Aeromexico fails to escape fate of its larger Latin peers
Government support for airlines during the COVD-19 pandemic has been patchy, and the have and have nots are emerging as the crisis wears on.
Latin America has been a laggard in offering financial packages to airlines as the virus spreads rapidly through the region, and as a result, two of the area's largest airlines - Avianca and LATAM Airlines Group - have sought Chapter 11 bankruptcy protection.
The government of Latin America's second largest aviation market, Mexico, seems unlikely to offer support to the country's airlines, and now Mexico's only full service operator, Aeromexico, will seek to reorganise under Chapter 11.
- Latin American governments have been the least supportive of airlines during the COVID-19 pandemic, offering only 0.8% of 2019 revenues compared to the global average of 14%.
- Avianca and LATAM Airlines Group, two of the largest airlines in Latin America, have filed for Chapter 11 bankruptcy protection due to a lack of government support.
- Mexico's government has stated that it will not provide financial assistance to its airlines, leading Aeromexico, the country's only full-service operator, to seek Chapter 11 reorganization.
- Aeromexico had attempted to improve its financial position and avoid bankruptcy, but the COVID-19 crisis severely impacted passenger demand and liquidity.
- The lack of government support and persistent low demand have forced airlines in Latin America to seek bankruptcy protection, following the trend of their larger peers in the region.
- Aeromexico's bankruptcy filing highlights the challenges faced by airlines in Latin America in building liquidity and surviving the crisis without government aid.
Summary
- Latin governments continue to lag other regions of the world in offering support to airlines during the COVID-19 crisis.
- The government of Mexico has bluntly stated that it has no intention of offering support to its airlines.
- Now Aeromexico has become the third airline in Latin America to file for Chapter 11.
A lack of government support had already forced two large Latin airlines into Chapter 11
An analysis by IATA shows that Latin America has been the least supportive of airlines during the COVID-19 pandemic, which has created historical and unprecedented drops in demand.
The virus struck Latin America later than other regions in the world and Brazil, Peru and Chile are battling cases numbers that are trending in the wrong direction.
See related report: COVID 19: Brazil's rising cases create new uncertainty for airlines
IATA has calculated that Latin governments have offered airlines in the region just 0.8% of 2019 revenues, compared with 14% globally and 25% in North America.
In a matter of weeks, two of Latin America's largest airline groups - Avianca and LATAM Airlines Group - have filed for Chapter 11 bankruptcy protection. LATAM was in better financial shape than Avianca before the crisis, but the sudden and unexpected cash burn that LATAM and other airlines have faced was too much for the airline to endure without government aid.
See related report: COVID 19: Latin airline bankruptcies reflect lack of government aid
Delta Air Lines, which has recently taken a 20% stake in LATAM Airlines Group and holds 49% of Aeromexico, has previously said that "while it was disappointing to see, none of the Latin American countries LATAM operates in was prepared to provide them government financial support to this point - which necessitated the decision to file".
Mexico's airlines have stressed the need for support from the government...
During the COVID-19 crisis Mexico's airlines have been stressing that they require financial support to create war chests of cash to withstand the vaporisation of demand created by COVID-19.
Previously, Aeromexico CEO Andrés Conesa stated that the airline needed liquidity support due to financial markets being distorted. "It is very difficult to put a price on the renewals of debt in these very uncertain conditions…and it's very difficult to price any debt issuance in the public markets", he explained.
See related report: COVID-19 Mexico's airlines - government support and/or consolidation?
Enrique Beltranena, the CEO of Mexico's largest domestic airline, ULCC Volaris, previously told CAPA TV that "something that is important is that we are not envisioning the government coming to restructure or do a sabotage of our airlines".
"We are just requiring specific aid packages related to credit that can help us support the process of not having revenues in the following months. So we are not envisioning government subsidies in any way in the short term or the long run."
Volaris CEO update on CAPA TV in Apr-2020
Mexico's government refuses aid to airlines; Aeromexico seeks Chapter 11 after failing to build liquidity
Despite the rationale offered by Aeromexico and Volaris about the need for federal financial support, Mexico's government seems unmoved by those arguments.
Shortly after the outbreak, Mexico's President Andres Obrador was quoted in La Política stating that the government would not assist Aeromexico, noting that he would not return to neo-liberal era politics.
As recently as last week, Aeromexico had actively attempted to counter speculation that it would be forced to seek Chapter 11 bankruptcy protection, stating that it was examining options to improve its financial position and stressed that it had not initiated, nor taken the decision to initiate, a Chapter 11 restructuring process.
At the end of Mar-2020 Aeromexico had approximately USD563 million in cash, which was 19.9% of the company's total annual revenues. Moody's had estimated that the company's cash fell to approximately USD490 million at the beginning of May-2020.
The ratings agency calculated that Aeromexico had USD400 million in maturities due through 31-Mar-2020, and USD260 million in estimated annual lease payments. Approximately USD180 million of those maturities are mandatory payments without flexibility to refinance or renegotiate, said Moody's.
Aeromexico was obviously trying to avoid becoming the third full service airline in Latin America to seek Chapter 11 bankruptcy protection. But the fall came quickly. On 30-Jun-2020 Aeromexico CEO Andres Conesa was forced to announce: "We expect to utilise the Chapter 11 process to strengthen our financial position, obtain new financing and increase our liquidity, and create a sustainable platform to succeed in an uncertain global economy".
Aeromexico had followed United's lead in seeking to leverage its loyalty programme
The airline had reached an agreement with its Club Premier loyalty programme (PLM) partner Aimia to raise some liquidity. Aeromexico owns 51% of the programme and Aimia holds the remaining stake. PLM has agreed to provide Aeromexico with a USD50 million loan and USD50 million in pre-purchases of award tickets.
The company had taken steps to cut its monthly cash burn in half, and was working on a slew of initiatives to raise up to USD400 million in additional liquidity, including sale and leaseback transactions and financing from export credit agencies, but sadly nothing materialised.
Demand had remained severely depressed - Aeromexico's passenger levels plummeted by 92% year-on-year in May-2020 - and there was little obvious prospect of improvement.
In its bankruptcy filing, Aeromexico stressed it implemented several initiatives to generate additional liquidity to protect its cash position, but the negative effects of COVID-19 on passenger demand were more "persistent than expected", and "these efforts have been insufficient to guarantee that the company can continue its operations without undergoing a major restructuring process in the benefit of all its stakeholders".
Aeromexico could not escape the fate of its larger airline peers in Latin America
There is no denying that airlines in Latin America face a disadvantage in working to build liquidity during the COVID-19 crisis. That lack of government support has resulted in large airlines in the region making the tough decision to seek Chapter 11 bankruptcy protection.
Aeromexico was working to avoid making that tough decision, and despite feverish attempts to avoid the fate of its full service airline peers in Latin America, the mountain was just too hard to climb.