Aviation News Online

AWAS enterprise value and logo; Etihad alliance unravelling?

Aircraft lessors today are worth more across the globe after Terra Firma managed to get US$7.15bn for AWAS on a basis of close to 1.2x price-to-book ratio. That is good going and Terra Firma has ended its investment in very strong fashion. Terra Firma held out for a company that could see the gain from AWAS – DAE is that company. It is well worth considering the fact that when it comes to DAE’s purchase of AWAS, Standard Aero is more like a trade (delayed) to help fund the AWAS acquisition, which has given DAE more breath, global reach and liquid assets to trade. Although it remains to be seen if the incremental platform is actually worth $200m (annually) to earn back the purchase cost over the next decade, it may be that the dollar appreciates significantly relative to the Dirham, which will make this investment appreciably cheaper over time – that is a good bet for a start. The best example of this, albeit with some luck, was the exceptionally good trade for SMBC with RBS Aviation as the Japanese Yen fell from JPY80 to JPY120 to the USD at the time, making that purchase a real bargain over the long term, especially given the AWAS purchase price and what it means for the value of competitors.

Once again, we have a great deal for all involving big numbers from the aircraft leasing sector and once again the logic of the purchase price is sound for all. Only the US dollar falling rapidly in value against the JPY and AED will damage the DAE and SMBC purchase agreements. This really is a day for lessors to smile.

Make sure you look to Airline Economics issue 36 for the full cover story on the AWAS sale and sign up for the DAE-sponsored Airline Economics Growth Frontiers Dubai conference on the 2,3,4 October 2017 for a DAE CEO keynote.

Meanwhile, when Etihad invested in Alitalia we all thought that was the airline investment too far. Sure, Air Berlin was a massive risk that has cost a great deal of money; Jet Airways was a massive risk and that thus far has worked out very well; but we all knew that however well Alitalia might run for a time, there would always be a big bump in the road and here it is – Alitalia employees have rejected a management restructuring plan to cut staff and salaries by 2 to 1. The staff unions believe that the Italian government will be asked to call in an administrator to draft an alternative rescue plan as creditors move towards the exit doors. The Italian government has stated that it will not renationalize the airline under any circumstance and as such is at an impasse. The Alitalia board is meeting today to try to work out what to do now that the plan to cut 1,700 jobs among ground staff and trim salaries among flight personnel by 8 per cent, in order to unlock additional financing and keep Alitalia in the air, has been rejected. The reality is that there is nothing the board can do, they are now literally going to have to ask the Italian government for a bailout and the Italian government will most likely ask for that to be matched by Etihad. That will damage Etihad greatly.

The Etihad airline investment model, much like the Swiss Air Lines one before, is in danger of unravelling and financing arrangements pegged against airline investments might be in danger too.

As all this mess unfolds, it is worth remembering that Alitalia has made an annual profit only a few times in its 70-year history, and it is losing at least €500,000 a day and the cash holdings will not last to the end of May, as things stand. In all this, the Italian workers would rather see the airline go down and everyone lose their jobs than the few. This is true to form because the government has been there to throw money at the airline every time in the past.

The Alitalia board has no choice today but to enter special administration, under which the government would be asked to appoint a commissioner to assess whether the carrier should be overhauled or wound up. This will protect the airline from creditors Intesa Sanpaolo and UniCredit and allow for a swift swing of the axe to cut the workforce.

It remains to be seen if the Italian government will stick by Etihad or if it will demand cash assistance in order for Etihad to remain a 49% shareholder. There seems to be no upside for Etihad in all this right now.

Date: April 25, 2017

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