Irish-based airline Cityjet is back under High Court protection from creditors, for the third time in its 33-year history.
Mr Justice Michael Quinn confirmed the appointment of Kieran Wallace and Andrew O’Leary of specialist firm Interpath Advisory earlier this week as examiners to the carrier. They have up to 100 days to devise a rescue plan for the business, which has €7.7 million in cash and creditors who are seeking €13 million.
An independent report on its finances by Damian Murran of Teneo Restructuring Ireland says its net liabilities were €38.5 million at the end of February. Much of that consists of payments due under aircraft leases, so does not fall due immediately.
Mr Murran points out that net liabilities would increase to €66 million as a consequence of examinership, including €18.7 million due to unsecured creditors. However, he states that liquidation would increase the amounts owed to €177 million.
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This is partly because liquidation would trigger big penalties under the airline’s contracts with SAS and Lufthansa, adding significantly to the amounts due to its creditors.
[ More turbulence at Cityjet as interim examiners called inOpens in new window ]
While the company remains under the court’s protection, creditors cannot enforce any debts. The “examinership” process is designed to allow financially troubled companies with a reasonable chance of survival stay in business.
Cityjet last went into examinership in April 2020, a month after Covid-19 curbs grounded global air travel. It emerged the following August. The first time it did so was in 1996.
Run by chief executive and founder Pat Byrne, who is no longer a shareholder, Cityjet flies regional routes for Scandinavian airline SAS and Germany’s Lufthansa. It uses its own aircraft and crews for this, a practice known in the industry as wet leasing.
It began focusing solely on this business in 2018, deciding to no longer operate its own scheduled services in a move designed to cash in on opportunities it saw emerge as bigger carriers sought ways to maintain less lucrative regional routes while they concentrated on longer routes.
[ Dublin-based CityJet reports loss of €16.8m in 2023Opens in new window ]
Cash flow forecasts in the report show that the company can trade through the 100-day examinership while paying its workers and suppliers critical to keeping the business going.
Cityjet’s current problems are rooted in the decision of key customer, SAS, to enter Chapter 11 bankruptcy in the United States in July 2022.
Not unlike examinership, Chapter 11 is a federal court-supervised process that allows companies facing financial problems restructure their debts and capital so they can stay in business. Airlines based outside the US have used this process in the past.
SAS originally expected Chapter 11 to take around nine to 12 months, but it ended up lasting two years. That limited SAS’s scope to make longer-term commitments to Cityjet, leaving the Irish group with no certainty on its arrangement with the Scandinavian group beyond October 2023.
During that period, SAS also contracted some routes to a Cityjet rival, Estonian carrier Xfly, aggravating the Irish group’s problems.
Consequently, Cityjet began to focus more on providing services to Lufthansa in 2023.
Those routes were seasonal. The cost of laying off crew and mothballing aircraft for the winter, and then returning them to service for the summer, was prohibitive. Instead, Cityjet kept planes and crews in service. That cost it €13 million, according to Mr Murran.
Last year, the airline began talks with Lufthansa to establish a long-term commercial relationship, spending cash on boosting its workforce, compliance and maintenance in anticipation of a big contract extension. It even drew up plans to increase its fleet.
The pair agreed initial terms late last year. However, in January, Lufthansa told Cityjet that its board had decided on a new strategy. Not only was the German group not going ahead with the extended wet-leasing deal, it said it was terminating its current contract in October. That removes around one-third of Cityjet’s business.
As this was going on, SAS finally emerged from Chapter 11 in August last year with $1.2 billion in fresh investment.
However, the lack of a long-term deal with SAS prompted Export Development Canada (EDC) to sell 14 Bombardier planes, leased to the Irish group, to American Airlines, agreeing short-term lease extensions and a delivery schedule up to April next year for the aircraft.
This will cost Cityjet €21.6 million up to that date, stemming from terms in the leases covering engine overhauls. That figure would have been higher but EDC agreed to amend those terms, cutting the liability by €20 million.
However, Mr Murran points out that as Cityjet has not paid the Canadian company since February, it risks a breach of contract and a “reversal” of the deal to cut the liability by €20 million. EDC is listed as a creditor, through CJF Aviation, for €1.9 million.
EDC is one of the parties with which Mr Wallace and Mr O’Leary will be negotiating through the examinership. On Monday, the High Court heard it was not objecting to Cityjet’s petition for protection from creditors.
SAS will also loom large in the process. That group agreed a new four-year deal with Cityjet in October 2024. It is the largest user of wet leasing among European airlines. Lawyers said on Monday that it would continue doing business with Cityjet through the examinership.
Any new business plan will focus on flying routes for SAS while potentially expanding the current agreement. There may be some headroom for this as Xfly, the Estonian carrier that took some of the Irish group’s routes, has filed for bankruptcy.
But Cityjet will be smaller.
As things stand, it employs more than 580 people across the Republic, the UK, Denmark and Sweden. According to Mr Murran, 116 of those are based in Ireland, with eight in Luton, and 461 working for its Danish subsidiary, Cityjet AS.
[ Investors circle troubled CityjetOpens in new window ]
Some of those jobs will be lost, but nobody knows where or how many at this point.
New investment seems certain to play a part in any rescue. The examiners’ lawyers told the High Court this week that some – as yet unnamed – potential backers have expressed interest since their interim appointment on May 8th.
One possibility is that the larger of its current shareholders, Spanish group Air Investment Valencia, which is controlled by businessman Carlos Bertomeu, could reinvest in Cityjet.
Air Investment Valencia owns 80 per cent of Cityjet as it is, through a holding company, Strategic Alliance of Regional Airlines, which owns Cityjet and Spanish carrier, Air Nostrum, along with aircraft maintenance and service companies.
Cityjet owes Air Nostrum’s maintenance arm €2.3 million, making the Spanish business one of the biggest individual unsecured creditors.
Irish company CF Miga owns the remaining 20 per cent. That business is also a secured creditor as Cityjet owes it €400,000 from a €1.9 million loan given in 2020.
Creditors are likely to take a hit in any scheme of arrangement, as examiners’ rescue plans are known. The law allows examiners a lot of scope to restructure debt. In addition, once the scheme is supported by any single group of creditors that loses out as a consequence, the court can approve it.
Mr Justice Quinn acknowledged on Monday that this was the third time that Cityjet had sought the High Court’s protection and gone into examinership. However, he argued that this was “no bar” to the company availing of the process again, as it faced new difficulties and challenges.
