UK closer to Cape Town ratification; Kuwait Airways IPO in doubt as government refuses financial support

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By TESTCustomwebLP TESTCustomwebLP March 5, 2015 16:43

UK closer to Cape Town ratification; Kuwait Airways IPO in doubt as government refuses financial support

SpiceJet and the Indian courts showed that in reality if Cape Town is not passed into legislature then it is not worth anything in the event the of a dispute (as reported here in February). This then brought-up the question of if Cape Town matters at all given that the UK, India and the US and other had never ratified it, but the Aviation Working Group were quick to land on the ground in India and start making a difference for members. This hard work paid off late last week when the Indian government passed Cape Town Convention into law, that then left the question of what about the huge markets of the UK and US etc? Well today the UK moved closer to ratifying Cape Town into law.

The UK Government signalled its intention to ratify the Cape Town Convention last year by laying the Convention and Protocol before Parliament as Command papers. The UK government has now published its final consultation paper in relation to the UK’s ratification of the Cape Town Convention.

This treaty contains a number of optional provisions which the UK can decide whether or not to adopt. In a statement, Matthew Hancock, UK Minister of State for Business and Enterprise and Energy, announced the government’s publication of the final response to the Business Innovation and Skills consultation on the optional provisions held June and August 2014. The response, published today, sets out which of the optional provisions the UK intends to adopt.

Hancock added that a short technical consultation is being held on the practical effect of the draft regulations, to which comments are also invited. “Following the technical consultation the necessary regulations will be made to implement the treaty. The treaty will come into effect on the first day of the month, three months after the instruments have been deposited with the International Institute of Private Law (Unidroit), the depository for the treaty,” adds Hancock.

“The Government has chosen to consult on Alternative A, the option strongly recommended by the Aviation Working Group, whose members are drawn from the aviation finance industry,“ says Kenneth Gray, consultant, Norton Rose Fulbright. “Once ratified, the problems arising from the High Court’s decision in the Blue Sky case, which has meant that since 2010 lenders wishing to take security over aircraft under English law have been requiring the asset to be flown into English airspace, will be largely mitigated, to the relief of the aviation industry.”

Full analysis on this move will be featured in the forthoming issue of Airline Economics, which will also feature all of the Aviation 100 Deals of the Year. Subscribehere.

Meanwhile, the situation at Kuwait Airways remains unclear this morning as the Kuwaiti Government has reportedly refused to infuse money into the airline to cover the KD145m ($490m) of recent losses after the airline ran-up losses of KD67.6m for FY2013 and KD78m in 2014. It was hoped that after the government took over the airline to ready it for an IPO it would start things by clearing all debts, that now seems unlikely.

The fact is that the airline needs to be completely overhauled and the sooner new management are called in the better, the recent run of losses that now stretches back to 1990!

2013 results were particularly bad given that $500m was given to the airline by the Iraqi state for war reparations. Kuwait Airlines has just 14% local market share and around US$1.7bn of debt on its books. It has an aging fleet that it is only now desperately trying to renew through leasing aircraft, with four A320s arriving this month and eight more to come the airline will be able to ground and sell of older aircraft, but this will not make much of an impact. In fact Kuwait Airways is not expecting its first new purchased aircraft until the end of this decade.

The leased aircraft will help but they will not cut maintenance bills by enough to put the airline back in the black. Kuwait Airways must contract rapidly in order to expand again; in much the same way that Malaysia Airlines needs to do now. Kuwait Airlines is not a good investment prospect without government backing and any IPO is likely to fall flat on its face.

Given load factors, debts and cost of debt it is also reasonable to state that without government assistance the airline might falter and if it did then the lessors would be harmed.

On a far lighter note: The International Air Transport Association (IATA) announced yesterday global passenger traffic results for January 2015 showing traffic growth (revenue passenger kilometers or RPKs) of 4.6% compared to January 2014. This is a slower start to the year compared to 2014 full-year growth of 5.9%. But the timing of the Lunar New Year in Asia, which occurred one month later this year compared to 2014 points to a much stronger start to 2015 over 2014 in reality. Global January capacity rose 5.2% and load factor fell 0.5 percentage points to 77.7% as a result. Russia and Brazil remain the main risk factors to growth in 2015, but for the latter, which has an economy on the rocks with inflation proving a real problem, there is a ray of hope with the Olympics around the corner in 2016 that will create economic stimulus and of course one hopes high demand for air travel.

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By TESTCustomwebLP TESTCustomwebLP March 5, 2015 16:43