USAfrica's demise eight months after it started serving Johannesburg from Washington DC exemplifies the extreme risks in starting an international airline in the US. One lesson: American Airlines drives a hard aircraft leasing deal.
USAfrica began service in June with two MD-11 aircraft on sublease from American, hoping to break into what, say the carrier's founders, is the highly lucrative US-South Africa market. No US major serves the market, and South African Airways, a codesharing partner with American, only serves New York. But while a $30 million financing package for starting up the airline sustained it early on, lack of recognition from passengers, used to flying via Europe, gave the airline average load factors of only 40 per cent.
Though holiday travel increased traffic numbers, the airline needed a load factor over 50 per cent to break even. A USAfrica spokesman says that forward bookings promised better loads for peak-season travel later this year, but that operating revenues and a lack of permanent and even interim financing meant that, by January, the airline was unable to keep its lease obligation with American.
Sources say that AMR had USAfrica on 'an extremely short lease' because the carrier's financing was not stable and the airline was 'experimental' in nature. Kenneth Raff, managing director of fleet transactions for AMR Corp, denies that American's alliance with SAA, and USAfrica's frequent flyer plan hook-up with United Airlines, played a role in the decision to pull the MD-11s: 'It was a financial decision.'
The repossession was fast by leasing industry standards and illustrates the different approach a major airline - American in particular - can have toward a lessee. In an era of aircraft lessee demands for lease holidays and cuts, American's actions are unusual.
Raff says when word was received that USAfrica could not meet its biweekly lease payment obligation for the two MD-11s, American let the startup management know that it would not tolerate non-payment, due the following day. However, sources say that because of USAfrica chairman Wesley Kaldahl's ties to American as a former vice president of that carrier, American was willing to wait three days for the rent.
A frantic effort to raise interim financing turned up nothing, and American repossessed both aircraft. With no revenue stream, USAfrica filed for Chapter 11 bankruptcy protection within days and was attempting to find another lessor to provide aircraft.
'You can call it draconian, but I call it protecting the value of an asset,' says Raff, adding that he has little tolerance for what has become the common occurrence of lessors working with troubled airline clients. 'It perpetuates the situation of people demanding forgiveness for rent, and I think it's a bad precedent.'
FedEx Corp, which is looking to expand internationally, is known to be in discussions with American to take over its entire fleet of 19 MD-11s. Raff refuses to comment on this transaction or reports of AMR establishing a separate aircraft leasing company. He admits, however, that American feels safer having its aircraft back.
In mid-February, USAfrica was still looking for financing. But once bankrupt, climbing back out is a difficult task. As difficult, perhaps, as becoming the first US international startup airline since the 1940s.
In mid-February, USAfrica was still looking for financing. But once bankrupt, climbing back out is a difficult task. As difficult, perhaps, as becoming the first US international startup airline since the 1940s.
Source: Airline Business
