchange filings (January 28 2019), Jet Airways stated an Extraordinary General Meeting (EGM) will be held on February 21 during which the company and its creditors will seek approval to “convert loans into shares” – which is a default and debt restructuring.

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Stock markets reacted like they usually do: by going up. Jet Airways shares gained 7.8% following this announcement, which is basically a warning to existing shareholders their present position will be at best much diluted or at worst completely wiped out. Whether this is a classic case of “bad news is good news” or an even more classic case of picking pennies in front of a steamroller remains to be seen.

The February 21, EGM will include representatives from creditors, the largest being the State-owned State Bank of India and privately-owned ICICI Bank but will also include a well-known major player in the aviation industry: Etihad Airways of Abu Dhabi. Etihad already owns a large equity position (24%) in Jet Airways, but it’s no mystery the Gulf company aims at taking control of the ailing Indian carrier.

According to Indian law, foreign investors cannot own more than 49% of an Indian airline. But reportedly, Etihad and the Abu Dhabi government have been negotiating with Indian regulators for a “one-time dispensation” that would allow Etihad to hold a majority in Jet Airways in return for a large capital injection.

This is rather puzzling. Etihad has been posting enormous financial losses in 2016 and 2017, to the tune of $3.3 billion over two years. 2018 data should be available soon. While the situation is bound to have improved thanks to radical measures such as selling half their cargo fleet to DHL Aviation, storing all the long-range Boeing 777-200LR and the usual wave of layoffs, it’s likely not to be exactly positive.

In October 2018, Etihad also rejected entering talks with bondholders who are still holding on to $1.2 billion in bonds Etihad issued in partnership with two airlines it partially owned at the time, Air Berlin and Alitalia. The former has already been liquidated and the latter is once again a ward of the state.

These bondholders are largely vulture funds whose specialty is exactly this sort of distressed assets, so this is unlikely to be the end of it.

How an airline with financials as unsound as Etihad’s can afford to even contemplate large capital investments in a money-losing company like Jet Airways speaks volumes about the business model adopted by Gulf airlines.

And this business model has been what has so far effectively kept the massively disappointing Airbus A380 program alive and breathing for so long, but the writing is on the wall.

Following the announcement by Qantas, Australia’s flag carrier, of the cancelation of the balance of their order of eight aircraft, Airbus and Emirates entered negotiations about the remaining order for 53 A380.

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On February 14, it was announced an agreement had been reached to cut the A380 order to just 14 A380, with the balance replaced by 30 much more versatile and cost-efficient A350-900. As a compensation Emirates has also placed an order for 40 A330neo, the re-engined version of the popular but aging A330.

However, expect the latter to be the subject of much negotiation in the near future: the A330neo is not a popular aircraft with airlines and, much more critically, doesn’t fit into Emirates’ strategy, present nor future.

This means that at the present pace of eight A380 deliveries per year the final aircraft will be delivered in 2021.

But as the saying goes, if Athens weeps Sparta isn’t merry.

The Boeing 747-8, the latest version of the four-engined aircraft, faces an extremely uncertain future as well. As of December 31, 2018, deliveries stood at 130 aircraft with just 24 firm orders left. Unlike Airbus, Boeing can count on the freighter market to keep production going for a little while, especially given the stock of passenger 747 available for freighter conversions is aging and rapidly dwindling.

But the future of air transport belongs to the fuel efficient, flexible and long-range twin-engined airliners such as the Airbus A350 and Boeing 787: four-engined airliners will increasingly become relics of the past.

Thomas Cook plc, the UK-based vacation giant, announced they are seeking a buyer for their airline, Thomas Cook Airlines.

This is due to the bad financial shape of the Thomas Cook group as a whole, which accumulated heavy debt loads over the past few years and posted a record £60 million loss in Q4 2018. The company has long been struggling despite its size. Squeezed between the meteoric ascent of travel-oriented websites and intense competition from German vacation colossus TUI, it has failed to adapt.

Thomas Cook Airlines itself is a mixed bag: while the fleet is composed of aging, less fuel-efficient airliners, many of its routes are highly palatable, especially those to popular vacation destinations such as Palma de Mallorca, Pointe-à-Pitre, and Santorini.

However, as Thomas Cook Airlines has been valued at anything between £1 billion and £3.2 billion, potential buyers are not many and all of them would attract close scrutiny from EU antitrust authorities, making the deal particularly delicate to close.

This is just another chapter in the saga of the reorganization of the European airline industry, which is only bound to accelerate from now one: expect more dismissions, debt restructuring deals and outright bankruptcies in the near future. By MC01, a frequent commenter, for WOLF STREET


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