Near the start of the European wave in the corona crisis, an article in the Financial Times on 16MAR20 already warned that most airlines would face bankruptcy by the end of MAY20. ICAO’s report recently underlined the Darwinian survival of the fittest principle and CFG posed the question on 19APR20 as to “when [will the] airline mass extinction start?”.
As if a trigger had been pulled, the news of airlines filing for bankruptcy or bankruptcy protection started filling media channels almost immediately after CFG published.
First up on the scene was low-cost airline Norwegian, whose staffing subsidiaries in Denmark and Sweden, namely Norwegian Pilot Services Sweden AB, Norwegian Pilot Services Denmark ApS, Norwegian Cabin Services Denmark ApS, and Norwegian Air Resources Denmark LH ApS, filed for bankruptcy, due to "the lack of significant financial support" from the Swedish and Danish governments, according to the company. It also ended its staffing agreements with OSM Aviation, which provided crews based in Spain, UK, Finland, Sweden and the U.S., thus laying off a total of 4,705 employees (1,571 pilots and 3,134 cabin crew).
In a company statement, Norwegian’s CEO, Jacob Schram, lamented the move, stating: “The impact the Coronavirus has had on the airline industry is unprecedented. We have done everything we can to avoid making this last-resort decision,” praising the pilots and cabin crew who had been “the core of our business and they have done a fantastic job for many years,” and sincerely apologizing for the consequences.
Consequences, however, that were also largely due to Norwegian’s over-ambitious expansion plans and the losses it had accrued over the past three years. "We are working around the clock to get through this crisis and to return as a stronger Norwegian with the goal of bringing as many colleagues back in the air as possible." Norwegian remains operational with just 700 pilots and 1,300 cabin crew based in Norway (where the government is paying "all salary-related costs" for as long as staff is furloughed), France and Italy. The Norwegian government has proposed €236 million in aid; however, this will require the company to restructure and to reduce its existing debts. The rescue plan will be discussed on 04MAY20.
On 21APR20, Virgin Australia became the largest airline so far to seek bankruptcy protection and enter voluntary administration following the corona shutdown, after the Australian government refused its request for a 1.4 billion AUD (€800 million) loan. Australia’s refusal is due to the fact that 90% of the airline is held by foreign airlines who, in theory, could end up using the loan to aid their own struggling operations. Yet, according to Virgin Australia, its shareholders such as Britain-based Virgin Group, Singapore Airlines, and Etihad Airways, are already receiving support from their governments, and those funds, too, cannot be used to save Virgin Australia.
It therefore appointed Deloitte to act as administrators, who have since been busy trying to prevent airports and creditors in Australia and the U.S. from seizing parked aircraft as securities. Virgin Australia has not flown in a profit in the past 7 years, and now owes around 6.8 billion AUD (€3,94 billion) to over 12,000 creditors – of that, at least €1,1 billion is owed to its aircraft lessors who have the right to repossess the 69 leased aircraft within 60 days of non-payment. Deloitte will become responsible for payment in 28 days from taking over administration.
Deloitte partner and lead administrator, Vaughan Strawbridge, recently disclosed that a number of potential buyers have already expressed an interest: "Eight have signed non-disclosure agreements and negotiations are continuing with another 12," he said, and Deloitte is planning to come up with a restructured airline proposal to buyers by mid-May, hoping for sales to go through in JUN20, thus securing the airline’s future, albeit on a much slimmer scale. The next creditor meeting is planned for 22AUG20.
In the meantime, the airline continues to operate a minimum service of 64 domestic return flights each week, some contracted domestic charter flights, as well as government-aided international flights to Hong Kong and Los Angeles.
Just one day later, on 22APR20, Air Mauritius dec
lared it too was entering into voluntary administration. Another airline that was already in financial crisis prior to the corona pandemic, which then forced it to stop all domestic and international flights and leading to a “complete erosion of the company’s revenue base,” as per the company’s statement.
Grant Thornton administrator, A. Sattar Hajee Abdoula emphasized in a letter, that this was a move to secure the future of the 52-year old, national airline: “At the outset, it is important to highlight that Air Mauritius has not filed for bankruptcy. Our objectives as administrators are to safeguard the interests of the company and, more importantly, re-engineer its activities so that it can take off again once this crisis is over.”
The timing is more than unfortunate for the airline which, just this JAN20, set up a Transformation Steering Committee to turn around a growing loss of around €35 million by DEC19, with its fleet of 13 aircraft, serving 22 international destinations and transporting around 1.7 million passengers each year.
LGW – Luftfahrtgesellschaft Walter
That same day, 22APR20, a perhaps lesser known airline, but one that played an important part in German aviation, Luftfahrtgesellschaft Walter (LGW) also declared insolvency, putting 354 jobs on the line. Here, the corona crisis is truly the cause for insolvency, as the company’s 15 De Havilland DHC-8 aircraft, currently parked up at Bratislava Airport, Slovakia, were leased in an exclusive, long-term cooperation to Lufthansa subsidiary Eurowings, which had to decommission around 90% of its own fleet and terminate the wet-lease contract with LGW at short notice because of COVID-19. LGW’s future is therefore in the stars, as its Managing Director, Dominik Wiehage, pointed out: “After the termination of the cooperation by Eurowings, we have made intensive efforts to find employment for our LGW aircraft throughout Europe and will continue to do so in our own management. Due to the almost complete standstill of air traffic, these efforts have unfortunately not been successful so far. As it is also impossible to estimate – as things stand today – whether we will receive public funds to bridge the period until air traffic resumes, especially on the regional routes served by the LGW, we must, therefore, draw the legally necessary conclusions. We are very sorry for the employees of the LGW – all of them are very well trained, very motivated and very customer-oriented employees, for whom we want to keep the option open, especially with our own management, of being involved again in a new start in air traffic.”
CFG already reported last week “the end is near” for SAA, and though it comes as no surprise given its long financial struggle, the death of an 86-year old, national airline is hard to take. Yet, in a phone call to MoneyWeb last week, Public Enterprises Minister Pravin Gordhan is reported to have said: “The old SAA is dead, there is no doubt about that, but what will take its place may be some or all of the old SAA and maybe some other airlines too,” and hinted at a solution with public and private owners, though could give no details on what he called “complex issue”.
Tightening the belt
Meanwhile, a host of other airlines, whilst looking for government financial support, have announced that they will be reducing one of their largest operating cost factors: labor costs. With currently much staff being furloughed or on short-time work, employee numbers will be cut once airlines resume operations again. British Airways will cut 12,000 staff (800 of which are pilots), Lufthansa plans to let 10,000 staff go, Air Canada 5,000, SAS 5,000, RyanAir 3,000, KLM 2,000, AerLingus 900, and Air New Zealand has recently been criticized by a cabin crew union for considering an “old school redundancy process thinking” wherein it looks to reduce staff by as much as 30% (roughly 3,750 jobs), with plans to hire some back on lower salaries at a later stage. U.S. airlines are currently bound by the terms of their $25 billion bailout package not allowed to cut jobs, however as this ban is only valid up to 30SEP20, another wave of redundancies announcement is likely in the final quarter of this year.
Hope never dies
Yet, in the midst of all the negative aviation news, over in the UAE, Air Arabia Abu Dhabi, (IATA reservation code 3L) is preparing to launch operations as the UAE’s fifth carrier and Abu Dhabi’s first low cost operator. The airline, which is a joint venture between Air Arabia and Etihad Airways, received its AOC (Air Operating Certificate) on 23APR20 and thus the approval from UAE’s General Civil Aviation Authority (GCAA) to start operations. Air Arabia Abu Dhabi is currently working closely with the GCAA to set a launch date once skies open again after COVID-19.
Adel Al Ali, Group Chief Executive Officer, Air Arabia, said: "While the spread of Covid-19 continues to impact the global economy including the aviation industry, we are confident that the industry shall overcome today's challenges and will emerge stronger. Obtaining the AOC during this time reflects our commitment and readiness to launch Air Arabia Abu Dhabi operations as soon as skies and airports open and customers can fly again."
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