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Airline Management, Major Airlines, Other Aviation Issues

SUMMARY: Air Armenia becomes the 2nd national airline to go bankrupt this month, the poorly financed airline shuts down after a local bankruptcy filling by HSBC. This follows Estonian Air shutting down on November 8th after the EU Commission ordered Estonia to take back the state aid it had provided the perennial money losing airline. It is very difficult for small airlines to find a niche in the highly competitive market as competition globally intensifies, and more and more small airlines will fail, sadly most due to poor management, it is about financial mismanagement followed by poor or none existing planning, strategy, marketing or revenue management (e.g. Estonian Air according to EU Commission). Finally, since I am looking at Armenia and the Caucasus region, a quick overview of corruption is in order, from small Pacific island nations being paid to recognize some of the 5 Russian backed self declared Republics to using offshore companies to rob 3 Moldovian banks of billions of $US and money laundering out of Russia, seems very fitting.

Air Armenia the national airline of Armenia was declared bankrupt yesterday (November 25, 2015) by a court in Yerevan the capital of Armenia following a claim by HSBC Armenia. This is the second national airline to go bankrupt this month (Estonian Air shut down November 8, 2015), and more will follow as competition in the airline industry intensifies and yields stagnate globally, making it difficult for small airlines to compete.

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air armenia-ek-ra01-air-armenia-airbus-a319-132cj_PlanespottersNet_473195air armenia-231595111382782395

Air Armenia’s only jet the past year was the above Government of Armenia VIP A319-100. It had cancelled its orders for 4 x Sukhoi SSJ100’s and 2 x A320’s, returned last year 2 x A320’s to lessors but continues to use its fleet of Cargo aircraft, like the above AN-12, in the past Armenian registered aircraft (EK) were common in Africa’s war zones, “flag of convenience” flying illicit arms to various groups with aircraft usually not airworthy or maintained to any standards.

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This is the second national airline to go bankrupt in 2 years following Armavia in 2013, which was strangely the launch customer for the Sukhoi SSJ-100 Superjet.

On October 29 of 2104, Air Armenia suspended all scheduled services due to financial problems and it was operating 2 x A320-200’s leased in from GECAS and BOC at the time, plus it has been operating the Armenian Governments VIP Airbus A319 till now, which means it was very well connected to the Government.

Founded in 2003, Air Armenia started off as a cargo and was still operating 2 x AN12’s and 1 x AN32 till yesterday.

It is the same old story, lack of money at the beginning and obviously not enough money was made serving the 8 destinations in Russia on top of Athens, Frankfurt and Paris. From the vast network of 11 destinations it is clear it was spread too thin, too many destinations for an airline in operation only since July, 2013.

So by the time it shut down scheduled routes it was operating scheduled services for only 15 months, so poor financial and network planning to revenue management, in short back to poor management, as usual for start-up failures. You need to have enough start-up capital and a good business and financial plan for revenue and costs.

My rule of thumb is to have your calculated start-up capital (training, lease or finance down payments, reservation system, etc.) plus 6 months of operating costs and assume no revenue, then you will have ‘adequate’ capital to make a go at it, less than that you are “hoping” all will work out-somehow, that is why most start-ups fail within 12-18 months, they run out of money.

The airline also had an order for 2 x A320’s and 4 x SSJ-100-95’s that were cancelled. Politically Armenia is one of the few countries that is politically close to Russia, with 3,000 Russian troops stationed at the 102nd Military Base in Gyumri, where there are also 18 x Mig-29 jet fighters, 60+ T-72 tanks, S-300 surface to air missiles and since 2013 somewhere in the country are several Iskander-M ballistic missiles, well hidden I guess.

The Russian security is there to patrol Turkish and Iranian borders, and to keep peace in another self-declared Republic, Nagorno-Karabakh Republic, (like the Republics of Abkazia, South Ossetia, Transnistria and Crimea which are recognized only by Russia and some close allies and paid of small corrupt nations) which occupies Azerbaijani territory (4,400 km2 population at +145,000). The Republic is not yet recognized by any country other than Armenia and possibly Russia, but in the case of Abkhazia it is recognized by Russia, Venezuela, Nicaragua and Nauru (?), unfortunately the tiny Pacific island nations like Nauru can be bought, the same with Vanuatu which recognized Abkazia in May, 20111 and withdrew its recognition May, 2013 ?

While the world’s smallest nation by population little known, Tuvalu (population 10,837, area 26 km2) recognized Abkhazia in Sept 2011 and South Ossetia later withdrew again in May 2014, what no more money in brown envelopes ? and was considering recognizing Nagorno-Karabakh Republic, how easy it is to get international recognition for self declared Republics, just buy off small island nations, like Japan buys off Dominica to vote in favor of whaling !

Just how things work in these small nations and probably in those 5 self declared Republics is shown in a recent case in Vanuatu, where the Prime Minister, Baldwin Lonsdale went on an international trip, so the speaker of the parliament, Marcellino Pipite automatically became acting head of state and quickly pardoned himself and 13 other MP’s who were convicted of bribery but not yet sentenced, in short all 14 are now in prison including two former Prime Ministers ! nice try !

Back to Air Armenia, sorry about that diversion, but politics and aviation go hand in hand in many corners of the world. Air Armenia did find a 49% investor, a Ukrainian investment fund named East Prospect Fund, registered in the offshore haven of British Virgin Islands, that makes me, a former investment banker in Eastern Europe really suspicious, seen it, done it, it just smells and when it smells like crap it usually is crap, lots of offshore companies are used for illegal activities, and most are owned through Bearer shares which is equity that is owned by whoever holds the physical stock certificate, the issuing firm does not register the owner of the stock or track transfers of the stock, so you NEVER know who the owner is-great set up for illegal activities.

Anyway this new investor, planned to put in $US 68.6 million and expand operations to wide body aircraft to fly to Asia ? really ? I have seen this BS so many times before, Bank of Abkazia bank guarantees to Moldovian bank loans, etc. Just too many criminals in those former USSR Republics, one has to be very careful, they are used to it, we westerners are not, and its hard for someone to understand how things work if you have not been exposed to the ‘wild’ east before.

I slightly divert, but today (according to ‘The Economist’) in Moldova there is a major political crisis due to a massive bank fraud scheme where $US 1.0 billion was stolen from 3 Moldovian banks that were involved in a fraud scheme between 2007-2014 which laundered $20 billion of Russian money through various British shell companies and a Latvian bank. The people of the country are so upset with the pro-western political parties in power that if an election was held today, Moldova (which has lost part of its territory to the self- proclaimed and Russian backed Republic of Transnistria, one of 4 such Russian supported self-declared Republics), would vote for pro-Russian parties and become another Russian controlled Republic.

I also understand their are plans for a Crimean based airline, whose destinations will be limited to Russia and its friends, not sure how successful it will be, Crimea for Russians is not the destination it was under the USSR days.

Lastly, the Russian Sukhoi 24 shooting down by Turkish F-16’s, in my opinion was a deliberate attempt by Turkey to try and derail any possible cooperation between the west and Russia against ISIL. Turkey benefits from ISIL supplied oil, supports Turkmen in Northern Syria, freely allows foreign fighters to cross its borders to join ISIL and like the Gulf Sates and Saudi Arabia, prefers a Sunni controlled Syria and Iraq over Shia control. This time the Russians are right to punish the Turks, who have gone astray lately with their politics, and one wonders how much it really deserves to be a part of the EU.

Again thank you, cheers.

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About Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow

I am a Canadian and EU national with an MBA and 33+ years experience in aviation business development with 20 years overseas and work in 25+ countries. A former investment/merchant banker (mergers and acquisitions to corporate turnarounds). airline and OEM senior executive and past owner of 6 successful aviation companies in 3 countries (executive jet charter/management companies, aircraft sales, aircraft broker, airline/aerospace consulting to aircraft insurance). I have a very diverse aviation background with 75+ aviation companies (45+ airlines of all sizes, OEM's, airports, lessors, MRO to service providers) as consultant, executive management, business analyst and business development adviser. Excellent success track record in International Business Development. Most work with airlines is with new start-ups and restructuring of troubled carriers. I sold new business jets, turboprops and helicopters for Cessna, Raytheon, Gulfstream to Eurocopter as an ASR as well as undertaking sales and marketing of commercial aircraft for Boeing, de Havilland, Dornier, Saab and Beechcraft. Brokered everything from LET-410's to B747's and from piston PA31 to G550 business jets. I look beyond the headlines of the aviation news and analyze what the meaning and consequences of the new information really means. There is a story behind each headline that few go beyond. Picked the name Aviation Doctor, as much of my work has been with troubled companies or those that want and need to grow profitably. I fix problems be in the business, and help with restructuring for a better tomorrow. You can reach me with comments or suggestions at: Tomas.Aviation@gmail.com and I comment a lot on Google+, my Facebook and LinkedIN.

Discussion

4 thoughts on “SUMMARY: Air Armenia becomes the 2nd national airline to go bankrupt this month, the poorly financed airline shuts down after a local bankruptcy filling by HSBC. This follows Estonian Air shutting down on November 8th after the EU Commission ordered Estonia to take back the state aid it had provided the perennial money losing airline. It is very difficult for small airlines to find a niche in the highly competitive market as competition globally intensifies, and more and more small airlines will fail, sadly most due to poor management, it is about financial mismanagement followed by poor or none existing planning, strategy, marketing or revenue management (e.g. Estonian Air according to EU Commission). Finally, since I am looking at Armenia and the Caucasus region, a quick overview of corruption is in order, from small Pacific island nations being paid to recognize some of the 5 Russian backed self declared Republics to using offshore companies to rob 3 Moldovian banks of billions of $US and money laundering out of Russia, seems very fitting.

  1. We will be stopping all potential deals with SCAC. Unreliable partner in our opinion

    Like

    Posted by Leadmann | December 2, 2015, 6:46 am
    • Can you tell me how your experience with SCAC was ?

      Like

      Posted by Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow | December 2, 2015, 11:51 am
  2. I like your rule of thumb regarding start-up financing.
    I love your last paragraph.

    Like

    Posted by Murray Henley | November 27, 2015, 1:09 am
    • Thank you for your kind comment, yes it may seem harsh, but 6 months is a good buffer, as all start ups over estimate their success in planning, but reality shows that load factors and yields do not materialize as hoped and then you are bleeding cash every month, so good to have a ‘reserve’ that is adequate.

      Kind regards,

      Tomas

      Like

      Posted by Aviation Doctor - Helping aviation companies to transform the present into a more profitable tomorrow | November 27, 2015, 6:33 am
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