South America’s LATAM Airlines Group filed for Chapter 11 bankruptcy reorganization in the US courts on Tuesday morning, seeking to restructure debt while continuing regular operations. Or, at least, operations as close to regular as possible given the current global aviation environment. The filing covers the operations in Chile, Peru, Colombia, Ecuador and the United States. It excludes operations in Brazil, Argentina and Paraguay. All of the operations, however, intend to continue current operations “as travel restrictions and demand permit.”
We have implemented a series of difficult measures to mitigate the impact of this unprecedented industry disruption, but ultimately this path represents the best option to lay the right foundation for the future of our airline group. We are looking ahead to a post-COVID-19 future and are focused on transforming our group to adapt to a new and evolving way of flying, with the health and safety of our passengers and employees being paramount.– Roberto Alvo, Chief Executive Officer of LATAM
The filing comes against the backdrop of global aviation trade group IATA highlighting the high variability of government support for the struggling aviation industry. In particular the group noted that Latin American government support has been very low compared to some other regions.
While LATAM continues to negotiate with the Brazilian government for support of that portion of its operations the rest of the group expects no government aid going forward.
Cutting debt, cancelling aircraft leases
The Chapter 11 filing was triggered in large part by the company’s failure to make payments on a billion dollars worth of debt tied to new aircraft purchase financing. LATAM reports $7.6 billion in debt against $1.3 billion cash on hand. Despite this debt ratio, however, the company recently issued a dividend payment. It now anticipates drawing against $900 million in debtor-in-possession financing from existing major shareholders including Qatar Airways and the Cueto family that generally controls the airline today through various holdings.
Of the existing 340 aircraft in the fleet LATAM aims to cancel the leases on 19. These include a pair of A350-900s and four 787-9s. Another 13 single-aisle planes are to be returned to lessors, 11 of which are A321s with a single A319 and A320 each also to be removed from the fleet.
The company holds orders for 44 new Airbus aircraft and 7 from Boeing. Expect that these pending aircraft will be deferred or otherwise renegotiated as the company right-sizes for the future. These numbers also reflect the 10 A350 orders previously transferred to Delta Air Lines under the joint venture deal those two carriers reached last year. One report further has that deal revised to see Delta buying out its plan to take on four more A350s from LATAM later this year.
The LATAM bankruptcy proceedings follow similar moves from Avianca under US law and Virgin Australia under Australian law. In both of those cases the airlines expect to continue operating with fresh funding investments and certain existing debt erased. For most travelers the impact should be relatively low.
Accelerating the new Delta partnership
LATAM hopes that the bankruptcy proceedings will allow for its partnership with Delta to not only proceed, but to accelerate in implementation:
Given the strategic importance of this partnership, the Debtors expect to use the Assumption Procedures requested by this Motion to assume expeditiously the Delta Joint Venture Agreements. The Delta Joint Venture Agreements are expected to bring relevant benefits to LATAM and its customers. Therefore, it is critical for the Debtors to assume the Delta Joint Venture Agreements and honor the obligations owed under such agreements.
In this context the expeditious moves represent not taking delays as a result of the reorganization more than focusing on truly speeding the process. But getting it done quickly is a key factor in the recovery for the carrier, assuming demand returns.
Loyalty remains untouched for now
As with the rest of the operations, the LATAM Pass loyalty program remains unaffected for now. The existing partnerships with airlines for earnings and redemption, as well as lounge access and other benefits, all remain in place and the airline expects they will continue unabated. The company highlights the value of the LATAM Pass program in its filings, noting that the program delivered $179 million in direct revenue from selling points to individuals and business partners in 2019. While airlines have historically used advanced sales of points to help finance operations in similar situations, this crisis has seen relatively few transactions on that front.
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