LATAM Airlines shares plunged over 36% on Tuesday (May 27) after South America's largest air carrier announced it had filed for bankruptcy. The NYSE-listed airline group initiated a voluntary restructuring under Chapter 11 protection in the US, with the support of Qatar Airways and the family of chairman Ignacio Cueto, two of its largest shareholders.
The Chapter 11 bankruptcy filing which covers LATAM Airlines Group headquartered in Santiago, Chile, as well as its affiliates in Colombia, Peru, Ecuador, and the US -but not those in Argentina, Brazil, and Paraguay- underscores the severity of the financial challenges facing the travel industry due to the coronavirus pandemic.
Population lockdowns, quarantines, border closures and other measures taken by governments paralysed air travel which has plunged to a fraction of the levels it was just months ago.
Before the pandemic, LATAM Airlines flew to 145 destinations in 26 countries, operating more than 1,300 flights a day.
The airline transported 74 million passengers last year and had more than 340 planes in its fleet and nearly 42,000 employees. It reported a profit of US$190 million in 2019.
Earlier this month LATAM announced plans to cut more than 1,800 jobs, and the airline has reduced its total schedule by about 95%.
“LATAM entered the COVID-19 pandemic as a healthy and profitable airline group, yet exceptional circumstances have led to a collapse in global demand and has not only brought aviation to a virtual standstill, but it has also changed the industry for the foreseeable future,” said Roberto Alvo, Chief Executive Officer of LATAM.
“We have implemented a series of difficult measures to mitigate the impact of this unprecedented industry disruption, but ultimately this path represents the best option to lay the right foundation for the future of our airline group.”
Under US law, a “chapter 11” bankruptcy allows for continued operations under government supervision, negotiation of expense and debt and usually lets management stay in control.
The Cuero families and Qatar Airways will provide up to $900M in debtor-in-possession financing; the company had approximately $1.3B in cash on hand at the time of the filing.
Latam's move comes just two weeks after Latin America's second biggest airline, Colombia's Avianca, also filed for bankruptcy protection in the US to reorganise its debt.
Australia’s number two airline Virgin Australia also entered voluntary administration last month and several regional carriers in the U.K. and the U.S. have shut down operations.
Over the weekend, Lufthansa Airlines' parent company agreed to a $10 billion bailout from the German government.
The International Air Transport Association on Monday said debt accumulated by the global aviation industry could increase by 28 percent this year, reaching $550 billion.That’s a $120 billion increase over debt levels at the start of 2020.
“Government aid is helping to keep the industry afloat. The next challenge will be preventing airlines from sinking under the burden of debt that the aid is creating,” said Alexandre de Juniac, IATA’s Director General and CEO.
Will LATAM Airlines emerge as a stronger company? Latam shares began the year trading at more than $10 apiece and Tuesday closed at $1.68.