The debtors required the chapter 11 filing to preserve its cash in a non-operating environment; they have $275mm of unsecured trade payables and a boat load of debt secured up by all kinds of stuff â from credit card receivables to aircraft. The debtors incurred the debt in an effort to expand capacity in an increasingly competitive space beset by low cost carriers nibbling away at market share. One of the lenders? United Airlines. How poetic!
Back to the aircraft. Given what travel trends are likely to be and new aircrafts that the debtors are contractually on the hook for, it stands to reason that the debtors will use the bankruptcy to reject a number of aircraft lease agreements in addition to addressing their balance sheet. The market is about to be flush with planes for sale. Query what new airline may rise from the ashes.
Luckily, the debtors have a meaningful amount of unrestricted cash to fund their cases and so, at least for now, theyâre not seeking a DIP credit facility. That may change, however, if the travel environment doesnât improve and the cases drag on. Which they very well may given the uncertainty in the markets and the very real possibility that air travel doesnât recover. Notably, tourism is a major driver of Aviancaâs traffic. Something tells us that there arenât a whole lot of people planning extensive getaways to Bogota at the moment. đ¤
This will be an interesting test case for a lot of other airlines that, unlike the US-based airlines, arenât lucky enough to receive governmental intervention.
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Which âother airlinesâ? For starters, we know that Virgin Australia entered voluntary administration in Australia two weeks ago after the Australian government declined Virginâs entreaties for a $888mm loan.
There will be others. Here is Bloomberg suggesting that, due to sovereign issues throughout Latin America, other Latin American airlines are in trouble. In the piece published before Aviancaâs chapter 11 filing, they noted:
But while just about everyone agrees it will be up to governments to help save the industry, thereâs a disconnect between whatâs needed and what nations can -- or even want to -- do. Brazil and Colombia seem willing to step up; Mexico and Chile donât. Latin America was already the lowest-growth major region in the world and budgets were stretched thin even before oil collapsed and the coronavirus crippled the global economy.
As we now know, Colombia didnât step up. Which leaves Latin Americaâs other air carriers in a bad spot, including Latam Airlines Group SA (the finance unit of which has debt bid in the 30s and 40s), Gol Linhas Aereas Inteligentes SA ($GOL)(the finance unit of which has debt bid in the low 40s), and AerovĂas de MĂŠxico SA de CV (Aeromexico)(which has debt bid in the 30s). Will one of these be one of the next airlines in bankruptcy court?
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The US isnât the only country to entertain bailouts of airlines. In mid-March, Norway offered 6 billion Norwegian crown ($537mm) credit guarantees to Norwegian Air Shuttle SA ($NWARF). There are strings attached, though. Reuters noted:
To receive the full 3 billion, the company must first persuade creditors to postpone installment payments for loans and forego interest payments for three months.
DNB Markets analyst Ole Martin Westgaard said in a note the package was likely too small, calculating that it would only cover the total cost of grounding all Norwegian Air aircraft for one-and-a-half months.
âWe are doubtful the company will be able to attract any interest from a commercial bank at interest rates that would make sense,â Westgaard said.
It is struggling to get it done. In late April, Bloomberg reported:
Norwegian Air Shuttle ASA, the low-cost carrier fighting to qualify for a bailout, presented a plan to relieve part of its heavy debt burden that would largely wipe out existing shareholders and warned most flights would stay grounded until next year.
The airline is racing against the clock to meet terms set by Norway to access the bulk of a 3 billion-krone ($283 million) package in loan guarantees. With most of its fleet grounded, the company has proposed a debt restructuring and capital increase by mid-May that would unlocking [sic] the cash it needs to survive the coronavirus crisis.
The company has debt bid in the low 20s as it attempts to address its conundrum.
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On Tuesday, Boeing Corporation ($BA) CEO Dave Calhoun came out blazing. Per Bloomberg:
Boeing Co.âs top executive sees a rocky road ahead for U.S. airlines, saying itâs probable that a major carrier will go out of business as the Covid-19 pandemic keeps passengers off planes.
The recovery is going to be slow, with air traffic languishing at depressed levels for months, Boeing Chief Executive Officer Dave Calhoun said in an interview to be aired Tuesday on NBC. Asked by âTodayâ show host Savannah Guthrie if a major airline might have to fold, Calhoun replied, âYes, most likely.â (emphasis added)
Take cover yâall. He continued:
âSomething will happen when September comes around,â Calhoun added, referring to the month when the U.S. governmentâs payroll aid to the airline industry expires. âTraffic levels will not be back to 100%. They wonât even be back to 25%. Maybe by the end of the year we approach 50%. So there will definitely be adjustments that have to be made on the part of the airlines.â
If this happens, the sh*t storm that will be sure to unfurl from those who were anti-bailout will be hard to contend with (though there is something to be said for buying time to make a bankruptcy more âorderlyâ). The warrants the government received in exchange for the billions of dollars will become worthless exposing them for the mere window dressing they obviously were. Why didnât the government take a more aggressive approach that both assisted the airlines and shunned moral hazard? Why didnât it pursue a General Motors-style transaction and serve as effective DIP lender to the airlines in bankruptcy? These are questions that are sure to re-emerge.
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When all is said and done, weâre going to have a number of different data points to determine which approach was best. For the next several months, however, the question will remain salient all over the world: to bailout or not to bailout?