Airlines Try to Fly Out of Trouble

covid Airlines Try to Fly

The coronavirus (Covid-19) pandemic, and resultant quarantine measures and travel bans, has hit Latin America’s airlines particularly hard. This emerging crisis in Latin American air travel has been highlighted by three separate events taking place within the space of a month. On 28 April US aircraft company, Boeing, pulled out of a long-negotiated US$4.2bn deal to buy the civil aviation business of Brazilian aerospace manufacturer Embraer. Then, on 10 May, Colombia-based Avianca, Latin America’s second largest airline, filed for Chapter 11 bankruptcy in a US court. This was followed on 28 May by a similar filing from Latam Airlines Group, the largest Latin American passenger carrier.

The Boeing deal was part of a strategy to form global alliances in a pre-coronavirus world. Although there were divided opinions within the Brazilian government over the deal, the net result of it falling through is that Embraer will have to re-think its international strategy at a time when the shape of future air travel – and therefore the type of aircraft that the industry will need over the next few years – is in doubt. Embraer CEO, Francisco Gomes Neto, has said the company can find US$1bn in cost savings this year and has enough cash to survive for the next two years, even if it wins no new orders.

Avianca’s bankruptcy filing two weeks later also raises the question of what the company needs to do to be profitable in a post-pandemic world. The airline employs 20,000 people worldwide, has annual revenues of around US$4.6bn and last year carried over 30m passengers. Founded in 1919, it is the world’s second oldest airline. Until recently the company was controlled by Brazil’s Synergy Group, but the majority shareholder is now Kingsland Holdings, a subsidiary of United Airlines. In its bankruptcy filing Avianca said that the Covid-19 crisis, including the Colombian government’s decision to suspend most flights from 23 March, had cut its revenues by 80%. Because of its high levels of debt, Avianca had been considered one of the most vulnerable Latin American carriers, along with Mexico’s Interjet and Brazil’s Gol. Avianca’s intention is to seek a three-phase recovery: first, to secure new capital; second, to agree a reorganisation plan; and third, to emerge from Chapter 11.

At the end of May, it was Latam’s turn. The Chile-based carrier is the region’s largest, with 41,000 employees and annual revenues of around US$10.4bn. Latam is part-owned by Delta Airlines of the US, by the Chilean and Brazilian Cueto and Amaro families, and by Qatar Airways. Because of Covid-19 lockdowns, the company was forced to ground around 95% of its flights. It has pared back to operating only 39 domestic routes in Brazil, 13 in Chile, and four international routes. According to its CEO, Roberto Alvo, “Latam entered the Covid-19 pandemic as a healthy and profitable airline group, yet exceptional circumstances have led to a collapse in global demand that has not only brought aviation to a virtual standstill, but has also changed the industry for the foreseeable future”. Latam has clearly taken the view that to survive it must cut costs. On 5 June the firm’s management said it was laying off 1,000 workers from its Chile, Colombia, and Peru hubs, on top of 1,850 redundancies announced on 15 May in those countries plus Ecuador. Alvo said that further layoffs might be necessary. 

More airlines are likely to follow. According to the International Air Transport Association (IATA), passenger airlines will have combined losses of US$314bn this year due to the Covid-19 crisis, with Latin American carriers losing US$18bn. In March research by JP Morgan, an investment bank, suggested that in a scenario in which all flights remained grounded, Avianca and Latam would have three to four months before running out of cash. As it turned out these were indeed the first to file for bankruptcy. Among other carriers the report suggested were also exposed were two Brazil-based carriers, Gol (five months) and Azul (six months). Panama-based Copa Airlines, widely seen as one of the financially strongest airlines in the region, would have ten months.

In theory at least the industry will find a way out of the crisis like it has done before, after the 9/11 crisis in 2001 for example. But the Covid-19 downturn has been sharper and longer than anything yet experienced, and it is still unclear how long the shutdown will last. Nor is it clear how social distancing and other health protocols can be implemented to convince customers and regulators that air travel can be made safe from the virus. It is hard to see how some proposals – such as leaving empty middle seats – can be implemented while maintaining profitability. Calculations by IATA suggest it will take three years for domestic and regional passenger numbers to return to pre-pandemic levels, and maybe four years for long-haul international flights to recover. 

Governments in the US and Europe have begun bailing out their airlines (the US Congress has voted through over US$50bn in emergency assistance), but government assistance has so far not been forthcoming in Latin America, where governments have less funds at their disposal and other political priorities given that air travel is often seen as the preserve of the rich. This adds to the industry’s challenges in the region. Avianca and Latam say they have spoken with various governments about potential assistance, but no solid commitments have been made. The issue is not simple. Tourism is important for many Latin American economies, but without the right airline routes to bring the visitors in, it cannot prosper. Some may also be troubled by a scenario in which subsidised US carriers have an unfair advantage over Latin American competitors.  

Despite deep uncertainty, some analysts are optimistic about the ability of Latin American airlines to bounce back. There are signs of investor confidence. Domestic travel may be the first to improve, and could provide a road to recovery through domestic routes and smaller aircraft. Some of the region’s low-cost carriers (LCCs) are also upbeat about the current turbulence. Estuardo Ortiz, CEO of Chile’s JetSmart, recently said “We are not considering filing for bankruptcy at the moment. The fundamentals of JetSmart in its ultra-low-cost structure are still valid. We are still focused on long term sustainability and with our growth projection for 2026”. Colombian LCC Viva Air says it initially expects big price discounts as carriers try to entice customers back into the air. However, most analysts expect fares to ultimately end up higher than they were before the pandemic. IATA has said that flying with empty middle seats would probably push up air fares by 50%.

Some confidence

While the stock market is not always a reliable indicator, after a deep slump since March, on 5 June New York Stock Exchange-listed share prices for Brazil-based Gol and Azul jumped by 14%, while those for Mexico-based Volaris rose by 10%. This improvement, after major falls, seems to have been based on the fact that as lockdown restrictions are lifted in the US, pent-up demand there has been released and domestic air travel has begun to pick up quite strongly. Investors may be anticipating a similar pattern as Latin America lifts restrictions. They may also be taking a calculated guess that the likes of Gol, Azul, and Volaris will be able to stay out of Chapter 11 bankruptcy.