Volatile capital markets have forced three airlines to shelve initial public offerings and at least one other carrier to cancel a debt issue. Global markets hit turbulence in early May. Over a month later, they are still unsettled. Worries over sovereign risks in Europe, the EU's ability to control them, and the austerity this will require have all fed investor fears that recovery from the global financial crisis will be rougher and slower than hoped.
Wall Street's performance in May was its worst in 15 months. Conditions have been so bad that one analyst advises: "equities are not the place to be today."
The impact on airline capital-raising is shown by Porter Airlines' nerve-wracking experience. The Toronto carrier filed its prospectus for a C$120 million ($115 million) IPO just before the turmoil hit. As investors headed for the exits, it delayed its offering a week to give it time to add first quarter results to its prospectus. After releasing the results, underwriters cut its proposed share price 20% and set a new date for the IPO to close. But four days later, with markets on the edge of panic, Porter shelved its IPO.
CAPITAL RAISING SCORECARD
- Comair South Africa: R124m ($16m) rights offer to existing shareholders completed in May
- AirAsia X Malaysia: RM100m ($30.7m) rights offer to existing shareholders in May/June
- Icelandair Iceland: $30.8m private equity placement in June
Cancelled or delayed
- Porter Airlines Canada: C$120m ($115m) IPO
- Cebu Air Philippines:22.4bn peso ($480m) IPO
- Garuda Indonesia: $400m IPO
- Allegiant Air USA: $250m debt issue
- Mexicana Mexico: $250m bond offer for June/July; IPO next year
- Dniproavia Ukraine: 4.9% part-privatisation for late June
- Transaero Russia: $200m IPO for autumn
- Air India India: refinancing for $1.15bn debt
- Middle East Airlines Lebanon: considering IPO next year
- Pegasus Turkey: considering public listing
- AirAsia X Malaysia: considering IPO second half 2011
Garuda Indonesia and Cebu Air have done the same. Cebu's 22.4 billion peso ($480 million) offering would have been the biggest Philippines IPO in five years. In April Cebu delayed its launch because of national elections, due in May. But after those elections, the market was so unsettled that the airline decided to put off its IPO indefinitely. Lance Gokongwei, president of the parent company, told reporters its expansion would continue, but "it's not a good time to push ahead" with the IPO. He says a new date will "depend on market conditions".
Garuda has rescheduled its $400 million IPO, originally set for June, until the end of this year. Initially, it delayed its offering to tie up several loose ends on its debt restructuring, but like Cebu Air, it then found market conditions had soured. To protect Garuda, Indonesia has resisted moves that would open up ASEAN's skies. The longer Garuda's privatisation takes, the longer such protectionism is likely to last. In short, Garuda's delay could slow the pace of liberalisation in southeast Asia.
Beyond these three IPOs, US carrier Allegiant Air has indefinitely delayed a private debt issue of $250 million that was designed to help pay for its new fleet. Its decision illustrates that current conditions are equally tough for debt and equity offerings. It is hard to know how many others may have quietly decided to postpone capital raising. The only successful capital raisings since 1 May have been rights issues by South Africa's Comair and Malaysia's AirAsiaX, both to existing shareholders, and a private equity placement by Icelandair with several pension funds. No one has successfully approached the public capital markets.
One silver lining in this big cloud is that investors have not singled out airlines for more punishment than other sectors. Hundreds of non-aviation IPOs have either been discounted, scaled back or shelved. With other sectors facing the same hit, analysts suggest commercial aviation should fare as well as any other sector when markets recover.
For now, chief financial officers are watching for the first signs of that recovery. All eyes are on Mexicana, which announced in May amid all this turmoil that it would launch a $250 million bond offer in June or July to clean up its balance sheet before next year's planned IPO. Mexico recently saw its first IPOs after a two-year drought, emboldening Mexicana to forge ahead. But even if it succeeds, CFOs elsewhere will still wonder how much Mexicana's success turns on local conditions rather than a global come-back.
The same question will arise if Ukraine proceeds with its part-privatisation of Dniproavia. What happens in emerging markets, though, may not equate with a wider recovery.
The irony of this turmoil is that investors and lenders are so preoccupied with the mixed signals about a global economic recovery that they are ignoring the extent to which commercial aviation has already recovered. This is already evident with IATA's newly improved forecast of the first industry profit for three years.
At some point, airline executives hope that jittery investors will finally recognise this growing strength and return to the markets again. Without better access to capital, airlines cannot sustain the kind of growth that IATA foresees.
Read our earlier report on how airlines were returning to the capital markets