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Mexican airline Interjet is falling deeper into debt at just the wrong time.
The carrier received a cash injection for 900 million pesos and is expecting a further 1.2 billion pesos from its board (about $105 million total), according to its third-quarter results.
Even after getting the first tranche of the injection, the company’s net-debt-to-Ebitda ratio grew to 11.1 times, up from the 7.1 times the privately-held company reported in January, a Bloomberg analysis of the document shows. The rise is mainly due to a 60 percent increase in the cost of leasing aircraft, which the company attributes to its sale and leaseback transactions.
In January, Chief Executive Officer Jose Luis Garza told Bloomberg News that a then-recent 3.2 billion-peso cash injection would be the last one it would need. The deteriorating financial position comes at a particularly tough time for the company, which is looking to revamp part of its fleet. Last month, Garza said the airline would phase out some of its 22 Sukhoi Superjet 100s and replace them with 20 Airbus SE A320neos.
Analysts say it’s a necessary move because Interjet is Moscow-based Sukhoi’s only client in the Americas, making it difficult to find parts and technicians. Only 11 out of Interjet’s 22 Sukhoi have flown this month, according to aircraft tracking websites.
Ordering 20 new aircraft would take some doing, as Airbus’ A320neo production line is sold out for years.
That means Aerolineas ABC, the formal name of Interjet’s parent company, will likely go to third-party lessors for the aircraft, which could further erode the the carrier’s financial status, according to George Ferguson, an analyst at Bloomberg Intelligence.
“They’re going to have to pay an above market lease rate, which is going to hurt them,” Ferguson said in an interview. “What will it do to their profitability?”
The most recent cash injection was to pay down financial creditors, according to the document.
Interjet did not respond to repeated requests for comment.
Adding to Interjet’s woes is a saturated Mexican market. Interjet, alongside competitors Grupo Aeromexico SAB and Controladora Vuela Cia de Aviacion, the operator of Volaris, grew at “explosive” rates during 2013 and 2014, says Grupo Bursatil Mexicano analyst Mauricio Martinez. For some years, that worked well for the carriers as fuel costs were low and travel demand was high — a trend that started reversing in 2017, Martinez said.
“The market became saturated and some routes started losing profitability,” he said.
Monday’s news that incoming president Andres Manuel Lopez Obrador is scrapping a $13 billion airport project that was meant to alleviate the congestion at the current Mexico City facility will also negatively affect the carrier, Morgan Stanley analysts say in a note.
The news has “negative long term growth implications” for all airlines, Morgan Stanley analysts led by Josh Milberg wrote, noting Interjet and Aeromexico could be even worse off as they have a higher exposure to Mexico City.
A challenging environment has hurt profit at all three airlines, but Martinez says Interjet might have a harder time bouncing back. The carrier’s lease agreements are in U.S. dollars, as is part of its debt.
“A peso depreciation or a big increase in fuel prices could be dangerous for them,” Martinez said. “Being so highly leveraged, these things could be the difference between living or not.”
In January, Bloomberg reported that Interjet had grounded four of the Superjets for at least five months because of engine maintenance delays and was cannibalizing parts to keep other jets flying. At the time, Garza said building up the supply chain for the aircraft had been a process but downplayed the idea that the jets represented a problem for the company.
Mexican business columnist Dario Celis reported some weeks ago that Garza will be stepping down soon. Interjet later said in a filing it had nothing to comment on the report.
©2018 Bloomberg L.P.