Delta Airlines to proceed with joint venture despite financial probems

Following regional rival Avianca Holdings’s footsteps, LATAM Airlines, the largest carrier in Latin America, is reorganizing and restructuring debt under court-supervised bankruptcy protection in the United States because of the unprecedented downturn in business caused by the coronavirus.

Today’s filing for Chapter 11 bankruptcy covers LATAM Airlines Group (NYSE: LTM), headquartered in Santiago, Chile, as well as its affiliates in Colombia, Peru, Ecuador and the U.S., but not those in Argentina, Brazil and Paraguay.

LATAM said the restructuring will result in a smaller airline, but it will continue to operate as normal, with no interruption in passenger or cargo service, reservations or its loyalty program. Downsizing is something all airlines are trying to figure out how to do in the face of a pandemic that has wiped out travel demand.

Capital injection, government protection

Qatar Airways and the family of chairman Ignacio Cueto, two of the company’s largest shareholders, are fronting $900 million in debtor-in-possession financing. The capital injection will help LATAM, which has $1.3 billion in liquid reserves, pay vendors for services, and puts the two shareholders at the head of the line for claiming assets if the airline is forced to liquidate later.

“LATAM entered the COVID-19 pandemic as a healthy and profitable airline group, yet exceptional circumstances have led to a collapse in global demand and has not only brought aviation to a virtual standstill, but it has also changed the industry for the foreseeable future,” LATAM Chief Executive Robert Alvo said in a statement. “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.”

The airline group said it is in discussions with the governments of Chile, Brazil, Colombia and Peru for emergency aid and invited other shareholders to provide extra financing to protect jobs and minimize disruption.

95% passenger traffic drop

Last year, LATAM launched 26 new routes and transported a record 74 million passengers. It reduced passenger operations by 95% in April and May because of coronavirus travel bans and low passenger business.

The bankruptcy complicates LATAM’s pending joint venture with Delta Air Lines (NYSE: DAL). The Atlanta-based carrier is paying $1.9 billion for a 20% stake in LATAM in an effort to expand its footprint in Central and South America, and take business from American Airlines. The two companies are already cooperating on codeshares for passenger travel and earlier this month signed a blueprint for how to integrate operations once they receive approval from regulators.

“In the time we have gotten to know one another, we’ve developed the utmost respect for and confidence in the LATAM leadership team,” said Delta CEO Ed Bastian in a statement. “Airlines globally have been devastated by the COVID-19 pandemic, for which no business plan could have adequately prepared. We remain firmly committed to our partnership with LATAM and believe that it will successfully emerge a stronger airline and Delta partner for the long term.”

New cargo routes

LATAM this spring has added new routes and frequencies for cargo customers to meet the surge in demand for perishable foods, medical supplies, and other goods resulting from lost cargo space when airlines took down most flights in the face of widespread travel restrictions. LATAM’ has more than 300 aircraft in its fleet, including 11 Boeing 767-300 freighters. The airline has also repurposed several passenger aircraft for cargo mode, using special sacks to hold cargo in the seats and even tearing out seats to create room for cargo in the passenger cabin.

LATAM’s bankruptcy foreshadows the difficult road airlines have in downsizing to a level commensurate with extremely low travel demand, minimize drawdowns of cash reserves until travel picks up, and then having enough employees and other resources to ramp up schedules when people are ready to fly again.

Debt levels increasing worldwide

The International Air Transport Association on Monday said airlines collectively a 28% increase in debt levels to $550 billion that could hamper their ability to recover.

Over the weekend, Lufthansa Airlines’ parent company agreed to a $10 billion bailout from the German government. Israeli flag carrier El Al recently said it could go under without government aid, while Virgin Australia has also filed for bankruptcy protection and several regional carriers in the U.K. and U.S. have shut down operations.