Airlines struggle to survive through pandemic
July 20, 2020 |
Facing low demand, Latin American carriers cut costs, postpone debt payments, file for bankruptcy and seek government support
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Mexican airline Aeroméxico is meeting with bondholders this week after it missed debt payments at home and filed for bankruptcy in the United States, but it is not the only carrier in Latin America to take drastic steps to rearrange its debt. Colombia's Avianca and Chile's LATAM Airlines have also sought bankruptcy protection in US courts as travel restriction during the COVID-19 pandemic has brought air traffic to a virtual standstill.
In June, Aeroméxico saw the number of international passengers plunge 96% and domestic travelers tumble 80% year-on-year. Likewise, LATAM suffered a 98% drop in international passengers in June, while Gol Transportes Aéreos, which only flies within Brazil, endured an 89% decline when compared to the same month last year.
"The companies are trying to adapt their business models to this new scenario of very weak demand," said Débora Jalles, director of Latin American corporate ratings for Fitch Ratings. "This is very challenging with operations at 15% to 18% capacity."
The region's airlines are trying to make it through the crisis by postponing debt payments, filing for bankruptcy protection and seeking government loans and guarantees. But the number of COVID-19 cases remains on the rise in Latin America, particularly in Brazil, Peru, Mexico and Chile, and prospects for a coming recovery are receding into the distance. Latin America accounts for less than 9% of the world's population, but it has recorded more than a quarter of the global deaths from COVID-19, according to data from the reference website Worldometer.
"Companies have been reducing personnel through layoffs, vacations and unpaid voluntary licenses, among other measures," said Jairo Agudelo, research manager at Bancolombia's Capital Inteligente. "In this way, they have turned the largest portion of fixed costs into variable costs during the crisis."
Airlines have also opened negotiations with lessors and postponed payments on leasing obligations, he added. Other analysts pointed out that airlines have lowered prices and offered advanced sales as ways to make money.
After filing for bankruptcy in late May, LATAM secured $900 million in debtor-in-possession (DIP) financing from three shareholders, Qatar Airways and the Cueto and Amaro families. In July, the Santiago-based airline presented more DIP financing for $1.3 billion and included its Brazilian business in the Chapter 11 proceedings. Aeroméxico was not far behind, filing for bankruptcy in the United States and starting talks for DIP financing in early July.
But these measures may not be enough, according to an investor in Miami. "In my view, without the help of governments, Latin American airlines will not survive," he said. "The question is which governments will be able or be willing to help."
In Brazil, LATAM, Gol and Azul signed up for BRL4 billion ($743 million) in emergency funding from a group of lenders led by the national development bank BNDES. The airlines, however, have waited longer than expected for the money, Jalles said.
"They are still waiting to receive it," she said.
The Brazilian Senate chipped in last week and passed a bill to help airlines through the crisis, including reimbursements and rebookings for cancelled flights during the pandemic.
In Colombia, Avianca has held talks with the government, but it is not clear if it will reach an agreement, Agudelo said. "The government has many fronts and many needs, so whether or not airlines will get help is a coin toss," he said.
In Mexico, Communications and Transportation Minister Javier Jiménez has said the government has no plans to bail out Aeroméxico, but it could offer financing and credit guarantees and allow the airline to renegotiate tax payments, according the local press reports.
STABILIZING SHARE PRICES
As earnings plummet, some airlines have sold shares to maintain liquidity. Gol sold shares to US investment management firm BlackRock in late June, while Azul sold its 6% stake in TAP Air Portugal to the Portuguese government for roughly BRL65 million and withdrew conversion rights for €90 million ($110 million) in 2026 bonds.
Outside of occasional equity deals, however, shareholders are not expected to make major capital injections in Latin American airlines in the coming months. "There are limited opportunities for the shareholders to inject money into the companies," Jalles said. "We are not counting on this as being feasible."
Despite the challenges faced by airlines to remain afloat, their stock prices have stabilized after suffering a free fall in February and March because the market has incorporated all the risks, Jalles said. Now the future of Latin America's airlines depends entirely on when demand returns to previous levels, she added.
"Things are changing so much and so quickly, that it's really hard to make predictions," Jalles said.