Questions, Questions, Questions: Third time lucky? The Euro? SpiceJet & the Cape Town Convention?

Dino D'Amore
By Dino D'Amore January 26, 2015 20:49

Questions, Questions, Questions: Third time lucky? The Euro? SpiceJet & the Cape Town Convention?

It may well be third time lucky as IAG’s improved offer of €2.55 a share for Aer Lingus has been approved by the latter’s board with an announcement scheduled for today. Once again the ex-Aer Lingus pilot and CEO Willie Walsh is posed to make a high class purchase, that is of course if the Irish government who hold 25% and Ryanair agree to this deal. Ryanair still holds a huge 29.8% of Aer Lingus and its breakeven price on that holding will be at around the €2.56 mark, so the low-cost carrier will make a loss on the holding. That said, Ryanair has already written down the investment so it may take the cash and please its shareholders. The Irish government should also be pleased with the offer that is well above the original 2006 float price of €2.20 a share, which it has only really traded above during the two Ryanair takeover bids and this IAG bid now. Aer Lingus shares stood at €2.35 over the weekend and rose to €2.42 on the open today, while IAG added 1.8% to 545.5p (up 31% in the past 12 months), valuing IAG at around £10.9bn.

So what does IAG get out of this?

IAG is moving for additional Heathrow slots in the most logical, cheapest and maybe only way possible in the here and now. It can flip many of the current BA Heathrow/Dublin flights onto far more lucrative routes that will improve load factors on Aer Lingus flights at the same time. Here lies the rational and also the problem – the Irish transport minister, Paschal Donohoe, said yesterday that the government would examine how a takeover would affect Aer Lingus workers and competition on routes to and from Ireland, specifically Heathrow connections. Then of course there is the dreaded European Commission and the highly-likely scenario that it may force IAG to relinquish Heathrow slots in order for the deal to go through. Now that should stop the deal in its tracks as it would undermine one of the core reasons for the purchase.

IAG is unrecognisable from the BA that Willie Walsh took over just a few years ago; it is an amazing transformation into what is fast becoming the most dynamic airline group in Europe, maybe even the western world. IAG is already the western answer to the Etihad model – Now if only Heathrow could get its expansion plans through and the UK could lower APD tax and the EU could find a way to stop meddling, then, maybe, just maybe, IAG could indeed start to resemble and compete with the likes of Etihad and Emirates to the massive benefit of the UK economy. Of course successive UK governments have been, and most likely will continue to be, anti-aviation, but during the next 100 days of electioneering there will be many clues as to if Heathrow is to get its expansion plans agreed before the end of this decade, and it will also decide if the UK will leave the EU before the end of the decade in the event of a Conservative win. If the UK left the EU then you can bet that aviation and IAG and Heathrow in particular would suddenly be recognised as key for the UK economy and that would put the needs of the two operations high on any government agenda. Watch this space.

Meanwhile there are reports that that Greece’s leftwing Syriza party may form a coalition government with the right-wing, anti-bailout Independent Greeks party. The leader of the smaller party, Panos Kammenos, is quoted as saying: “I want to announce that from this moment there is a government in the country. The Independent Greeks give a vote of confidence in Prime Minister Alexis Tsipras. There is an agreement in principle.” – So Greece is indeed on a collision course with the EU and it is now highly likely to leave the Eurozone.

Meanwhile, SpiceJet says it will get Rs1,500 crore (US$243.75m) in new equity funding over a period of just over three months, according to a turnaround proposal from a new promoter; Ajay Singh that the civil aviation ministry has approved . Ajay Singh is to have SpiceJet shares transferred into his ownership from Kalanithi Maran and KAL Airways and Singh will control the board. The first instalment of Rs 100 crore (US$16.25m) was scheduled to be made yesterday, but it is not clear if this payment has been made (no statement to that effect has come over the wires). The next instalment, of Rs 400 crore (US$65m), is scheduled for February 15, followed by two more of Rs 500 crore (US$81.25m) each on March 20 and April 30, according to the plan approved by the Indian Ministry of Transport on Thursday last.

The proposal submitted by the airline to the Indian authorities puts the immediate liabilities of the airline at about Rs 1,500 crore (US$243.75m). At least Rs 650 crore (US$105.63m) of this is due to lessors– this is not so good. If we take average lease rates for the number and type of aircraft leased then we can safely say that an average of 19 months lease arrears per aircraft is in play at SpiceJet right now. Arrears to airport operators (which like to hold the aircraft as bargaining chips) total about Rs 300 crore (US$48.8m).

Here is the rub: SpiceJet at this moment in time should be handing back aircraft to lessors as they demand the same. But SpiceJet officials have told us that under Cape Town they have 60 days breathing space for this to happen, by which time they will be back in the black. But as SpiceJet might argue that under Cape Town they have 60 days to return aircraft there is the undeniable fact that the Cape Town Convention and the related Indian declarations made when ratifying the treaty only applies if the airline is under formal bankruptcy and/or insolvency protection where a court-ordered moratorium applies to all creditor action. In the case of SpiceJet, there is no such court proceeding and no court application has been made and in any case under Indian law there is currently no insolvency restructuring proceeding open to SpiceJet. So the blunt fact is SpiceJet does not have 60 days under the Cape Town Convention to hand back lessor owned assets – The airline is in effect refusing to return lessor-owned assets without any basis in law.

Then we come to the other point blank fact in play – SpiceJet was set on a course of losses by Air India government subsidies being used to slash ticket prices across the domestic market. This dynamic has not gone away, it has not changed fundamentally and if Air India looked like it was going to go under tomorrow then the government would likely as not infuse more cash. Take this fact along with the new powerful market entrants and you have a more competitive situation now than existed some five years ago. SpiceJet can reduce in size and concentrate on key routes with smaller aircraft to survive and grow again but statements have been made over the weekend indicating that there will be 40% more flights by summer 2015 from 12 months earlier. Either way right now it looks as though SpiceJet’s bridges are well and truly burned with quite a few lessors. If you would be happy leasing into SpiceJet right now then please do let me know as you may have an upside to this saga that I am unable to find.

Dino D'Amore
By Dino D'Amore January 26, 2015 20:49