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Emergency landing
When Oasis Airlines collapsed recently, two partners at KPMG in China were appointed to preserve the assets of the business. Restore reports. The unique regulatory and commercial complexities of the aviation industry can combine to create some of the more demanding restructuring assignments. So on 9 April this year, when Oasis, an airline with four aircraft and just under 700 staff, announced it was insolvent, Eddie Middleton and Patrick Cowley, the partners at KPMG in China who had been appointed as provisional liquidators by the Hong Kong Court, were looking forward to the challenge. Soon after their appointment, the Chairman announced that all operations had been suspended. At that moment, three of the four most valuable assets still happened to be in the air or outside Hong Kong.
“As our role was to try to preserve value, we needed to get the planes and crew home to Hong Kong as quickly as possible,” recalls Middleton. “We had one plane on the ground in Namibia, one en route to Vancouver and a third en route to London. We were not afforded the luxury of time, and therefore had to think and act extraordinarily quickly.” Asset recovery Working in multiple locations, the variety of issues that needed to be resolved demanded the immediate deployment of professionals possessing a range ofskills including restructuring, corporate finance, tax and IT advisory. This team had
to work closely with a number of aviation specialists.
“Calling on KPMG’s global network of firms, we were able to hit the ground running,” says Middleton. “Within a couple of hours of the appointment, our teams were briefed, deployed and working closely with management to achieve our initial goals. As daylight broke in London and Vancouver, teams were being deployed there also.” At the same time, with almost 25,000 passenger tickets issued, call centres were inundated. “We deployed our in-house public relations team to assist with the management of these centres,” explains Middleton. “The immediate needs of passengers due to fly also had to be addressed and alternative arrangements with other airlines made.” When the time arrived for the aircraft in London to embark upon its return flight to Hong Kong, KPMG faced a
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myriad of hurdles – no fuel, no in-flight service, airport and airspace charges due and no money, to name but a few. Critically, of course, the Hong Kong Government had to be persuaded that the appointment of provisional liquidators had no impact on passenger safety. Any one unresolved issue could have caused the aircraft to be impounded.
The British Airports Authority (BAA) expressed thanks for KPMG’s, “commercial, timely and practical” approach, which led to “the best possible outcome – passengers on a plane to where they had booked to travel – and an agreed way forward”. BAA’s Sarah Hunter adds: “The 'team' approach with
“The team approach with which KPMG joined debates and conversations is rare”
“Being able to turn to our UK firms’ colleagues in Sarah Hunter, British Airports Authority London meant we could position people at the which KPMG joined debates and airport to manage the operation,” conversations is, in my personal explains Cowley. “All the pieces of experience, rare.” the jigsaw puzzle had to be put in place in order to do anything with the aircraft.” The Namibian plane was under a ‘wet lease’ and there was no immediate The plane, carrying a few passengers reason to request its return. Lines of and the London-based crew, communication were quickly eventually departed London soon established with the aircraft’s after midnight and landed safely in financiers. It would have been easy for Hong Kong the following day. them to enforce their security rights
and take control of the plane, but that could have jeopardised its safe recovery and ultimately the return for Oasis’ stakeholders. “We had to work closely with the financiers in all aspects of the recovery of the aircraft and demonstrate to them that their immediate interests were also being addressed,” says Cowley.
The plane flew from Windhoek to Frankfurt as scheduled. However, the mortgagee bank demanded the aircraft be brought back to Hong Kong.
“We had no choice but to notify Air Namibia that the plane would be returning to Hong Kong the following night, rather than fly back to Windhoek,” explains Cowley.
“The Gatwick problems suddenly seemed so small in comparison, and it was a great relief when she touched down safely in Hong Kong.”
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By day three, all four aircraft and all overseas crew were safely back in Hong Kong. Returning value At this stage, Cowley and Middleton still hoped that the airline could be rescued. “We were inundated with calls from potential investors from all over the world, who were interested in everything from spare parts to the whole airline,” says Middleton. Despite serious negotiations with a number of parties, the industry’s regulatory requirements, coupled with the extent of the airline’s liabilities, made it impossible to achieve a rescue.
“There were simply too many hurdles to get over, and a self rescue wasn’t possible due to financial constraints,” remarks Middleton.
Suddenly, traditional insolvency issues, such as retention of title and liens, were “front and centre”, as Cowley puts it, with liens being exerted over the aircrafts’ maintenance records. “Without these, the aircraft could not fly or be sold,” adds Cowley.
Ground control: Eddie Middleton (left) and Patrick Cowley (right), KPMG’s insolvency specialists in charge of the liquidation process at Oasis Hong Kong Airlines.
The liquidators used a section of the Companies Ordinance that requires anyone holding documentation and records belonging to the company to hand them over. This was done without prejudice to the lien.
Creditor concerns With around 25,000 creditors, Middleton and Cowley applied to the Court for a ‘regulating order’ releasing
Key issues in aviation
Airline insolvency cases have some considerable challenges for an insolvency practitioner, and numerous factors suggest the Oasis experience is unlikely to be an isolated one. • Fuel replaced labour as the largest single cost item for the global airline industry in 2006. In the six months up to the beginning of June 2008, 24 airlines went out of business or filed for bankruptcy protection worldwide, according to the International Air Transport Association.
• Continued excess capacity and losses make consolidations and alliances even more crucial. Despite Delta’s merger with Northwest, over-regulation remains the biggest single hurdle to consolidation.
• Perceived limitations on competition draws regulators to amend or block alliances such as the proposed Iberia/American Airlines/British Airways venture. Carriers should analyse the possibilities for maximising returns whilst minimising regulatory interference. • Demand shocks caused by terrorism (9/11, London bombings) and pandemics (SARS, potentially Asian bird flu) have increased the financial vulnerability of the sector and are a major contingency risk that carriers now have to plan for.
• The impact of ticket taxes, levies and infrastructure pricing continues to put pressure on airline margins.
• Government ownership of airlines, bankruptcy protection and varying airport and flying rights across the globe mean airlines appear to be competing on an unfair playing field.
them from the statutory obligation to hold a creditors meeting. “With so many creditors spread across the globe, we felt that the costs and logistics of trying to hold a physical meeting would not be the best use of the creditors’ money,” says Middleton. “The Court agreed with us.”
Two planes have now been sold, with the remaining aircraft in the hands of receivers appointed by the mortgagee banks. KPMG even successfully realised value from Oasis’ option to purchase a fifth plane, for which a deposit had already been paid. “We are aiming to deliver rapid value to stakeholders, and want to return value to creditors as quickly as we can,” Middleton assures. “Paramount to the success of the engagement was the ability to deploy the appropriate skill sets and specialists in the right locations quickly. It was also essential to work cooperatively with all stakeholders, in particular with the airline’s own people, to align our goals.” R Patrick Cowley Restructuring Services KPMG in China patrick.cowley@kpmg.com.hk Eddie Middleton Restructuring Services KPMG in China edward.middleton@kpmg.com.hk