They didn’t get bailed out by taxpayers. But in a radical experiment these days, investors got to eat the losses, as they should.
By Nick Corbishley, for WOLF STREET:
Budget airline Interjet, Mexico’s third largest carrier by passenger numbers, canceled its entire roster of flights on Nov. 1 and Nov. 2, leaving some 3,000 passengers stranded, due to its inability to pay for jet fuel.
Flights resumed on Tuesday, by which time the company had apparently scraped together enough money to resume servicing its fuel tab. But many of Interjet’s workers refused to work, choosing instead to picket the company’s Mexico City headquarters over the fact they haven’t been paid their salaries for two months.
And according to one worker who spoke to El Financiero, some benefits, including uniform allowances, housing credits and health insurance payments, haven’t been paid since March.
The strike was halted after the airline agreed to pay one quincena, or fortnightly payment, to workers by the middle of this week. It also said it hoped to pay three quincenas by the end of the week. There’s only one problem: it has no money.
This is despite the fact that a consortium of investors very quietly acquired 90% of the airline for $150 million in July in an operation whose details remain largely secret. According to the newspaper Milenio, the money has not yet materialized, apparently due to concerns that the moment it does, the government will take a large chunk of it to cover tens of millions of dollars of unpaid taxes.
Interjet was founded 15 years ago by the family of former Mexican senator Miguel Alemán Velasco, himself the son of a former president. It has been plagued by financial problems for years. This is partly due to an ill-fated decision, back in 2012, to purchase 22 Sukhoi SSJ100, which were considerably cheaper than other 75-100 seater regional jets on the market but proved to be a nightmare to maintain and source spare parts for. Once they had mechanical problems that could not be easily fixed, planes were simply left in their hangars and ended up being cannibalized for spare parts. By 2019, only five of the 22 aircraft were still operational.
When the virus crisis hit, bringing the global aviation industry to a virtual standstill, Interjet’s problems quickly multiplied. In the past eight months…
- Mexico’s federal tax agency SAT has imposed an embargo on property belonging to Alemán Velasco due to the airline’s unpaid tax bills.
- 25 of its leased aircraft were repossessed.
- Customers have launched a class action suit over its endless cancellation of flights and shady reimbursement practices.
- The city of Chicago has sued it for failing to pay taxes and fees owed to O’Hare International Airport.
- The Canadian Transportation Agency withdrew its license to operate in Canada for not having liability insurance coverage.
On Monday, the Mexican government’s consumer protection agency, Profeco, piled on the pressure by warning consumers not to buy tickets from the airline, after receiving 1,500 complaints from customers over cancellations.
“Interjet has been facing a number of problems in its commercial operations for several months, including the suspension of various international routes, the non-payment of salaries, the suspension of its license to operate international air routes to Canada and the embargo of bank accounts, goods and brands,” a notice from Profeco read.
The airline was already on its knees a year and a half ago. In its earnings call for the first half of 2019 — the last time it publicly disclosed its financial accounts — it reported losses of 516 million pesos. Cancellations and delays of Interjet flights became a constant feature of the summer, affecting 21,000 passengers. In August 2019, the airline refused to pay $30 million in unpaid corporate taxes, citing serious cash flow problems.
The company tried to raise fresh capital on numerous occasions, but with no success, eventually prompting its CFO, George Ferguson, to tell Bloomberg Intelligence:
“You can’t keep losing money quarter after quarter, having negative cash flow and owing money to lessors. Sooner or later, the party is going to end.”
That time appears to have arrived. The company’s website has been down for the last two days. The director of Profeco, Ricardo Sheffield, has warned that the company is “practically bankrupt” and its assets could even be seized by the Ministry of Finance and Public Credit (SHCP).
If Interjet does collapse, it will become the fourth Latin American airline to cease operations since the virus crisis began, eight months ago, joining Latam’s Argentina operations, TAME in Ecuador, and Caribbean airline Liat, which are being liquidated.
In addition, there were three airlines that filed for bankruptcy in the US and are trying to restructure: LATAM Airlines Group, Latin America’s largest airline filed for US bankruptcy in May. Colombia’s Avianca, one of the largest airlines in the Latin America, also filed for US bankruptcy in May. And Aeromexico filed for US bankruptcy in June.
Avianca is still awaiting court approval for a $2 billion financing plan as it restructures under Chapter 11. The Colombian government has tried to arrange a $370 million loan to tide the company over but it has been held up after a member of the public filed an injunction arguing that the company was already in financial straits before the pandemic and it would be reckless to lend more money to it now.
Aeromexico has received a $1 billion debtor-in possession (DIP) loan. It has also signed a codeshare agreement and reciprocal frequent flier benefits partnership with Latam Airlines. Both companies were partly owned by Delta Airlines, which held 49% of Aeromexico and 20% of Latam. Delta has now written off its stakes in both airlines, expecting its shares to get wiped out in bankruptcy.
Other regional airlines have barely enough cash flow to survive more than a few more months of low or no income, and are hanging on by a thread.
Unlike the major airlines in the U.S. and Europe, most Latin American carriers have received little in the way of financial support from their respective governments. According to the IATA, they picked up just 1% of the $130 billion in government bailouts offered worldwide, by Brazil and Colombia.
In Mexico, where funds are more readily available than in most countries, the government has steadfastly refused to use taxpayer money to bail out shareholders and bondholders of large corporations, including Aeromexico, a crazy, wild-eyed experiment, a form of capitalism where investors, not taxpayers, carry the risks.
One homegrown company that is well positioned is Mexico’s low-cost airline Volaris, which has established itself as one of the world’s most efficient carriers. Before the virus crisis, it had overtaken Aeromexico in passenger numbers. With the third lowest unit cost in the world, behind Budapest-based Wizz Air and Malaysia’s AirAsia and on a par with Ryanair, and $436 million in cash, it is one of the few international airlines that has actually added routes in the past eight months.
But Volaris is the exception. Most airlines in Latin America are frantically paring back their operations in a desperate scramble to slash costs and stay in business a little while longer — those that haven’t already run out of runway. By Nick Corbishley, for WOLF STREET.
American Bar Association, Mexican business lobby, ambassadors from the US, Canada, etc. in uproar over holding executives accountable and threatening them with criminal probes. 70 Mexican officials also investigated. Read… US, Global Corporate Giants Not Amused Mexico Finally Forces Them to Pay the Taxes They Owe
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Imagine that.Paying dividends and buying back stock
only when you have money plus a cushion. works.
This is insane, capitalism destroys jobs. ?. So says the investors, government must intervene to bail them out.
Too bad this doesn’t happen with the US airlines. Natural demand and supply cycles should be allowed to drive the economy.
But anyway, where is my airline bailout. I am thinking of buys JETS ETF.
Latin American central banks / governments can’t print as much money as the reserve currency gang can – so really they have NO CHOICE but to let them fail. We should be so lucky.
Good write up on Interjet. Too bad. I live in Costa Rica going to (or went before March) often to Mexico. And within Mexico.
Interjet was a great airline. Two free bags, free drinks and food. Slowly downhill with then one free bag then no free bag.
Now its going to be Volaris for cheap and Aeromexico for much more.
Im taking my Mexican wife to the airport in half an hour for Volaris flight They will raise rates now that Interjet is no more.
Last time we drove by airport could see two Interjet planes parked at gates. Must be the frozen leased planes. Will see in awhile if they are still there.
I used to live in Playa Jaco, on the Pacific side, early 90’s. I used to import carbide tipped saw blades and other tools to cut all the beautiful but very hard exotic woods there, and did a lot of surfing.
I used to fly Lacsa. We used to call it “Lacsa lucksa” because we would never know if our surfboards/luggage would make it there with us or how damaged it would be.
I remember one time the Airbus couldn’t take off from LAX because a cargo door wouldn’t shut, so I’m looking out my window and watch a forklift going back and forth shoving and compacting cargo into the compartment until the door would shut!
Two things….ALL you could drink for FREE…..and the Tica stewardesses were HOT!!
Ask any engineer or car mechanic..
Cheap to purchase.
But if not cheap to maintain or get parts.
Lifecycle and operational costs will kill you. Ask any former Yugo owners.
“to purchase 22 Sukhoi SSJ100, which were considerably cheaper than other 75-100 seater regional jets on the market but proved to be a nightmare to maintain and source spare parts for. Once they had mechanical problems that could not be easily fixed, planes were simply left in their hangars and ended up being cannibalized for spare parts. By 2019, only five of the 22 aircraft were still operational.”
Just like ink-jet printers.
Exactly 2nd,
Scrounge money to buy fuel, so how much maintenance is being done? Inspections? Fixing directives? Fixing snags?
And if the budget is that tight then what about pay cheques for flight crew?
I remember once telling my boss, “You pretend to pay us and we’ll pretend to work”. And yes, I was flight crew. It wasn’t that we were going to be unsafe as our butts were in the same plane as the pax, but it was the extras and extra effort that makes an okay airline into a great flying experience. By definition, budget airlines are what they seem. You get what you pay for.
It is a testament to the pilots and modern aircraft reliability that these cheap low cost companies don’t have wrecks all over their routes. I include the Max in this statement as they will get fixed.
This story is happening all over the industry; from single plane/pilot operations, rotary, and large carriers. It’s all the same, just more examples.
You get what you pay for. When there is no more fat to trim then you start on body parts.
Paulo-again the shame is that too-many always refuse to acknowledge the simple truth of your last sentence. Complaining about the the decline of service&value from once-great (or never-truly-longrun great from those who start with an unrealistic grasp of their true overhead costs, as Interjet here) firms is always free, opening one’s wallet to truly pay for service and value-well, that’s hard!
may we all find a better day.
Paulo,
“Pencil whipping” applicable to all areas of endeavors.
Macair provided BA with a masterclass.
Remember “TQMS”?
aka Time to Quit & Move to Seattle.
I never met a ’91’ Chief Pilot who’s other ‘hat’ was head of maintenance, for the various flt dept’s i flew for, that would compromise quality/safety of the mission for econometrics.
Perhaps i was very fortunate as hearing some horror stories over the decades. Inclusive of ‘121 & 135’ operations..
Happy Trails…..
Old racing adage (ref by Henry ‘Smokey’ Yunick) regarding econometrics.
“If you want nice fresh oats you have to pay a fair price. If you can be satisfied with oats that have already been thru the horse, that comes a little cheaper.”
No need to go that far (YUGO) we have our own lemons.
do the name VEGA and PINTO sound familiar?
What’s wrong with using YUGO as an example? What is your point exactly?
Anyway the YUGO example is better. The other cars had overarching design flaws which makes them not as good as an analogy. YUGO is the best analogy as there was no one single main fault, it’s the the overall quality the flaws of which presented themselves in 1,000 ways.
Growing up in northeastern Ohio, an area not friendly to any vehicle, my neighbor’s dad bought a Yugo in around 1987 or so. It was rusted out within a couple of years, he couldn’t have gotten more than 3 years’ use out of that brand new car.
It is not what killed Interjet. What killed Interjet are lease payments on Airbuses they decided to lease. So instead of financing proper maintenance of their owned Sukhoi fleet, they burned cash on leases when peso collapsed and were in big trouble well before the corona crisis. In fact, 5 or 6 operational Superjets are the only Interjet planes now flying.
The issue Sukhoi had was with the French-made part of the engines. It is now believed to have been fixed and Sukhoi is now the most operated aircraft here in Russia due to its right size for crisis times.
Interjet leased a lot of Airbus A320s, but the leasing company reposed all of the planes due to lack of payment. :-)
“You can’t keep losing money quarter after quarter, having negative cash flow and owing money to lessors. Sooner or later, the party is going to end.”
Hmmm … he’s obviously not heard of TESLA & co.
Isn’t Tesla profitable or very close to it?
Anyway an airline business model is NOTHING like a ‘tech company’ business model (if you are willing to accept Tesla as a tech company – certainly it’s at least half tech as its technical development is a big part of its business), so your analogy is very off-base.
Pretty clearly you saw an opportunity to bash Tesla, however irrelevant, and took it.
nah, there are entire articles set up for the purposes of bashing TSLA, no need to do it just for the heck of it. Speaking of bashing TSLA…
Perhaps the cartel’s make over the aircarrier to evolve their transition:
a)great avenue for financial engineering.
b)strengthen routes to NA mrkt. for passengers & ‘freight’.
c)they have a history of efficiency in operations management.
Note: Theoretical thesis only.
In what way theoretical? Air Holland was kept flying between Curacao and Holland by the profit of its “freight”
How do politicians buy votes then?
“In Mexico, where funds are more readily available than in most countries, the government has steadfastly refused to use taxpayer money to bail out shareholders and bondholders of large corporations, including Aeromexico, a crazy, wild-eyed experiment, a form of capitalism where investors, not taxpayers, carry the risks.”
The scythe of insolvency strikes once more… leaving in its wake a trail of bodies who stench is so potent none will be left without feeling its wake… not even liquidity injections escape its event horizon… taking all counter-parties… leveraged or not, with it to the singularity of chapter 11 for the fortunate… chapter 7 for those who even have a carcass left.
This news cannot be good for the airline industry. There will be more cancelations of purchases and delay of maintenance on planes. I am following boeing because I am researching purchasing a home/duplex in the Everett Washington area within the next year.
https://www.seattletimes.com/business/boeing-aerospace/boeing-leaders-meet-thursday-to-decide-fate-of-everetts-787-line/
this is an article that states there will be layoffs in everett due to the downturn but also because the company is deciding to move its 787 production line entirely to their south carolina facilities. This moves their production from a union state to a right to work state. This could benefit their stock price, and benefit my house looking. currently the everett washington area housing is a sellers market with prices increased 12% year over year.
The natives are leaving: look up rental trucks (Penske/U-Haul) costs from Seattle to (example) Boise, then compare the reverse trip.
Same dynamics unfolding 180 miles to the South.
Ymmv.
Making aircraft is one of those industries in which you want to have a union. They keep middle management honest.
But Boeing is a death company anyway. Any new airline, of which there will be many because of covid, will go a320. Not because of the Max but because Boeing is missing an XLR. And Airbus will go to for the kill. The tube with wings will be death within 30 years so no fear that some other company will take the place of Boeing
When Virgin Airlines went belly up as soon as the pandemic began, no one could believe a dillionaire, sorry billionaire, like Richard Branson did not have the money to save his own airline. The first thing he did was ask for a bailout from the government.
The result?
Virgin Australia has been bought by US private equity group Bain Capital after falling into administration due to coronavirus travel restrictions. The airline was struggling with long-term debt of A$5bn (£2.55bn; $3.17bn) even before the pandemic struck.
Jun 26, 2020
Hmm, let me think. What happens next?
Branson’s Virgin Group only owned 10% of Virgin Australia.
Etihad Airways owned 21%, Singapore Airlines, China’s Nanshan Group and HNA each own approx 20%.
From weak to stronger hands, just as it should…
One might argue that the collapse of air travel is a very good thing. That any non-essential air travel should be inconvenient enough to put people off the whole idea of flying.
Because:
The Biggest Oil & Gas Discoveries Of 2019
Conventional oil and gas discoveries have fallen by the wayside since the shale boom and the subsequent oil price collapse. In fact, they’ve fallen to their lowest in 70 years.
All in all, this year has seen new discoveries of nearly 8 billion barrels of oil equivalent, compared to 10 billion barrels of oil equivalent discovered last year.
But what’s most striking is that new discoveries aren’t even close to keeping pace with the loss of conventional resources.
According to Rystad, the current resource replacement ratio for conventional resources is only 16 percent. In other words, only one barrel out of every six consumed is being replaced with new resources.
So not only has our pace of discovery declined, but discoveries are also in much more challenging geological venues and typically offshore, which means it could take many years just to bring new resources online.
As a general rule, investors SHOULD “eat the losses”, when a real free market is operating. But this is different: the airlines, like many other businesses, were under a PROHIBITION to operate issued by the State. There should be compensation for this, same as for restaurant, gym, hotel, academia (Spanish), etc., owners.
This is what “We are all in this together” should mean.