25-Jun-2020 1:14 PM

Europe's first COVID-19 airline exits: LEVEL Europe/SunExpress Germany

Analysis

When the UK regional airline Flybe folded on 5-Mar-2020, it cited COVID-19 as a contributory factor. However, this was before lockdown and travel restrictions were imposed in the UK and across Europe. Airline seat capacity in Europe that week was still at 98.2% of last year's levels.

Four weeks later, seat capacity had disintegrated to 21.6%. For much of Apr-2020 and May-2020, capacity hovered around 10% of 2019 levels and has picked up only to 20.3% in the week of 22-Jun-2020.

Three other airlines went bust before Flybe in 2020. However, given the profound collapse of demand for air travel, it is remarkable that no other European airline ceased operations until the second half of Jun-2020. Even then, there have been only two: LEVEL Europe and SunExpress Deutschland, both owned by major parent groups. The Irish regional wet lease operator CityJet has been under creditor protection since Apr-2020, but has not ceased trading.

The survival rate of European airlines in the depths of the crisis has been boosted by state aid and growing debt. Survival in the recovery phase will depend on the uncertainties of demand and revenue returning at the same pace as the more certain capacity and cost.

Summary

Flybe was the first European airline to cite COVID-19 as a factor in its bankruptcy, although it ceased operations before the UK lockdown.
Three other airlines (Ernest Airlines, AtlasGlobal, and Air Italy) ceased operations in 2020 before the COVID-19 crisis.
CityJet, an Irish wet lease operator, entered into examinership in April 2020 due to the pandemic's impact on its operations.
LEVEL Europe, a subsidiary of IAG, filed for bankruptcy in June 2020, becoming the first European airline to cease operations during the crisis.
SunExpress Deutschland, the German subsidiary of SunExpress, announced its closure as part of a restructuring plan in June 2020.
The survival of European airlines during the crisis has been supported by state aid and increased debt, but the recovery phase poses challenges as demand and revenue remain uncertain.

Summary

Ernest Airlines, AtlasGlobal and Air Italy ceased operations in 2020, pre-crisis.
Flybe was Europe's first airline bankruptcy to cite COVID-19 as a contributory factor, although it was before lockdown and travel restrictions.
The virus pushed CityJet into insolvency in Apr-2020 (but operations continue).
LEVEL Europe and SunExpress Deutschland are the first European airlines to cease operations during the crisis.

Ernest Airlines, AtlasGlobal and Air Italy ceased operations in 2020, pre-crisis

The first European airline bankruptcy in 2020 came on 11-Jan-2020, before the impact of COVID-19 was a significant factor.

Ernest Airlines, a virtual airline headquartered in Milan and launched on 1-Jul-2016, offered flights between Albania and Italy via the operator Mistral Air.

Turkey's AtlasGlobal, based at Istanbul Ataturk, suspended operations and filed for bankruptcy on 14-Feb-2020. AtlasGlobal was a full service airline, and much of its business was charter flights for tour operators.

It had suspended operations on 26-Nov-2019, but resumed flights on 21-Dec-2019, so its problems also predated the coronavirus crisis.

Air Italy ceased operating and entered liquidation on 26-Feb-2020, after which attempts to find a buyer were unsuccessful.

The airline, formerly known as Meridiana, had transformed itself from a focus on its historic home on the island of Sardinia into a subscale attempt at becoming a second national airline for Italy.

This had been prompted, at least in part, by Alitalia's entry into administration in May-2017. This attracted an investment in Air Italy by Qatar Airways, which took a 49% stake in Sep-2017.

Although COVID-19 hit Italy before other European markets, it had not yet taken hold by the time of Air Italy's liquidation.

Flybe was Europe's first airline bankruptcy to cite COVID-19 as a contributory factor

The first European airline to cite COVID-19 as a factor in its bankruptcy was Flybe.

However, the UK regional airline ceased operations and filed for bankruptcy on 5-Mar-2020. Although the coronavirus was by then headline news, this was before the UK entered lockdown and imposed travel restrictions.

Moreover, Flybe had consistently struggled to be profitable for many years, and had been seeking financial support from the UK government in Jan-2020.

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The virus was certainly by then adding to the uncertainties surrounding demand for aviation, and Flybe was probably noticing a fall in demand from connecting traffic to/from affected regions. Capacity cuts across Europe gathered pace soon after Flybe's demise.

Nevertheless, citing COVID-19 was more a last ditch attempt to persuade the government to agree a bailout than a genuine cause of its difficulties. These were structural and had been around for a long time.

European airline insolvencies in 2020

Airline	Country	Status	With effect from
Ceased operations:
Ernest Airlines	Italy	Ceased operations/company voluntary arrangement	11-Jan-2020/19-Feb-2020
AtlasGlobal	Turkey	Ceased operations/filed for bankruptcy	14-Feb-2020
Air Italy	Italy	Ceased operations/in liquidation	26-Feb-2020
Flybe	UK	Ceased operations/in administration	5-Mar-2020
LEVEL Europe	Austria	Ceased operations/filed for insolvency	18-Jun-2020
SunExpress Deutschland	Germany	Ceased operations/plans liquidation	Late Jun-2020
Still operating:
CityJet	Ireland	In examinership	17-Apr-2020

The virus pushed CityJet into insolvency (but operations continue)

On 17-Apr-2020 the Irish wet lease operator CityJet entered into examinership - a form of creditor protection lasting up to 100 days.

Examinership requires that a company is insolvent, but that it also has a reasonable prospect of survival. It can then undertake a restructuring and come to new arrangements with creditors.

During this period, the business can maintain its operations and continues to be controlled by its directors, under the advice of the Examiner appointed by the court.

CityJet made losses in 2018 and 2019 and had high levels of debt even before the virus took hold. However, the pandemic was certainly a major contributory factor in pushing it into insolvency in Apr-2020.

The pandemic caused the grounding of CityJet's fleet in Mar-2020 and prompted the cancellation of two of CityJet's contracts for the operation of regional aircraft for European flag carriers - namely Air France and Brussels Airlines.

Since then, in May-2020, Aer Lingus has also cancelled a contract with CityJet. A contract with SAS is now its only hope for a post-virus future. Meanwhile, CityJet has appealed to the Irish government for financial support.

On 23-Jun-2020 CityJet executive chairman Pat Byrne told RTE that if the company survives the examinership it might have only 500 staff, compared with 1,175 before the crisis.

LEVEL Europe was the first European airline to cease operations during the crisis

LEVEL Europe, part of IAG, filed for bankruptcy on 18-Jun-2020, citing the coronavirus. This was the first airline in Europe to stop trading since Flybe, whose own demise just preceded the crisis.

Separately from other LEVEL branded airlines, this Vienna subsidiary was registered as Anisec Luftfahrt in Nov-2017 and renamed under the low cost brand in Dec-2019.

The LEVEL brand was originally established as a long haul low cost operator in Barcelona, and its Paris network is also long haul.

However, the Vienna branch has only operated low cost short haul flights, a segment previously the preserve of Vueling within IAG. Vueling was already present at Vienna when IAG established LEVEL there, but only with a small share.

The group planned to introduce long haul low cost flights under the LEVEL brand at some point, explaining its decision to establish the brand first with short haul.

It also created a degree of internal competition within the group for the provision of short haul low cost capacity at a time when Vueling's financial performance was sliding.

Such considerations seem like luxuries at a time of crisis, even for a group with one of the strongest liquidity positions among European airlines.

IAG could have applied some of its cash reserves to keep LEVEL Europe going, but there was clearly no business rationale to do so.

SunExpress Deutschland is the second European airline to fold during the crisis

SunExpress Deutschland is the German subsidiary of SunExpress, a Turkish airline jointly owned by Lufthansa and Turkish Airlines since its founding in 1989 to operate leisure routes between Germany and Turkey.

The Frankfurt-based German operation was founded in 2011, but will now be closed down as part of a restructuring (announced on 22-Jun-2020).

The SunExpress Deutschland fleet, comprising 14 Boeing 737-800s and seven A330-200s (the A330s form the widebody fleet of Lufthansa's Eurowings low cost subsidiary), are to be transferred to the SunExpress AOC.

In the pandemic crisis, both Lufthansa and Turkish Airlines must focus on cash and the efficient allocation of resources.

Both sit in the lower half of European airline groups ranked according to their liquidity expressed as a percentage of 2019 revenue (although Lufthansa's state aid package improves it to the middle of the pack).

The demise of SunExpress Deutschland and the transfer of its fleet to the Turkish operator seems designed to allow a more cost efficient operation of the brand under one AOC and management structure, and in the country with lower labour costs.

Post-virus recovery could present a bigger challenge

The vast majority of Europe's airlines have so far survived through what are likely to have been the trough months of the coronavirus crisis (capacity seems likely to grow from here, unless there is a second wave of the pandemic and a return to worldwide travel restrictions).

There has been significant assistance in financial support from governments.

See related reports:

State aid has by no means reached all European airlines, but a number of them have also managed to negotiate new debt and to draw down on existing lines of credit.

All have helped to conserve cash by cutting variable costs almost to zero - through the grounding of fleets - and by lowering fixed costs where possible.

The survival rate of European airlines during aviation's worst ever crisis has been a significant achievement, so far.

As capacity starts to rebuild, costs will grow while the return of demand and revenue will be less certain. The post-virus recovery phase could present a bigger challenge to airline survival.