Aeromexico Files For Bankruptcy As Pandemic Shuts Down Latin American Air Travel

Grupo Aeromexico, Mexico’s second largest airline, became the third major Latin American carrier to file for bankruptcy amid the covid-19 pandemic.

Aeromexico said on Tuesday that it will “continue operating and use Chapter 11 as a way to strengthen its financial position and liquidity” and that the goal of this step will be in “protecting and preserving its operations and assets and implementing the necessary operational adjustments to face Covid-19-related impact.”

Aeromexico’s petition, filed in federal bankruptcy court in Manhattan, listed more than 100,000 creditors.

“The company has been evaluating the alternatives to improve its financial position after the impact of the [virus] crisis that affects all the airlines globally,” Aeromexico said.

Aeromexico also said it has entered into talks to secure debtor-in-possession financing as part of its Chapter 11 restructuring.

“Aeromexico trusts that it will get through its formal compromises for the [debtor-in-possession] financing. These funds, along with the cash available at Aeromexico, and with the approval of the Chapter 11 judge, we will have enough liquidity to fulfill our future obligations,” the company stated.

Aeromexico has received $100 million in funding over the past three months.

“Our industry faces challenges we’ve never seen before due to an incredible reduction in passenger demand globally. We are committed to adopting the necessary measures to operate continuously and efficiently under this new reality,” said Aeromexico’s CEO Andres Conesa.

Aeromexico’s largest stockholder is Delta Air Lines Inc. (DAL) with a 49% stake.

Aeromexico’s bankruptcy followed similar moves by major regional carriers Latam Airlines SA of Chile and Avianca Holdings SA of Colombia. (Delta also owns a 20% stake in Latam)

Grounded flights and travel bans led to a 90% plunge in Aeromexico’s passenger traffic. Back in May the airline reached deals with unions and suppliers to reduce costs by about $50 million per month.

But the airline also asserted it is sticking to its plans of quadrupling its international flights and doubling its domestic flights in August as the coronavirus lockdown relaxes.

Unlike their peers in the U.S. and Western Europe, Latin American airlines have received little government support during the pandemic.

Mexican President Andres Manuel Lopez Obrador already blocked any bailouts for large companies.

In May, S&P Global Ratings cut Aeromexico to “junk.”

“There’s a high risk that lockdowns could remain in place for a longer-than-expected period, delaying a recovery in Aeromexico’s operations. This could cause the company’s metrics to weaken further in the next two years,” S&P said.

In June, Moody’s Investors Service also downgraded Aeroméxico’s credit rating

“The passenger airline sector has been one of the sectors most significantly affected by the [coronavirus] shock, given its exposure to travel restrictions and sensitivity to consumer demand and sentiment,” Moody’s said at the time.

Moreover, Aeromexico had been struggling long before the pandemic struck.

The Mexican carrier posted a net loss of $3.05 million in 2017, followed by a loss of more than $83 million in the following year. In 2019, Aeromexico widened its loss to $105 million.

During the first quarter of 2020 alone, Aeromexico reported a loss more than $110 million.

More Latin American airlines may also collapse in the coming weeks and months.

Peter Cerda, the regional vice president for the Americas at the International Air Transport Association, warned that Latin American airlines are in deep trouble as many have already cut costs and scaled back operations.

“If this trend is allowed to continue, connectivity around the region will be affected,” said Cerda. “Less connectivity means less choice, and less choice usually translates into higher prices.”

Eliseo Llamazares, head of the South American aviation and tourism practice at KPMG, warned: “More than consolidation, many [Latin American] airlines will disappear.”

Llamazares also explained why regional governments have refused to bail out their air carriers.

“All the governments understand the importance of giving support to the [aviation] industry, but Latin America is a poor region, and it’s very hard to explain to the population that they are giving support to a private company despite this company providing a public service,” he said. “That is a very difficult conversation to have. And if there is any [government] support coming, it will come very late.”