Yesterday, Grupo Aeromexico inked a restructure of the Collective Bargain Agreements with two of its Unions. The new deals allow the airline to meet specific commitments and objectives required by the DIP lenders under Aeromexico’s Chapter 11 bankruptcy. Additionally, the airline saves up to US$550 million of labor costs in the next four years. Let’s investigate further.
A necessary agreement
Aeromexico was on the spot. The Mexican airline had missed two deadlines to reach satisfactory agreements with its four syndicates. As part of its Chapter 11 reorganization, Aeromexico had to reduce costs and restructure the Collective Bargaining Agreements with its pilots (represented by ASPA), cabin crew members (represented by ASSA and STIA), and ground workers (represented by Independencia).
The airline’s future was on the line, literally. If Aeromexico didn’t come to an agreement with its Unions, it could have lost the remaining Debtor in Possession Credit Facility (DIP Financing), worth US$625 million.
Aeromexico’s financing is worth US$1 billion. It has already withdrawn US$375 million, composed of US$200 million of Tranche A and $175 million of Tranche B.
The airline is using this money to cope with the current COVID-19 crisis. In 2020, Aeromexico lost 54.2% of its passenger traffic while posting a US$1.6 billion net loss up to 2020’s third quarter. We still have to see the financial results of the final quarter.
Stay informed: Sign up for our daily aviation news digest.
A troubled negotiation
The agreement with Aeromexico’s Unions wasn’t easy. Both pilots and cabin crew members accused the airline of trying to impose unfair pay cuts.
According to ASPA, Aeromexico first asked the pilots to take reduction costs of up to US$760 million. Moreover, the airline was looking to ink permanent changes on the new CBA. The pilot union repeatedly rejected that petition.
Instead, both ASPA and Aeromexico renegotiated, going from US$760 million to US$350 million, plus making all the CBA changes temporary. They will expire on December 31, 2023. Among these changes is wage freezing.
Meanwhile, with the cabin crew members, Aeromexico will have cost reductions of $US200 million for the next three years. Plus, it will temporarily furlough more than 300 flight attendants until December 31, 2021. It had previously fired 766 flight attendants.
During the last few weeks, some international Unions, like BALPA, ALPA, and more, published solidarity letters with Aeromexico’s workers.
The Mexican Government served as a bridge between both sides of the negotiation. Nevertheless, had the deal gone sour, the Mexican Government wouldn’t have provided any help to Aeromexico. As proven with Interjet —and with many other companies during the current COVID-19 crisis— the Government will not save ailing businesses.
What does this mean for Aeromexico’s future?
For now, Aeromexico will be able to continue with its Chapter 11 reorganization. The airline will receive the remaining DIP Funding. Still, Aeromexico has many challenges to create a leaner organization and compete better against low-cost carriers Volaris and Viva Aerobus in the domestic market.
Aeromexico will further reduce its fleet (it has gone from 130 aircraft to 107 by the end of 2020). It will most likely reject leases for its older fleet, with planes like the Embraer E190 and the Boeing 737-700 eventually leaving the company. In the meantime, it will push its recently ungrounded Boeing 737 MAX fleet.
But we could also see a few surprises in the long-haul department. Maybe Aeromexico will reject a few Dreamliner leases, especially if the long-haul market delays its recovery even further. Currently, the Mexican airline is deploying its Dreamliners in odd routes like Mexico City-Cancun and Mexico City-Tijuana.
What do you expect of Aeromexico’s financial reorganization? Let us know in the comments.