This Is What Forced Primera Air to Declare Bankruptcy

Oct 1, 2018

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Reports surfaced earlier on Monday that Primera Air was planning to declare bankruptcy and cease all flights. Shortly after a leaked email broke the news, Primera Air confirmed that it was ceasing operations effective Tuesday, Oct. 2.

But, you may be wondering: What exactly led Primera Air to go belly up?

After all, there are plenty of other profitable and successful low-cost and ultra-low cost airlines. Spirit Airlines has one of the highest profit margins in the US. Ryanair has grown to become Europe’s largest airline, earning more than US$1 billion in profits each year. Aer Lingus is one of IAG’s (British Airways’ parent company) most profitable airlines despite operating with a low-cost airline structure.

On the surface, it doesn’t seem like an airline could make a profit with $63 one-way and $199 round-trip flights to Europe. However, airlines have become so savvy at charging for baggage, food/drink and other ancillary fees that WOW Airlines’ CEO has even floated the idea of eventually paying passengers to fly on his airline.

So, what went wrong with Primera Air? In a statement provided to TPG, the airline’s board of directors laid out what led to its financial downfall.

“Severe Corrosion Problems”

As my wife Katie and I learned at American Airlines’ maintenance facility in Tulsa, corrosion is a significant issue that airlines have to constantly battle. And, Primera Air learned this lesson the hard way:

“In 2017, the company lost one aircraft from operations due to severe corrosion problems and had to bear the total cost of rebuilding, resulted in a loss of more than 10 million euros [US$11.6 million].”

The cost to rebuild an aircraft wouldn’t be fun for any airline to bear, but it’s especially hard for a small airline that’s likely having to fund its operations and expansion with loans. Besides the cost to repair the aircraft, the airline also faced the drag of having one of its less than 10 aircraft out of service for the rebuilding process.

“Severe Delays of Aircraft Deliveries”

But, the worse was yet to come for the airline. Primera Air planned to launch transatlantic operations between the US and Europe using a fleet of brand-new fuel-efficient Airbus A321neo aircraft. However, it turns out that the airline didn’t plan enough buffer time between the scheduled delivery of its aircraft and the launch of its inaugural service.

On one hand, this inclination is understandable. Not putting these new aircraft to work immediately while having to pay for them would be a financial drag on the company. But, Airbus delivery delays meant that the airline was left without an aircraft that could operate its new routes.

So, Primera Air turned to wet-lease operator National Airlines and operated its inaugural transatlantic service with a 26-year-old aircraft instead of a brand new one. The bad luck wasn’t over for Primera Air yet. Shortly after its inaugural, this leased aircraft was grounded for multiple days with engine issues causing multiple cancellations.

All told, the airline reports realizing 20 million euros (US$23 million) of losses from this operational disaster, as the board of directors details in its statement:

“2018 began with a fantastic start of our low-cost long-haul project with a brand-new Airbus 321neo fleet, however, due to severe delays of aircraft deliveries this beginning ended up being rocky and incredibly problematic: operational issues, cancellations of number of flights, loss of revenues are just a few to mention. In addition, to fulfill our obligations in front of passengers, Primera Air leased in aircraft and beared additional costs of over 20 million euros.”

Failure to Secure Bridge Financing

To fund the airline’s operations through these losses, the airline’s board of directors says that it “has been working relentlessly during the last months to secure the long-term financing of the airline.” But, it was unable to reach an agreement with its bank for “bridge financing.” This was the final nail in the coffin for the airline, and the board of directors says it had “no other choice than filing for bankruptcy.”

In the end, the airline’s mismanagement — from maintenance to aircraft delivery — was compounded by its bad luck, causing significant losses. Its inability to secure additional financing kept the airline from being able to recover from this string of events.

Featured image by SOPA Images / Getty Images.

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