Via Wolf Street

It’s all about money, but whose money?

By MC01, a frequent commenter on WOLF STREET:

As the dust starts to settle and air travel finally resumes, the European Commission (EC) is starting to look into the stream of public funds and taxpayer-backed loans that is pouring into European airlines’ coffers to see what can be considered a true aid to get through the Covid-19 crisis and what is not. And according to Italian media, the EC already has its sights set firmly on Alitalia.

Alitalia.

Alitalia has been in administration since May 2017, when the Etihad partnership/takeover collapsed. This is already exceptional as common practice in Italian bankruptcy law is to liquidate a company after one year in administration at most, if a new buyer cannot be found or a recovery plan agreed upon.

On March 18, 2020, taking advantage of the general chaos due to the healthcare crisis, the Italian government decided to nationalize Alitalia, an operation which was supposed to cost €600 million right away (mostly to pay off existing creditors and exit administration) and €3 billion down the road.

EC investigators have highlighted a long series of inconsistencies besides the obvious political implications of pouring so much money into a company with decades of financial losses while the Italian social security agency (INPS) is struggling to pay unemployment benefits.

Among the primary issues are the exact nature of two still ongoing “bridge loans” for a total of €1.3 billion, and the extraordinarily long time spent in administration without any serious attempt to sell the company or to restructure it to make it profitable.

The EC argues the Italian government has engaged in a “sleight of hand,” using the crisis to do something that had long been planned. The EC has given the Italian government until September 1 to provide a new recovery plan, as the present one cannot and will not be approved.

LEVEL Europe.

One airline which won’t be able to access State funding is LEVEL Europe, which filed for insolvency in Vienna and suspended all operations on June 18.

LEVEL Europe was an Austrian-registered subsidiary of IAG, the group whose brands include among others British Airways, Iberia, Vueling and Aer Lingus. It operated in the ultra-competitive European low-cost market, initially from Vienna to a series of destinations in Western Europe but later extending operations to Amsterdam.

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However, the airline proved unable to compete with low-cost heavyweights EasyJet and Ryanair and always struggled financially. IAG took the obvious decision to cut their losses at a time when saving money has become absolutely paramount.

Lufthansa.

And surprisingly, another airline which may not access State funding is Lufthansa. After announcing the group will attempt to lay off up to 22,000 employees while agreeing to a €9-billion “rescue package,” the Frankfurt-based group just discovered a major problem: the new main shareholder.

During the Covid-19 crisis, Munich-based billionaire Heinz Hermann Thiele increased his already conspicuous holdings of Lufthansa shares to 15%, making him the first shareholder. Thiele, who cut his teeth as a corporate patent lawyer before entering in the Vorstände (executive boards) of several transport technology companies, has been extremely vocal in his criticism of the “rescue package” negotiated by Lufthansa CEO Carsten Spohr.

While the German government at first maintained Thiele was “just bluffing,” they later had to admit he carries more than enough weight in the Lufthansa board to scuttle the “rescue package” and possibly send the whole group into administration during the crucial meeting to be held on June 25, should he choose to do so.

As it always happens with Lufthansa, politics have fully taken over now. While Thiele has long been a vocal critic of the Merkel Cabinet, a political compromise will be found that will allow Thiele to get what he wants and the German government to declare victory and move on.

A solution is absolutely necessary at the moment as the whole Lufthansa group (Lufthansa, Swiss, Brussels Airlines, Dolomiti, etc.) is ramping up operations on flights to destinations in Europe and the Middle East, with the number of flights further increasing starting July 1. As the saying goes failure is not an option.

Condor, again.

Using the force majeure clause in the preliminary agreement, the Polish Aviation Group (PGL) has already decided they will scuttle the deal to purchase German leisure airline Condor.

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In January, PGL – a state-owned group which wholly controls Polish flag carrier LOT and has a 49% stake in Nordica, the Estonian flag carrier – announced a plan to buy Condor for about €300 million. Condor had previously been part of the ill-fated Thomas Cook Group and narrowly escaped bankruptcy thanks to a €380 million bridge loan from the German state-owned development bank KfW.

With PGL now out of the picture, Condor will need more state-backed money to survive: This is presently estimated at around €200 million. It’s likely the German government will attempt to “dump” Condor upon either Lufthansa or TUI Group. But in the present climate both groups are very likely to resist vigorously, unless Condor comes with a hefty financial support package.

In the meantime, Condor is laying off 15-25% of its staff to save money, a decision that was long overdue: Condor had become bloated under Thomas Cook ownership, and during the early phase of the special administration there were signs the trend was continuing, a baffling situation considering the airline’s precarious financial situation.

Norwegian Air Shuttle.

Speaking of “precarious financial situation,” no report would be complete without Norwegian Air Shuttle. NAS was already in serious financial troubles before the Covid-19 crisis due to its massive debt-fueled growth binge that didn’t quite work out as expected.

On May 20, the company announced the completion of a NOK13 billion ($1.28 billion) recapitalization program which included the issuance of 30 million new shares at NOK1 apiece, compared to the closing price the day before of NOK4.4.

In one of those now puzzlingly common moments, the just devalued NAS stocks immediately shot into the stratosphere, giving the company an all-time high market capitalization of NOK 13.73 billion at a time when just 7 of its 120 aircraft were flying.

Fund managers who had subscribed the new shares at NOK1 quickly sold them at NOK2.2 realizing a 120% gain in mere hours. Move along Tesla.

Part of the recapitalization was a required debt-for-equity swap, where creditors had to exchange some of their claims for shares. Aircraft lessors ended up with the lion’s share: AerCap with 15.9%; and BOC Aviation (a Singapore-registered subsidiary of the state-owned Bank of China) with 12.67%.

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These lessors aren’t happy about this agreement, but the alternative was a difficult bankruptcy involving a company with a convoluted corporate structure, heavy debts, and little hard assets, all of them already used as collateral.

The new owners have also forced a drastic change of plans. NAS originally expected to fly just 7 aircraft into 2022, an incomprehensible choice at a time when their rivals were ramping up operations and especially given that European legislators have allowed airlines a lot of leeway on on-board measures to prevent the spread of disease.

NAS has now pulled a further 20 737-800 from storage which will be used to serve destinations in Scandinavia and Britain, with more to come.

While the recovery in Europe is now underway, the extent of the medium and long-term damage to air travel remains to be seen, especially to long-range destinations.

The Italian government has announced it will drop almost all quarantine requirements and restrictions for travelers coming from abroad on July 1. It’s likely all Schengen Area governments will follow suit over the following 45 days. However, it remains to be seen exactly how much this decision will affect air travel, especially long-range flights from the Americas and Asia. By MC01, a frequent commenter, for WOLF STREET

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