LATAM becomes largest airline yet driven to bankruptcy by coronavirus

Business

(Reuters) – Chile’s LATAM Airlines Group (LTM.SN) filed for U.S. bankruptcy protection on Tuesday, becoming the world’s largest carrier so far to seek an emergency reorganization due to the coronavirus pandemic.

FILE PHOTO: The logo of LATAM Airlines is pictured on an Airbus plane in Colomiers near Toulouse, France, November 6, 2018. REUTERS/Regis Duvignau

The filing highlights the financial weakness of Latin America’s carriers and follows a similar bankruptcy reorganization earlier this month by its main rival, Colombia’s Avianca Holdings (AVT_p.CN).

But unlike Avianca, which experienced management turmoil and losses, Chile’s LATAM posted profits for the last four consecutive years totaling more than $700 million.

LATAM, which has about $1.3 billion of cash on hand, recently approved a dividend payment, in contrast to other carriers that have halted payouts amid the crisis.

LATAM said it would continue to fly through its bankruptcy restructuring.

Latin American governments, many under severe budget constraints themselves, have been reluctant to bail out their key airlines, in contrast to the United States and Europe. Most recently, Germany bailed out Lufthansa for a 20% stake.

Chile’s Economy Minister Lucas Palacios said on Tuesday he would not rule out a bailout, although he did not propose one.

“Lufthansa’s case is completely different,” Palacios said. “LATAM is an international airline, its shares trade in the United States.”

In a separate statement, Chile’s finance ministry said LATAM is a “strategic company for Chile” and that the government would “consider” how it could contribute to LATAM’s bankruptcy reorganization.

In Brazil, LATAM has been negotiating a bailout of up to 2 billion reais ($367.45 million) that has yet to materialize.

LATAM’s Brazil unit is not part of the bankruptcy, and the company said it might file for bankruptcy as well.

A source close to Latam’s negotiations in Brazil said that bailout talks were continuing.

Shares sank up to 41% in premarket trading in the U.S. before trading was suspended, a common practice when companies file for bankruptcy. Trading was also suspended in Santiago until noon.

Delta Air Lines (DAL.N) last year paid $1.9 billion for a 20% stake during better times for the industry, becoming one of the largest shareholders in the company.

LATAM laid off 1,800 employees out of over 40,000 in the lead-up to its bankruptcy filing.

“This path represents the best option,” Chief Executive Roberto Alvo said in a statement regarding bankruptcy.

TROUBLED MERGER

LATAM is an instantly recognizable brand for South Americans, dominating international air travel in the region, as well as a leading domestic flight operator in Brazil, Colombia, Chile, Argentina, Peru and Ecuador.

In addition to Brazil, subsidiaries in Argentina and Paraguay are also not part of the bankruptcy process.

LATAM said it raised up to $900 million to support operations through its bankruptcy reorganization from major shareholders, including the Cueto family which controls the airline and Qatar Airways.

LATAM was born in 2012 through a merger between Chile’s LAN and Brazil’s TAM, spawning a carrier with large aircraft order books and major exposure to Latin America’s top economy as it went through its worst recession on record.

It has since dropped many plane orders but maintains 44 with Airbus (AIR.PA) and 7 with Boeing Co (BA.N). LATAM said it would seek to cancel several of those orders, but didn’t provide details.

LATAM did disclose that Delta canceled the planned purchase of four Airbus A350s from LATAM, and paid $62 million to break the deal.

LATAM said that as of Tuesday, it had $7.6 billion in debt, including $460 million in loans tied to its Brazilian subsidiary which is not part of the bankruptcy process.

FILE PHOTOLATAM airlines logo, is seen inside of the Commodore Arturo Merino Benitez International Airport in Santiago, Chile April 25, 2019. REUTERS/Rodrigo Garrido

The airline was downgraded by S&P and Fitch on Friday after the company did not pay interest and principal on $1 billion worth of debt tied to the financing of new aircraft purchases.

Investment bank Moelis & Co (MC.N) is in talks to represent bondholders owning around $3 billion in debt owed by Latam, a source told Reuters.

Reporting by Marcelo Rochabrun in Sao Paulo; Additional reporting by Tatiana Bautzer in Sao Paulo, Rama Venkat in Bengaluru, Tracy Rucinski, Fabian Cambero and Dave Sherwood in Santiago, and Jamie Freed in Sydney; Editing by Kim Coghill, Jason Neely and Bernadette Baum

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