Latin America catches global spotlight for airline bankruptcies

SAO PAULO (Reuters) – LATAM Airlines and Avianca Holdings AVT_p.CN survived the Great Depression, but just a few weeks of quarantine forced the two companies into bankruptcy, making Latin America the world’s number one spot in airline financial ruin.

A Latam Airlines plane is seen at Guarulhos International Airport amid the coronavirus disease (COVID-19) outbreak, in Guarulhos, near Sao Paulo, Brazil, on May 19, 2020. REUTERS / Amanda Perobelli

Their bankruptcy filings this month are now expected to have a ripple effect on United Airlines and Delta Air Lines, whose untimely bets on the future of air travel in Latin America could cost them billions.

Hopes of a taxpayer bailout in the region are quickly fading, and bankruptcies show that even Latin America’s two largest carriers are not immune from collapse, even as many airlines in the United States. United States and Europe have received government assistance.

LATAM and Avianca have said they will continue to steal as they restructure their debts in bankruptcy court.

LATAM alone accounts for 40% of passengers traveling in Latin America and its bankruptcy surprised many investors while dealing another blow to Airbus, which counts LATAM and Avianca as main customers.

“The airline industry will not survive without government help,” Jerome Cadier, CEO of LATAM in Brazil, told Reuters.

It’s been in rescue talks for two months and counting, as much of Latin America’s airspace remains under heavy travel restrictions, even as other parts of the world reopen.

Latin America was already the least profitable region in the world for carriers before the crisis, hit by currency volatility, high taxes and a crippling recession in its largest economy, Brazil.

Still, it has long been seen as a region with great potential, enough to prompt Delta and United to spend heavily to topple American Airlines as America’s premier carrier for travel to Latin America.

‘STRATEGIC COMPANY’

Delta bought 20% of LATAM in December while United partnered with Avianca in 2018, but only after agreeing to fund the personal business interests of its Bolivian-born owner.

Three billion dollars later, the two American carriers still do not have the authorization to coordinate the flights with their partners. At today’s prices, Delta could buy almost four LATAM with the money it spent on its small stake. United could buy Avianca more than 20 times.

If you had invested $ 100 in Avianca at the start of this year, you would have $ 6.50 today. At its peak, LATAM boasted of being the second largest airline in the world in terms of market value.

According to analysts, in part due to LATAM’s size, the company’s shares did not fall as much before the bankruptcy as those of its peers.

“They were speculators betting on a bailout,” said Cristian Araya of Chilean brokerage firm Vantrust Capital.

Chile, where millions of people collectively own 15% of LATAM through retirement funds, declared it this week a “strategic enterprise” but failed to save it. Colombia has not made such rumors about Avianca.

Together, LATAM and Avianca still employ more than 60,000 people, although most of them earn half of their usual salary or not at all.

EMERGENCY MEETINGS

On Monday, LATAM’s board of directors sat for its 10th emergency meeting since April to formalize the bankruptcy decision.

The announcement surprised many, as the airline’s shares have fallen more than 60% since Tuesday.

Earlier this week, analysts at Raymond James still had an “outperformance” rating on the stock, predicting that LATAM stocks would double and calling its debt “manageable.”

But LATAM’s cash flow crisis and debt crisis were more serious than previously known, according to its bankruptcy filing.

The airline had defaulted on its debt repayments, scaring banks and aircraft rental companies. He had already exhausted his emergency line of credit in April. Shareholders had rejected LATAM’s board of directors from paying itself dividends that the airline could not afford.

Without a bankruptcy filing, LATAM would have had to pay some $ 200 million in expenses by next week, nearly a third of the total cash held by the airline’s subsidiaries participating in the bankruptcy.

At the same time, Delta abandoned a prior agreement to buy four Airbus A350 jets that LATAM did not want, paying a fee worth only a fraction of the price of the plane. LATAM wants to immediately return 15 Airbus planes, Avianca 8 others.

“Looking back, I think what we missed is that (LATAM) really needs to become a much smaller airline,” said Savanthi Syth, analyst at Raymond James, in an interview.

Cadier told Reuters he expects LATAM to decline by as much as 40%, which will include layoffs.

In a note downgrading LATAM after the bankruptcy, Raymond James said he had good news on Brazilian rivals Gol Linhas Aereas Inteligentes, Azul SA and Panamanian Copa Holdings.

“We don’t expect similar (bankruptcy) filings,” he said.

Report by Marcelo Rochabrun in Sao Paulo; Additional reporting by Tracy Rucinski and Fabian Cambero; Edited by Christian Plumb and Matthew Lewis

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