Etihad Airways Partners, the investment entity owned by Etihad that manages its investments in other airlines, issued a notification of default this week relating to the Serbian flag carrier, Air Serbia. The surprising announcement is for $115 million, comprising two loans Etihad Airways Partners provided to Air Serbia in 2015 and 2016.
Air Serbia seeking debt restructuring
In a notice to the London Stock Exchange, Etihad Airways Partners announced the following on Wednesday:
“As a result of the on-going economic uncertainty in relation to COVID-19, and due to the official closure on 19 March 2020 of airports in the Republic of Serbia for inbound and outbound flights, [Air Serbia] has notified the Issuer and Agent of its inability to perform its principal business activity of worldwide civil air transportation and, therefore, of its potential inability to satisfy its obligations under Clause 6 (Repayment) of the Debt Obligation Agreement and any further payment obligations under the Debt Obligation Agreement.”
What this effectively means is that Air Serbia notified Etihad that it requires a restructuring of its debt towards Etihad Airways Partners, or else it will default. The Serbian flag carrier has borrowed $115 million from Etihad Airways Partners, across two loans.
After Etihad and Air Serbia established their partnership six years ago, Etihad Airways Partners gave a loan of just under $53 million to Air Serbia to help it maintain its rapid expansion of operations. This loan is due in September this year, just three months from now, and Air Serbia evidently does not have the funds to repay it.
The second loan, for $63 million, is what Etihad Airways Partners gave to Air Serbia a year later, in 2016. This loan will mature in 12 months’ time. It is an even larger sum, and Air Serbia cannot afford to finance it.
Apart from the loans, Air Serbia has also benefited from Etihad’s expertise, which transformed the company into the regional leader that it is today. Thanks to Etihad, Air Serbia was also able to acquire an Airbus A330 aircraft.
This aircraft came from Jet Airways, another one of Etihad’s partner airlines. When that aircraft was undergoing maintenance, Air Serbia operated long-haul flights from Belgrade to New York JFK with an Etihad Airways Airbus A330 replacement, which Etihad gave to Air Serbia for a whole month.
Why is Air Serbia in financial trouble?
Air Serbia has been on a path of remarkable growth for the past several years. Last year, it launched 21 new routes and was the first airline to begin serving a new Serbian airport in Kraljevo, Morava. It had major plans for expansion this year too.
However, this has all been costing the airline millions, annually. Air Serbia is loss-making, though that loss has been falling for some years. But the airline is heavily reliant on subsidies it receives from the Serbian government. Furthermore, its expansion was financed by Etihad’s debt. This is the debt that the airline now cannot afford to pay back.
Air Serbia’s troubles are compounded by the ongoing slump in demand for travel resulting from COVID-19. This is an especially acute problem at this time of year when Air Serbia would ordinarily be generating revenue from ticket sales that it uses to cover the operational losses it makes during the winter months.
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