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No break in the financial storm clouds for Interjet. April 2020

The end of Q1 2020 saw claims emerging that several lessors had repossessed aircraft from Interjet. Sources indicate the repossession of at least 27 Airbus A320ceo and A320neo family aircraft from various lessors between March 24th and April 1st, with a further 20+ aircraft repossessed/returned to lessors from April 2nd to date. The ongoing Covid-19 situation is unprecedented, and no doubt plays a role in Interjet's difficulties. However, with lessors broadly agreeing payment deferrals with troubled airlines, these repossessions hint at ongoing, underlying problems at the airline.



Interjet has itself denied at least some of the aircraft were repossessed, insisting instead that the terms of the leases were 'abusive'. This is not the first time the airline has been in the spotlight for non-payment of dues. In an August 2019 Bloomberg report, Interjet's Chief Financial Officer indicated the airline was in 'technical bankruptcy' and unable to pay off taxes dating back to 2013, a claim the airline quickly denied. This paper looks at Interjet's decline in recent times and considers the airline's future.


Financial Performance

ABC Aerolineas SA de CV, doing business as Interjet, has made financial statements available only up until March 2019, the latest full financial year accessible being December 2018. Interjet has indicated that post March 2019, the requirement to make financial statements public had been fulfilled as they had paid off a loan with this stipulation, therefore the airline has posted no financial statements since then.



Using data from IBA's Credit Score Index, the above chart shows the progressive decline of Interjet's IBA Credit Score over the past three full financial years. While revenue had been growing steadily over the period, operating expenses grew faster leading to a gradual erosion of the company's operating profit. The two largest expenses, aircraft fuel and flight equipment rentals, grew 30% and 50% respectively between FY17 and FY18, flight equipment rental increases reportedly driven in part by a growth in sale leaseback activity. Costs denominated in USD also saw a slight increase over the period as the Mexican peso depreciated by 4.5%.


This situation led to relatively severe cash declines up until the end of FY18. As shown below, Interjet's cash and cash equivalents fell significantly from FY15, standing at USD 30 million at the end of FY18. Capital expenditure for 2017 and 2018 was negligible. However, operating cash declined due to net losses in both years. In March 2019 it appeared these losses were continuing, indicating sustained pressure on the airline's cash flow.



Mexican media reports indicate Interjet still owes a significant amount in back taxes. There are indications the owners have injected cash into the company in recent months but the extent of these injections is unclear.


Fleet Structure

Using IBA.iQ Fleets, as at the end of January 2020 Interjet's fleet was made up of 87 in service aircraft consisting of 45 Airbus A320-200s, eight Airbus A321-200neos, seven Airbus A320-200neos, six Airbus A321-200s and 21 Sukhoi Superjet SSJ 100s (which have been plagued by spare parts issues). At the time, the fleet was mostly leased, 62 of the 66 Airbus aircraft being leased from various lessors. Similarly, 61 of the 87 aircraft in the fleet were active, with 18 of the 21 SSJ 100s and seven of the 45 Airbus A320-200s stored or parked. As of April 6th 2020, the Interjet fleet had shrunk to 52 aircraft, Airbus down from 66 to 31 with only four A320-200s active.


The following chart shows historical changes in Interjet's Airbus fleet over the past four years. Fleet composition has changed little over the period, the only major feature being the net addition of 11 Airbus A320/A321neo aircraft post 2016.




According to IBA.iQ, seven Airbus A320 family aircraft were returned to lessors from Interjet's fleet before March 2020, the most recent an A320 back to Avolon Aerospace on February 24th 2020. These seven aircraft had an average lease length of 8.5 years. By April 6th, 34 Airbus aircraft had been repossessed by lessors with a significantly lower average lease length of 4.4 years. The chart below shows the progression of Interjet's lease ends and repossessions.



IBA.iQ Fleet data shows the repossession of these 34 aircraft represents a reduction from 16 distinct lease managers to 11. Five lease managers: Wings Capital, ICBC, Seraph Aviation, Zephyrus Aviation Capital and ORIX Aviation have exited their positions in Interjet. Of the 11 remaining, only four lessors (but five distinct entities) have yet to reduce their exposure to Interjet: JP Lease, Air Lease Corporation, BOC Aviation/BOC Aviation (Ireland) and Carlyle Aviation. This is shown in the table below. It is unclear whether these lessors plan to reduce their exposure in the coming months. There is no evidence of joint action or collusion between lessors, however it appears that several lessors have followed the trend and repossessed their aircraft.



ABS Structures

According to IBA.iQ, 16 Interjet aircraft were part of 11 ABS structures. Following the repossessions, 9 aircraft in Interjet's fleet remained owned by 6 ABS structures as of April 6th 2020. Of those nine, five are parked. The changes in ABS-owned aircraft in Interjet's fleet are shown in the table below:



In conclusion, Interjet's financial situation has been declining for some time now, the latest repossession wave being the culmination of increasing costs and diminishing cash over several years. The bid to increase cash reserves through sale and leaseback transactions appears to have delayed rather than prevented the airline's financial problems. We expect to see more lessors initiating repossessions in the coming weeks. Interjet may be content to allow repossessions currently as the Covid-19 crisis continues to ground, however its future creditworthiness will undoubtedly be affected by this period.


Author: Marlon Tull, Senior Aviation Analyst


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Positive Outlook for Boeing's 777X: Post-Pandemic Optimism Surrounds Twin-Engine Widebodies.

In response to the Airbus A350 program, Boeing unveiled its revamped 777X model with plans to fly it in 2017 and an entry into service date of 2019. Designated to become the largest twin-engine widebody and equipped with the latest General Electric GE9X engines and folding Wingtips, the Boeing 777X aircraft attracted a total of 66 orders in 2013. These consisted of orders from Lufthansa (20), Etihad Airways (25) and Cathay Pacific Airways (21). Emirates, in the following year, recorded the largest single order of 150 Boeing 777X models, which were then supplemented by 50 orders from Qatar Airways and 20 from ANA in the same year. Therefore, the number of orders received in 2014 accounted for over 60% of the aggregate order number for the Boeing 777X to date, according to IBA.iQ, as of July 2020.   The twin-engine widebody has seen little growth in its order book since 2015, receiving only 58 orders from three airlines and one unidentified customer. Its latest confirmed order for 18 aircraft came from IAG and was announced at the 2019 Paris Air Show. The challenges of attracting more 777X orders stem not only from manufacturing delays caused by unexpected wear on the GE9X engine compressor, but also a combination of key external factors including widebody secondary market oversupply, the low fuel environment and the 737 MAX grounding. These negative influences have been amplified by the Covid-19 outbreak.   In light of the global pandemic, extra-large widebodies such as the Airbus A380 and Boeing 747 aircraft have been downgraded and their retirements from existing fleets accelerated. This indicates demand in this sector has been significantly cut and oversupply has been exacerbated. In addition to the early retirements, airline customers have been considering delaying deliveries of the Boeing 777X aircraft. Both Emirates and Lufthansa, both of which initially planned to receive their first 777X deliveries in 2020, have rescheduled for 2021 according to Boeing. The German national carrier is committing to a 2021 delivery despite the slowdown in its programme because of the pandemic.   In November 2019 Boeing reported a change to its 777X orderbook, disclosing that Emirates exercised an order conversion for 30 B777X to the B787-9 aircraft and 11 confirmed B777X to options. At the same time, Emirates revealed that six of its 777-300ER orders were converted to the B777X which resulted in a total of 115 confirmed B777X orders in its current backlog. Due to Covid-19's impact on travel and the consequent imposition of global restrictions, airlines have been struggling and seeking out financial support so they can survive the unprecedented situation. Global downsizing in the fleets of airline companies has already begun and OEMs have introduced further cuts in their production lines, with the Boeing 777/777X combined production rate to be reduced to three per month in 2021.   IBA has reviewed the current order backlog and the corresponding delivery stream of the Boeing 777/777X family so as to illustrate and highlight the plausible alternations to both order and delivery characteristics as a result of Covid-19. In this analysis, we are focusing on the current balance of Boeing 777/777X passenger aircraft orders received so far and excluding any speculative future orders. Please also note that the delivery figures in 2020 represent the whole year and do not include aircraft which have been built but not yet delivered due to the pandemic. Based on data from IBA.iQ, there were 309 Boeing 777X aircraft in Boeing's orderbook as of January 2020 plus 35 Boeing 777-300ERs and two 777-200LR aircraft which are expected to be delivered between 2020 and 2023. Due to the Covid-19 outbreak, Boeing has rescheduled introduction of its first 777-9X aircraft until at least 2021 and its 777-8X model until the following year. Therefore, the forecasted delivery pattern will inevitably be reshaped in the post-Covid era.   In view of the delivery schedule alterations prompted by Covid, we have considered two scenarios regarding Boeing 777/777X future deliveries. In the 'Base Case' scenario, we assume all orders in the current backlog will be fulfilled. However, since Boeing has adjusted its production rate for the B777/777X family, the subsequent production ramp-up for the 777Xs will be deferred by approximately 4-6 years.   Although air passenger traffic has begun to slowly recover from the global pandemic, we believe Covid-19's impact on the global aviation industry will be long lasting. As airlines continue to file for bankruptcy or to enter Chapter 11 rejection scenarios, and the threat of a plausible second wave persists, any potential V-Shaped recovery is a long way off. Hence, it is essential we evaluate and prepare for a prolonged post-Covid crisis, which we define as the worst-case scenario in this analysis.   While Boeing continues its 777X testing program, some airlines question the likelihood of an entry into commercial service occurring in 2021, as is currently planned. This concern has recently been highlighted by its largest customer, Emirates, in a recent interview with Bloomberg. Since Emirates expects its first delivery no sooner than 2022, we have adjusted the entry into service date of the first B777X aircraft to 2022 in our 'Post-Covid Crisis Case'. In aggregate, we expect around one fifth of Boeing 777X current orders to be either converted to other models or cancelled in this 'Crisis Case'. This is mainly due to airlines being desperate to ameliorate their balance sheets by removing their order burdens to help them survive the aftermath of Covid. Moreover, international travel demand is expected to take much longer to recover, which will significantly affect widebody operators. In April 2020, Cathay Pacific was contemplating adjustments to its B777X order, including lengthy delivery deferrals and the possibility of switching to the Boeing 787-10. Troubled Lufthansa is currently negotiating a restructuring deal with its shareholders, which might include a requirement to trim or remove its Boeing 777X commitment. The German flagship carrier already operates 16 Airbus 350-900s and has an additional 27 in its backlog.   Turning to the Boeing 777-300ER order backlog, we believe it will be challenging to deliver all remaining orders. In 2012, Pakistan International Airlines placed an order for five 777-300ER aircraft which has since been in hibernation for over eight years. This order is likely to be converted to other Boeing aircraft types since the airline deposited US$ 50M when they made the purchase order. In addition, 15 777-300ER aircraft were ordered between 2014 and 2015 by unidentified customer(s) and are waiting to be delivered. However, many more aircraft have since been ordered and have already been delivered, leaving the future of the undisclosed orders uncertain.   Although the Post Covid 'Crisis' scenario for the future of the Boeing 777X family seems pessimistic, some airline customers remain positive about the newly developed widebody. In June 2020, Qatar Airways announced it will retire its entire fleet of Boeing 777-200LR and 777-300ER aircraft over the next four years. This will pave the way for the Boeing 777X. Since it will also accelerate retirements of its A330s in the near term and its A380 fleet by 2028, it is likely that Qatar will place some top-up orders for Boeing 777X models in the future. According to IBA.iQ, the Middle East carrier currently has 10 B777-8 and 50 B777-9 aircraft in its backlog.   Apart from Qatar Airways, both Emirates and Etihad Airways show appetite for more Boeing 777X aircraft in their future fleets. Being the largest operator of both the Boeing B777-300ER (133) and the Airbus A380-800 (115), we expect Emirates will require more widebodies to fill the void created by the early retirements of its A380 fleet. Since there are more Boeing 777X in its backlog than the Airbus A350 family, the future top-up order will lean towards Boeing. Etihad expects to need more widebodies once it recovers from the current pandemic, and its orders are likely to be for B777Xs or A350s.   In order to examine which airlines are likely to place orders for Boeing 777Xs in the future, we have created an illustrative chart which presents each airline with a score on an index of 10, 10 being the maximum and 0 the minimum. Essentially, the airline score index is an overview of a number of criteria which we're applying to assess the possibility of any future B777X orders. From an operational perspective, important elements include whether the airlines have any existing B777X orders or orders from competitive models such as the A350 and B787. We also consider whether the airline operates B777 family aircraft or has any A380s or B747s in its current fleet. The model takes several financial criteria into account as well, such as whether the airline required financial aid to overcome the Covid crisis, how the airline's financial status compares with the previous year and the forecast of its financial status in the near future.     Based on the criteria mentioned above, we have established a chart which includes 20 airlines that are more or less likely to place future Boeing 777X orders. Most of the listed airlines are national flagship carriers which have wide international routes in their network, such as Air China, Saudi Arabian Airlines, ANA and Korean Air. Further, international airlines like Eva Air and Bamboo Airways are among the B777X's potential customers. Bamboo Airways has also been considering the 777X for US routes in forthcoming years. Many B777-300ER operators in Europe or North America have chosen to switch either to A350s, for example Aeroflot and Turkish Airlines, or to scale down to the B787 as a replacement, as in the case of Air Canada and American Airlines. Hence, potential bidders for the B777X are mainly from the Middle East and Asia Pacific regions. Although the Boeing 777X will eventually enter into service and gradually replace old variants, Boeing's 777-300ER will remain a significant figure in this market segment with nearly 800 in-service units operating as of July 2020. A combination of the low fuel environment, the delayed B777X programme and the high popularity of large twin-engine widebodies has resulted in a recent increase in B777-300ER lease extensions.   In October 2019, freighter conversion specialist Israel Aerospace Industries (IAI) and leasing giant GECAS unveiled the designated B777-300ER Special Freighter, with a launch order of 15 firm conversions and 15 options. In early June, GECAS delivered a B777-300ER to IAI for freighter conversion, which will become the prototype B777-300ERSF. Since the Boeing 777-300/300ER is the most popular aircraft type to be operated as a temporary freighter in the Coronavirus lockdown period, prospects for the B777-300ER freighter conversion programme look promising. The table below illustrates the passenger aircraft types which were employed as temporary freighters as of June.     The market value and lease rates of mid-aged or older Boeing 777-300ER aircraft have been relatively stable compared with other similar widebody types. Current owners and operators of this type are more likely to hold onto the asset as potential feedstock for the converted Special Freighter, which has 25% more cargo capacity than the standard B777 freighter but maintains 90% commonality with its B777F counterpart. Even though a proposed 777X freighter is expected in the long-term, the initial B777 freighters will be approximately 10 years old by 2025. So far, Boeing has been vague about the specifications of its 777X freighter. All we know is that it is likely to be based on the smaller variant Boeing 777-8, which will be six meters longer than the Boeing 777-200LRF freighter.   Despite prospects for large widebody aircraft having been dented by the global pandemic, we remain positive about the future of Boeing's 777X programme. Since most 777-300ER orders have been followed by its entry into service, we expect the 777X to perform similarly. However, we doubt order numbers will overtake those of the 777-300ER model due to direct competition from the Airbus A350 family which has comfortably occupied this market sector. Unlike the Airbus A380 and Boeing 747 aircraft which are currently facing early retirement or fleet downsizing, the performance of twin-engine widebodies remains relatively consistent. As some airlines start to phase out their Boeing 777 fleet over the coming decade, we are likely to witness Boeing 777X family aircraft in the portfolios of the Middle East and Asia-Pacific flag carriers.   Please contact Jie Zhou, our Senior Aviation Analyst, if you have any further questions, comments or feedback on the analysis discussed.   The data featured within this article is derived from IBA.iQ, our leading platform for aviation intelligence. We are currently offering free system demonstrations, sign up here.

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