Via Wolf Street

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.

The airline, which belongs to the family of former Mexican senator Miguel Alemán Velasco, himself the son of a former president, has been plagued with 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. 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.
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On Monday, 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).

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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.

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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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