Skymark is bankrupt and is a case study for an airline’s eyes being too big for its stomach. We were not alone in finding this airline’s order of A380s – especially six of them – to be over the top. Airbus, of course, grabbed the order because they need every one. Plus, breaking into Japan was irresistible to Airbus before it won the JAL campaign.
But here we are, Skymark is in deep trouble. In Toulouse last week we noticed a new Skymark A330 on the stand, seemingly ready for delivery. That’s clearly not going to happen. Intrepid Aviation leased a number of A330s to the airline. Apparently Intrepid Aviation is owed ¥100bn by Skymark which is about one third of its total debt of ¥320bn. But being on the hook for an A330 is a “relative breeze” – as these aircraft sell easily as the market loves them – especially when compared with the slow selling A380.
The stakes are high. Franklin Pray, Intrepid Aviation’s CEO, is quoted in Aviation News saying: “If Skymark’s creditors, of which Intrepid Aviation is the largest, Airbus is the second and Rolls Royce is the third largest creditor, vote against the plan filed by Skymark, the airline will go into liquidation…”Airbus is on the hook with two A380s in Toulouse that were built for Skymark, one of which even had a test flight. You can see them in the picture at the back with the beige body and blue tail. They remain all covered up, and are not going anywhere soon.
So what does Airbus do now? Obviously it wants those two aircraft off the stand and in the air somewhere. We can’t see these aircraft ending up in Japan. Airbus and Intrepid are going to block any rescue deal involving ANA and investment banks to bail out Skymark. Intrepid and Airbus both seem pretty clear about this. As the largest creditors they clearly have some say in the matter. The two creditors are owed $1.6bn and will use their position as principal creditors to veto any rescue deal that does not take their interests into account, or introduce an alternative plan that does. This is perfectly rational.
Airbus initiated the Skymark bankruptcy for failing to make progress payments on its A380 order. Airbus was apparently keen to support an ANA-backed rescue on the basis that existing Skymark A330 leases and A380 orders would be taken on board by the consortium.
So who is in the better position? We expect the Japanese courts to favor the ANA rescue plan and thereby save the rump of Skymark and help ANA move this process forward. Even if this happens, Skymark (possibly ANA?) will face penalties.
Airbus does not want those aircraft parked in the picture to remain parked. But how badly do they want them gone? Certainly not badly enough to place them with another weak airline. The worst outcome is to associate the A380 with failed airlines. So Airbus will be very careful. The Skymark aircraft will be on deep discount and also need to be modified for any other airline.
Lemonade from Lemons?
Airbus’ position is not as uncomfortable as one might think. Indeed the Skymark bankruptcy might give Airbus an opportunity it might not otherwise have had. Recall that Airbus could not break into the US market with its first A300. So it made a very favorable offer to Eastern Airlines to try them out. Eastern went on to buy a number of them. Then American bought them. FedEx and UPS still use them. The Eastern bet paid off.
Given that precedent, Airbus could (for example) be speaking with any or all of the big US three and make them an irresistible offer – or indeed try the same proposition with any other ambitious airline (Turkish?) to try the A380. Whatever “loss” Airbus suffers could be partly offset by the Japanese settlement of Skymark’s bankruptcy. Probably at pennies on the dollar, but greater than zero which is the current situation with parked assets. Plus there could be huge upside benefits getting the A380 into the hands of a strong airline.
Airlines are risk averse and the A380 is a big airplane; very big. Only the strongest airlines can really exploit its capabilities. As we have seen with Emirates, in the right hands, the A380 is an overwhelming machine to compete against. The US Three make a fuss about the ME Three – but look at a 777 used by the US three next to an A380 and the image is quite clear.
Imagine that a US airline is offered an A380 at essentially the same price as a 777. Especially if the A380 is used between Heathrow and JFK, where alliance partner seat sales offset demand risks and also free up precious and pricey slots at Heathrow. Such a scenario isn’t impossible. The US network carriers are flush with cash and the future looks better than ever. And in the airline business, nothing says you’re doing great like a big shiny new airplane – especially two that could effectively serve the market while replacing three smaller aircraft, providing the same capacity at lower cost.
The Skymark bankruptcy could provide the impetus for a US carrier trying out the A380. Sometimes bankruptcies might or can have strange results.