Restructure, revive and rise - A new dawn for the aviation industry
Updated: Sep 8, 2020
Authors: Gareth Cremen – Director & Craig de Bruyn – Associate Designate
"You can't have a midlife crisis in the airline industry because every day is a crisis." — Herb Kelleher
Many executives across the globe can attest to this famous statement. The operations involved in running an airline requires an intense drive by many role players. Specialised skills, trust and competencies are essential elements required for the day to day management of an airline from maintaining high standards of safety and security, catering to consumer satisfaction and keeping abreast on international trends relating to air travel across various international routes and destinations.
In the midst of all of these essential operational requirements, what happens when there is a global pandemic outbreak which causes governments to close its borders coupled with a weakened consumer travel appetite? The Covid – 19 pandemic has already caused this crisis for all airlines.
Airlines everywhere have had to face serious financial challenges due to the fact that their operations have ceased and they are also battling with an overhaul of consumer refund demands. These are not easy times to manage an airline. No airline could possibly have prepared for contingency plans to have been developed for the cause of a force majeure of this nature. How does an airline turnaround its affairs with mounting external pressures?
Globally we have seen the following airlines experience operational and financial distress, and some being placed under administration and all under unique circumstances:
Air Mauritius, placed under voluntary administration following the financial strain operational challengers caused by the Covid–19 pandemic;
South African Airways (pre- Covid–19), placed under business rescue through a board resolution following a business rescue application by an affected person. Despite hefty bail outs from government being repeatedly injected into the airline, the governance structures could not effectively turn airline around; and
South African Express (pre- Covid–19), placed under business rescue by an order of court even after the airline vehemently opposed the application and failed to produce grounds why it was not financially distressed.
It is clear that although these airlines followed the same procedure, each did so under very different grounds. Many more a will follow suit.
But what does it mean for a company to be placed under administration or placed under business rescue? We compare administration mechanisms in varying jurisdictions and their aims. For this purpose, we will be assessing the insolvency laws in Mauritius in this regard for purposes of our comparison in shedding light on how the processes will affect a fellow African carrier.
The two turnaround processes mentioned above are not exactly the same, but share similar characteristics. In particular, features used such as ‘salvaging’ and ‘rescue’ means that even when operating through a difficult economic environment, in a challenging industry and in the midst of the crisis posed by the Covid – 19 pandemic, there is still hope for airlines. The intentions by the airlines in staying in the air are exemplary and require support by key stakeholders.
The aviation industry is an interconnected web connecting important role players such as cargo companies and travel agents whose businesses are streamlined from airlines.
Now is not the time to adopt a sense of defeatism but to recharge the support for the airlines servicing our nations. All parties in this interconnected web should work together (obviously being cognisant of anti-trust legislation) and not against each other in this downward spiral or it will be the end of the entire supply chain.
Salvaging and rescuing can only be made possible with the right administrator or practitioner, the right underlying intentions and the right financial backing. The nature and extent of a salvage or rescue will, however, rest on the most important role players – the consumers. The main generating asset for airlines are through ticket sales and safeguarding this asset is essential to airlines.
A key consideration is what happens if a travel insurer withdraws cover? Travel insurance is one element and insurers, like consumers, should understand what administration entails before simply withdrawing cover or support. One should not adopt overly simplistic attitude or stance regarding Administration or Business Rescue. Administration/Business Rescue can work under the right circumstances. What if travel insurance is not possible then how does an airline safeguard the consumer whilst ensuring future bookings? Travel agents, insurers and consumers must be aware that the traditional way in which airlines operated may change as a result of of this global crisis.
Working together and finding solutions rather than simply withdrawing until society returns to ‘normal’ should be adopted as the new ‘normal’. Travel Insurance companies should, if the airline is in Administration/Business Rescue, instead of simply withdrawing cover, consider a mechanism of ring-fencing travel ticket revenues or placing them in a trust fund until the travel has happened. This mechanism may also safeguard consumers against travel agents, wholesalers and tour operators who may also ending up going ‘belly-up’. The solution lies in thinking laterally and innovatively.
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