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.
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