Via Wolf Street

Throwing good money after bad as a business model.

By MC01, a frequent commenter on WOLF STREET:

On February 10, one of the largest Italian newspapers, Il Corriere della Sera, announced airline Air Italy, Italy’s second largest airline after Alitalia, was facing a liquidity crisis and may not survive long. Less than 24 hours later, Air Italy announced it would immediately enter voluntary liquidation. It said that until 25 February, flights would be carried out by other airlines, such as Wamos Air. Tickets for flights beyond that date would be refunded. And employees would receive their severance packages “as written in their contracts.” So that’s the end.

Air Italy, a joint venture between AKFED, the holding company for the Aga Khan’s for-profit ventures, and Qatar Airways, had ambitious plans to grow into a major player in the ultra-competitive European commercial aviation market.

However, it proved to be a financial nightmare: The airline lost €164 million in 2018 and €198 million in 2019, huge losses for a company whose fleet was down to just 12 aircraft. At the time the company ceased operations, its entire long-range fleet had been reduced to four Airbus A330, leased from parent Qatar Airways at very favorable terms.

Bankruptcy and turnaround advisory firm AlixPartners had put together a tentative recovery plan for Air Italy, but it would have required capital outlays of at least €500 million over the next two years, far more than AKFED was ready to stomach.

While Qatar Airways is blaming its partners for pulling the plug on the joint venture, over the past three months it approved cutting several unprofitable long-range routes, chiefly to South Asia, and quietly took back the A330 which had operated them.

Qatar Airways now wants RwandAir

Qatar Airways, having learned apparently nothing from this experience, is now negotiating with the Rwandan government to buy a large stake in the country’s flag carrier RwandAir. The airline has operated at a loss during its entire 11-year existence, and financial details for fiscal years after 2013 are difficult to access.

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In addition to bad financials and poor accounting practices, RwandAir is beset by other issues: The airline suffers from the typical “bloat” of African airlines, meaning it has far more employees than it needs, and the most profitable international routes from Kigali are already served by a host of aggressive airlines, from Air France to Turkish Airlines. This is going to be quite a challenge.

South African Airways gets another bailout.

Perpetually ailing South African Airways (SAA) has just been bailed out by the government, again. This latest bailout is worth ZAR 3.5 billion (about $240 million) and will be carried out by the Development Bank of South Africa, which is owned by the South African government. This is just the latest in a long series of bailouts that started in 2011 and has cost the South African taxpayer over $4 billion so far.

SAA is promising to axe routes and sell aircraft to bring some financial discipline to its books, but these are the same promises its executives have been making for almost a decade, while absolutely nothing has been done to restore the appeal of SAA on profitable long range routes against the likes of Emirates, KLM and Lufthansa.

And even less has been done about the aforementioned employee bloat. Excluding subsidiaries like low-cost airline Mango and the maintenance and catering divisions, SAA has about 11,000 employees, the same number it had back in 2011, and a fleet of 39 aircraft. A company that size would function perfectly well with 30-40% fewer employees.

The Kenya Airways boondoggle.

Kenya Airways, the state-owned flag carrier of Kenya and part of the same corporate alliance as SAA and RwandAir, is in the same spot: It has lost money every single year since 2013, and the latest financial statement puts losses at over Ksh 10 billion, or about $10 million.

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While this doesn’t sound like much, it must be remembered that according to Kenyan law, as a state-owned company, Kenya Airways benefits from different accounting rules than private corporations. The airline has “just” 3,500 employees, which doesn’t seem like much until one looks at how few destinations are served by the airline and how few passengers are carried.

Kenya Airways has proven largely unable to compete with foreign airlines on profitable long-range routes. These competitors include not only big established companies like KLM and cash-laden Middle Eastern upstarts like Qatar Airways, but also Ethiopian Airlines.

Ethiopian Airlines has taken advantage of its African competitors’ perpetual structural weaknesses and has aggressively expanded its network all over the Continent. To add insult to injury, state-owned Ethiopian Airlines has long been profitable; in the latest fiscal year made a profit of $260 million after taxes.

Brazilian bus company wants to become an airline.

Back to Gulf investment companies throwing good money after bad: According to Brazilian newspaper Folha do São Paulo, an unnamed “Abu Dhabi wealth fund” is about to invest $500 million in Itapemirin Group, Brazil’s, and by extension Latin America’s, largest bus company. It has been in rough financial shape at least since 2015, following an ill-advised decision to sell 40% of its fleet and its federal licenses to operate several interstate routes and then “outsource” them to direct competitors such as Viaçao Garcia.

According to Sidnei Piva, Itapemirin’s main shareholder, this investment by the Abu Dhabi wealth fund would not merely be used to renew the company’s bus fleet and revamp its crumbling IT infrastructure, but also to start a new airline, called “Ita.”

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Ita is supposed to have already ordered 35 unspecified Embraer regional airliners, though it’s not clear if directly or through leasing companies such as Guggenheim Partners and GECAS. The airline is supposed to start operations in “late 2021/early 2022.”

The funny thing is that Itapemirin already ventured in the airline sector during the economic boom of the 1990s with a freighter service called “Itapemirin Cargo” which operated a fleet of Cessna 208 Caravan and Boeing 727F, only to quickly shut it down in 1999 when said boom came to an end and the Brazilian real went through a massive devaluation.

That $500 million investment may sound like a lot of money, but it won’t get you very far in the aviation business, especially if you have little or no experience in the sector and plan to start out with a fleet as large as Ita. And that money surely will not last long if it also needs to be used to keep a failing bus company afloat. By MC01, a frequent commenter on WOLF STREET

The year has barely started, and it’s already the year of zombie airlines. Read… 2020, Already the Year of Zombie Airlines

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