The carnage in the aviation sector in the last year and a half is unlike anything we’ve seen before. Even in a good year, the finances of most airlines are precariously placed like a house of cards. A couple of bad business decisions can sometimes start a chain of events that can lead to complete shutdowns.
With restructuring, some airlines often get back on their feet, but sometimes carriers just can’t survive the onslaught. We take a look at what happens after an airline ceases operations.
Reasons for shutting shop
Sometimes shutting down operations can mean buying more time to restructure finances. If an airline has adequate assets, it can develop a plan to repay creditors in an orderly manner. A carrier can also use this time to redesign operations strategies such as fleet reduction, mergers, and workforce optimization to get out of trouble.
Virgin Australia went into voluntary administration in April 2020. With some changes in management and investment from Bain Capital, it’s now showing signs of recovery. Norwegian’s dramatic restructuring is a good case study of another airline that has done what it has to just to survive. But not every airline can be saved.
While such deterioration doesn’t happen overnight, many airlines have faced sudden closures due to repeated non-payment of fixed costs and never recovered from them. Compulsory liquidation is almost always the outcome in such cases. Thomas Cook Airlines and Kingfisher Airlines are a couple of examples that ceased operations permanently.
What happens to company assets?
Once it is clear that an airline can’t be recovered, all bets are off, and creditors start closing in to recover assets. Of course, everything goes through a legal procedure and paperwork. One of the first things that usually happens is that all its assets are frozen, including aircraft. This means that the airline often can’t help in repatriating its own stranded passengers.
During insolvency, an airline is deconstructed and its assets evaluated. In the case of India’s Jet Airways, lenders refused to give more money to keep the airline afloat, vendors asked for payments before services, and airplanes were repossessed by lessors, sometimes just hours before scheduled departure. Italy’s Ernest Airlines met the same fate, and COVID-19 squashed any chances of recovery.
Airplanes will sometimes be held by airports to which the airline owes money. If they are leased, they will usually go back to lessors. If owned, they will be added to the airline’s assets to be sold off and the proceeds distributed to creditors.
Other assets can include slots at important airports, spares, tools, loyalty programs and even brands and uniforms. All these items can have value to other aerospace companies and can raise money to add to the pot to pay back creditors. However, there is often not enough to pay back all those creditors.
What happens to employees and passengers?
Unsurprisingly, employees almost always take the brunt of such closures. Sometimes, when other airlines acquire airplanes of the defunct carrier, they also absorb cockpit and cabin crew for that aircraft type. Still, most employees are often left to fend for themselves after receiving some compensation. This became even trickier during the pandemic as airlines across the board started laying off crew, who had nowhere else to go.
Passengers are also affected, particularly with sudden grounding and freezing of the fleet. When Thomas Cook declared bankruptcy in 2019, thousands of passengers suddenly found themselves stranded in foreign locations with no immediate way to get back home.
Passengers can apply to have their canceled flights refunded, but this can be a lengthy process. They will join the long list of creditors to the airline, and will likely be a fairly long way down the list, after airports, fuel suppliers, lessors, and more.
No doubt, the pandemic has decimated the aviation sector in recent times. However, there are signs of recovery. With news of Emirates planning mass recruitment, Virgin Australia starting new routes, and some aircraft coming back from storage, the aviation sector seems to be getting back on its feet.