Sunday, June 17, 2012

PLUNA: Leadgate to Exit Ownership & Management of Carrier

PLUNA CRJ-900, CX-CRM, c/c 15274, delivered 29Oct11.
Spotted at Buenos Aires Aeroparque (AEP)
on 11Feb12 preparing to take off Runway 31. 


The Uruguayan government, led by Transport Minister Enrique Pintado and Economy Minister Fernando Lorenzo came to an agreement with Leadgate, the main partners in Sociedad Aeronautica Oriental (SAO), on Friday, June 16, for SAO to give up its 75% shareholding in PLUNA without any renumeration and with the shares to be placed in a trust called a "fideicomiso" until new investors are found that will purchase the shares.  Representing Leadgate were executives from the company that also acted as PLUNA senior management, Matias Campiani (then CEO of PLUNA), Sebastian Hirsch, and Arturo Alvarez Demalde.


Until the recent agreement, PLUNA was 25% owned by the Uruguayan government and 75% owned by SAO, comprised of Leadgate holding 66.6% of the shares and Canadian commuter airline Jazz, which paid US$ 15.1 million for its 33.3% stake in SAO in 2009.


PLUNA has been accumulating debt for many years, including since Leadgate's purchase of 75% of the company in 2007 for US$ 15 million.   In the two years prior to Leadgate acquiring an equity interest in the Uruguayan airline and taking over its management, PLUNA was 100% owned and managed by the Uruguayan government racking up losses totalling US$ 41.7 million.  Since Leadgate entered the picture in 2007 through February 2012, the airline has lost an additional US$ 85.7 million with US$ 11.8 million of that coming in the period July 2011 through February 2012.  Losses have apparently been accumulating at an even faster rate since then due to a number of factors, including a sharp drop in traffic resulting from Argentine government currency restrictions on Argentines acquiring foreign currency, including for travel outside the country.    

The accumulated losses have taken a toll on PLUNA's balance sheet with 2011 showing Assets of  US$ 290 million and Liabilities of US$ 301 million for a debt / assets ratio of 1.04 and a negative equity situation.  By Uruguayan law the company is considered insolvent. 

The company has also been suffering cash-flow problems not even being able to pay ANCAP, the Uruguayan state-owned oil company, for the fuel it has supplied.  On May 31, PLUNA paid ANCAP US$ 600,000 but missed the deadline on at least one payment since then.  In all, the carrier owes ANCAP US$ 25 million for past fuel deliveries.  Additionally, a US$ 9 million payment to Canadian bank Scotiabank for seven CRJ-900 aircraft purchased in 2007 is due in August, putting further strain on the airline's finances.

    PLUNA CRJ-900, CX-CRK, c/n 15239, delivery date 30Oct10
    landing at Buenos Aires Aeroparque (AEP) with thrust reversers deployed on 06Feb11.


This dire financial picture lead the Uruguayan government to recently determine that a capital injection of US$ 30 million was required to keep the airline operating and solvent while a solution could be found to make the airline viable in the longer term.  In accordance with its ownership stake, the government was to supply 25% of this amount, US$ 7.5 million, with the SAO partners to provide the US$ 22.5  million balance.   However, the private partners declined to invest further in the carrier under the current operating conditions, which they consider not conducive to turning around the carrier's finances. 

They cited several factors as being damaging to PLUNA's prospects, including:

1) High fuel prices.

2) Argentine government restrictions on foreign currency acquisitions by
    Argentines, discouraging travel.

3) Drop in demand due to slowing regional economies around South America.

4) The denial by the Argentine government of route rights to cities such as
    Bariloche (BRC) and Mendoza (MDZ), which are essential to the carrier's
    Montevideo (MVD) -based hub with primary spokes in Argentina and   
    Brazil.  To illustrate the extent of the restrictions, Argentina allows PLUNA to
    fly to only three airports in its territory while Brazil allows service to nine
    different airports.

5) Argentine government subsidies to Aerolineas Argentinas of approx. US$ 750
    million annually giving the carrier an unfair competitive advantage . 

Editor's Note:  Other airlines in Mercosur all have to deal with the above conditions but the route denials into Argentina probably hurt PLUNA the most because its MVD hub requires traffic flowing between Argentine and Brazilian cities.   

Some of the first consequences of this situation were PLUNA dropping Montevideo (MVD) to Campinas, Brazil (VCP) service, reduction of frequencies from MVD to Curitiba (CWB), Belo Horizonte (CNF) and Porto Alegre (POA) all in Brazil plus Asuncion (ASU) in Paraguay.  Its recently started venture into the Chilean domestic market flying from Santiago (SCL) to Concepcion (CCP) was also dropped.

PLUNA CRJ-900, CX-CRI, c/n 15234, delivery date 29Sep10
at Buenos Aires Aeroparque (AEP) on 20Mar11. 


The Uruguayan government's response to SAO's refusal to invest more was that the private investor  group could no longer contribute to the carrier's success and must abandon its management role and ownership in the airline.  Leadgate agreed to move in this direction and negotiations between the government and Leadgate as majority investor in SAO started around Friday, June 8.

Leadgate asked for the government to purchase its shares for US$ 18 million but the government indicated that it was not going to pay anything for them, apparently alleging mismanagement of the carrier by Leadgate.  In turn, Leadgate requested that the government agree not to bring any lawsuits against them and that one of Leadgate's senior executives, Sebastian Hirsch, be allowed to stay on for 90 days to make sure that nobody remaining at the carrier tried to paint a "revised" picture of what transpired under the private group's management.   After resisting these two conditions for several days, Mr. Pintado of the Transport Ministry and Mr. Lorenzo of the Economy Ministry both agreed to include them as part of the final agreement on Friday, June 15.  

SAO's 75% share, held by Leadgate and Jazz, will be deposited by the two private entities into a "fideicomiso" (trust) managed by the Montevideo Stock Market until their sale to a future private investor.   Neither Leadgate nor Jazz will receive the proceeds of the sale of the stock, Jazz already having written off this investment as a loss.  Presumably the cash generated from the stock will be used by PLUNA as operating capital.  The state made it clear that it does not want to be the sole owner of PLUNA so it will not acquire the shares.

It was also determined that Jazz, that has expressed an interest in acquiring SAO's interest, will be given 30 days to bid on the shares and the government will approve the sale if it believes that the amount offered is adequate.  Otherwise, the 75% shares will be opened to public bid.  Note that it appears that with Jazz having written off its 33.3% share of SAO (equal to 25% of all of PLUNA's shares), many of the shares that it would buy would in effect be shares that it previously owned !

Should Jazz not end up with the 75% equity stake another possible buyer would be Juan Carlos Lopez Mena, owner of the Buquebus ferry lines operating between Argentina and Uruguay and also of BQB Lineas Aereas, a Uruguayan airline and competitor of PLUNA on some routes.


The Uruguayan government's main objectives throughout this process were:

1)  Assure PLUNA's long-term viability.
2)  Guarantee no service interruption.
3)  Preserve the jobs of 900 PLUNA employees.

Another party interested in the negotiations was the Canadian government because four Canadian companies have a stake in the future success of PLUNA:

1) PLUNA still owes Scotiabank US$ 140 million of the original US$ 203 million
    purchase price of seven Bombardier CRJ-900's in 2007.  The Uruguayan
    government guaranteed the purchase.  Payments are made each February
    and August.   

2) US$ 120 million is owed to Export Development Canada for the lease of six
    other CRJ-900's. 

3) The CRJ-900's manufacturer, Bombardier, supplies spare parts for the aircraft.

4) Jazz, which has invested US$ 15 million so far and would like to see a return
    on that investment.


On a closing note, legislators from opposition parties to the current Uruguayan President, Jose Mujica, of the Frente Amplio party, have initiated preocedings to audit PLUNA's finances under Leadgate, alleging the payment of high fees to consulting companies and possible excessive compensation to PLUNA executives.  

They have especially objected to the clause in the agreement granting immunity from lawsuits and that a Leadgate executive will stay on for 90 days, apparently concerned that this may lead to a coverup of possible dishonest practices by management.      

Sources:   Aviacion News: 07Jun12, 14Jun12
               El Observador: 12Jun12
               El Pais Uruguay: 13Jun12, 14Jun12, 15Jun12, 16Jun12

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