The AMLO government, which has refused to bail out shareholders and bondholders of large companies, could be on to something: A form of capitalism where investors, not taxpayers, carry the risks.
By Nick Corbishley, for WOLF STREET:
Mexico’s main airline, Aeromexico, on Friday felt compelled to issue a denial that it “has not initiated, nor has it made the decision to initiate, a restructuring procedure under Chapter 11 of the Unites States Bankruptcy Code,” following allegations to that effect in Mexico’s most widely read financial daily El Financiero. A few lines further down in the press release, the company said it is exploring ways to restructure, in an orderly fashion, its short- and medium-term financial commitments.
If the statement was meant to put investors’ nerves at ease, it didn’t quite work that way. Aeromexico’s shares ended the day 4.5% lower and are now down 60% year to date.
Investors are spooked for good reason. In May, the number of passengers on its domestic flights plunged by 89% from a year ago, and for international flights by 98%. Like all airlines, it desperately needs financial support to navigate the unprecedented turbulence hitting the aviation industry. And for the moment, it’s not getting it.
Like many airlines, Aeromexico was already in trouble before the virus crisis brought air travel to a near-standstill. In 2019, its CEO, Javier Arrigunaga, went cap in hand to Mexican President Andres Manuel Lopez Obrador’s right hand man, Alfonso Romo, to request a $125 million emergency credit line from Mexico’s state-owned development bank. The answer was a resounding no.
According to the article in El Financiero that forced Aeromexico’s bankruptcy enial, the airline is currently being advised by U.S. law firm White & Case and Citigroup.
Two of South America’s largest airlines, Santiago-based LATAM (a Chilean-Brazilian airline) and Colombia’s Avianca, have already filed for bankruptcy protection in a New York court. In May, LATAM became the world’s largest airline to date to seek an emergency reorganization due to the coronavirus pandemic. It seeks to restructure $18 billion in debt. Latam’s filing for Chapter 11 is likely to delay a proposed bailout of the company by Brazil’s state development bank as well as push back aid to its domestic rivals.
Avianca was already desperately weak before Covid struck, having emerged from a debt restructuring process in Dec. 2019. Like LATAM, Avianca’s revenues and earnings were decimated by the near-total collapse of passenger operations in April, as all countries in Latin America sealed their borders and barred all non-essential travel. Passenger traffic on Latin American and Caribbean airlines plunged by a staggering 96% in April, according to the International Air Travel Association (IATA).
With Covid-19 cases rising across the region, which is now considered the epicenter of the global virus crisis, some countries still haven’t opened their borders and many travel bans remain in place. For example, travel between Brazil, which currently has the second highest number of covid-19 cases in the world, and the U.S., which has the highest, is still suspended, while all non-essential travel between Mexico, the U.S. and Canada remains restricted.
Prior to COVID-19, Latin America’s airline industry generated $167 billion in revenues and supported 7.2 million jobs, according to IATA. Forecasts now anticipate a drop of at least $77 billion in revenues, with more than 3.5 million jobs at risk.
Avianca recently reported that its passenger revenues had slumped 51% for the year up to early June compared to the same period of 2019. Given that included roughly two and a half months of normal uninterrupted operations, between January and mid-March 2020, the revenue figure shows just how dire second-quarter results are likely to be for Latin America’s airlines.
By the end of 2020, LATAM Airlines expects to be operating at half of pre-pandemic levels, said the group’s CEO Roberto Alvo on Thursday, adding that a full recovery was unlikely for at least three to four years.
LATAM’s Argentinean subsidiary has already announced it is ceasing all cargo and passenger operations, indefinitely. The decision, it said, was “a result of current market conditions, exacerbated by the impact of the Covid-19 pandemic and the difficulty of building structural agreements with local industry actors, which has made it impossible to foresee a viable and sustainable long-term project”.
It’s a common theme throughout the region. The airlines say they desperately need help from taxpayers to weather the storm. And in most cases they’re not getting it.
“This is our last chance to survive this crisis,” said Peter Cerdá, IATA Regional Vice President for the Americas. “Time is against us and every day that goes by places more agony on an industry that is seeking clarity on timelines to restart operations. No sector has the liquidity to stay afloat during a four- or five-month standstill.”
In North America and Europe, governments have responded to the turmoil hitting the aviation industry by unleashing billion-dollar aid packages to help keep airlines afloat. Some central banks have even bought bonds issued by airlines. It still may not be enough to save the industry.
On June 10, Delta Airlines, which forms part of the same SkyTeam airline alliance to which Aeromexico belongs, warned in an SEC filing that its revenues in the second quarter, ending June 30, would collapse by 90% compared to the second quarter last year. Ironically, Delta could end up facing billions of dollars in losses as direct a result of its untimely strategic partnership with LATAM, struck just seven months before LATAM’s bankruptcy.
Delta can count on government support, at least temporarily, as well as raise funds relatively cheaply on the bond market. In most Latin American economies, those sorts of luxuries are painfully scarce right now. As we’ve been warning since late March, most economies in Latin America have neither the fiscal firepower nor monetary leeway to bail out corporations in the way that countries in Europe and North America have.
Latin American and Caribbean governments have offered less support to the aviation sector sector than any other region, says Peter Cerdá at IATA. Even in Mexico, where funds are more readily available, the AMLO government has steadfastly refused to use taxpayer money to bail out shareholders and bondholders of large corporations. And he could be on to something — some sort of wild-eyed experiment, a form of capitalism where investors, not taxpayers, carry the risks. By Nick Corbishley, for WOLF STREET.
It’s all about money, but whose money? Read… Alitalia, Lufthansa, Condor, Norwegian, Other European Airlines Try to Survive, But it Gets Complicated
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Nick, it’s hilarious that AMLO (a supposed leftist) is actually practicing capitalism, unlike many of his supposed peers around the world who were supposed to be champions of said capitalism, but in reality is doing the equivalent of communism… picking winners and ignoring market forces.
I thought I had heard there was some conspiracy by right wing oligarchs to remove AMLO, we’ll see how long he lasts. Or if he gets ejected by those guys at the PRI, and they bring back somebody like Nieto.
MCH,
According to AMLO, there is definitely a conspiracy to remove AMLO. He’s even released leaked documents to prove it. That doesn’t mean his claims are true, but given Latin America’s long history of right-wing coups and counter revolutions as well as the financial pain AMLO has already caused many big Mexican companies and investors, it’s not exactly beyond the realms of possibility.
According to a survey in El Financiero — one of the media outlets accused of involvement in the alleged conspiracy — 44% of Mexicans believe the accusations are true, while another 44% believe AMLO made them up to rally his grass-root supporters against internal reactionary forces, which is also not beyond the realms of possibility. AMLO is a very astute and ruthless political operator.
One thing that is clear is that Mexican society is as riven politically as its big neighbour to the north.
The biggest difference is the legal status of those doing the robbing in each country. In Mexico, they are rightly called criminals, in the US, most of them are captains of industry.
I think AMLO did some unthinkable things that even Fox wouldn’t have done. Cancelling that airport was probably a last straw for somebody. One has to wonder where Mr. Slim stands in all of this. Probably backing an effort to get rid of AMLO.
MCH:
“….it’s hilarious that AMLO (a supposed leftist) is actually practicing capitalism, unlike many of his supposed peers around the world who were supposed to be champions of said capitalism, but in reality is doing the equivalent of communism… picking winners and ignoring market forces.”
Really????
And, pray tell what has the US capitalist system been doing principally since 2008????????
WOW!
Most are crony capitalists, not true capitalists –if that is not an extinct, always previously rare species. It is the stingy airlines’ fault that they are not getting bailouts like the financiers get: they did not bribe/ “contribute” to politicians enough.
Good grief, this is TERRIBLE.
Capitalism is for peasants, not REAL PEOPLE
AMLO must be some kind of communist!
“Crashing” in headline not a great word choice! Yikes
Gallows humor?
Things are obviously touch – and – go.
“LATAM Airlines expects to be operating at half of pre-pandemic levels, said the group’s CEO Roberto Alvo on Thursday, adding that a full recovery was unlikely for at least three to four years.”
This assessment is a window into our future. In the rosiest scenario, we’ll be back to pre-covid economic levels by January, 2025. Let that sink in for a moment. Remember it the next time you hear a talking head say “v-shaped recovery” on TV. There are no reality-based V-shaped recoveries. It’s all wishful thinking.
People are going to have to get used to the fact that economies are far more local now. Look to your neighbors for opportunities — not foreign travelers.
Areas that rely on foreign tourism will suffer for years.
Why are Latin American companies applying to a U.S. court ?
Are they registered as U.S. companies ?
400 million in bonds from last January 31st, usual book-runners M&S and G&S in the USofA https://www.prnewswire.com/news-releases/aeromexico-completes-successful-unsecured-senior-notes-issuance-in-international-markets-300997140.html
ALMO is only practicing capitalism because he has run out of other people’s money!
In other words, he is broke!
There is always an emergency budget option. He is not using it so he is not broke. My guess he wants to nationalize industry cheaply
If the South American countries keep letting over-leveraged big corporations fail, the Americans will be crossing the border to do the work no one wants to do.
There is no escaping capitalism.
Airplane…bailout…crash…
Sounds like a war movie.
Perhaps it is.
It’s much like “Cruise lines will sink without bailout”
I flew Aerlineas Argentina’s from Santiago to BA in 2001 It was quite a flight let me tell you Almost as much fun as my day trip to Colon, Panama
There goes the last market for Boeings 737 Max.
Wait, maybe Uncle Sam will buy them up for the USAF! Make them into bombers or Kamikaze planes.
With 30% not paying rent/mortgages in the country, maybe we can convert the world’s grounded plans into condos or public housing for the homeless or soon to be homeless?
Just one possibility.
Could have done that with thousands of cabooses that were dumped. Not to mention old box cars and unbelievable numbers of old passenger cars…but the government never seemed to prioritize keeping good resources by buying them cheap before they went to the scrap lines. Boosting private profit is perma-linked to creating expensive waste built on debt finance never-to-be-paid-off. The Ka-boom economy.
NY Mayor should set an example: put a dewinged 737 carcass in the middle of Times Square for homeless and low income housing and block off traffic. Forever. Pour soil into the street, let the new locals till the earth.
Please put your seat in the uptight position!
Enraptured with the headline-the possibility that investors will have to own their financial responsibility when they enter the doors of the big casino (cue the Albert Brooks/Bob Stupek scene from ‘Lost in America’…).
And, may we all find a better day…
A few weeks ago, at the height of the pandemic hype, airlines were offering discounted prices with free flexibility included.
I bought a few round trips in business class at 75% discount. With the idea to use them during the next 12 months when I feel like it.
I hope those airlines will still be around to honor the tickets.
I haven’t been to south America in the last 3 months but hopefully they did not fall for the “every other seat” social distancing thing which
1) has no scientific basis whatsoever.
2) is a sure path to bankruptcy.
Good luck to all of them and their employees.