A heavy debt load, weak cash flow associated with a significant decline in global air cargo demand and an employee lawsuit are raising questions about the ongoing financial viability of Western Global Airlines, an all-cargo carrier with a fleet of 21 aging aircraft that counts retailer Amazon as its top customer.
A review of flight tracking sites indicates Western Global is winding down operations, with the majority of aircraft having returned to home base at Southwest Florida International Airport in Fort Myers or its maintenance center in Shreveport, Louisiana.
Bloomberg, citing anonymous sources, reported Saturday that Western Global Airlines is considering whether to file for bankruptcy protection in response to a cash crunch and that executives are meeting with creditors about a financing lifeline. Bloomberg Law last month published a story saying Western Global is working with a restructuring specialist and investment bank on turnaround strategies, including selling some of its engines.
The cargo airline early this year canceled an order with Boeing for two large 777 freighters.
Last week, Moody’s Investors Service and Fitch withdrew their credit ratings for Western Global’s unsecured debt, saying that the company is no longer providing adequate information to support a rating determination. Western Global, headquartered in Estero, Florida, was grouped in a category of corporate debt issues that are considered speculative grade and high risk.
The decisions follow Fitch’s May 2 downgrade of Western Global’s ratings. “The downgrade is driven by further increases in liquidity and refinance risks given low aircraft activity with large parts of WGA’s fleet either stored or parked and limited flights to and from Asia. The downgrade also reflects the continued deterioration of capital markets access with WGA’s unsecured bonds currently trading at distressed levels,” it said in a report.
Moody’s downgraded Western Global on March 23 because of what it called a “deteriorating liquidity position” and concern that nearly two-thirds of the company’s revenue came from three customers: Amazon, Hong Kong-based Kerry Logistics and KPS World Transportation, a freight forwarder based in Shenzhen, China. The U.S. Department of Defense also is Western Global customer.
Western Global has fully drawn its $45.5 million revolving credit facility even with the expected return of some of the $13 million deposit from Boeing, and all its aircraft are subject to legal claim by creditors because of outstanding debt, limiting its ability to raise new funds on favorable terms, Moody’s said.
The freight operator has about $4 million in quarterly interest and principal payments on its debt and an additional $21 million semiannual coupon payment to bond holders due Aug. 23, according to Fitch.
A reduction in aircraft utilization, stemming from a freight recession that has knocked down airfreight volumes about 10% since the end of 2021, has hit Western Global’s revenues and cash flow harder than other carriers, according to the ratings agencies.
Fitch said Western Global’s flight hours have plunged 40% year over year through early May.
Parking old aircraft
Western Global has a fleet of aging MD-11 and Boeing 747-400 freighters that are expensive to operate and maintain. Fifteen of its 21 aircraft are above 25 years of age and the average fleet age is 28.4 years. MD-11 operators FedEx and UPS have begun phasing out MD-11s because the tri-jet aircraft burn much more fuel than more modern twin-engine jets. The 747-400, with four engines, is a fuel hog too, and analysts say many carriers are reconsidering their use with today’s high price of jet fuel and sagging cargo yields.
Most of Western Global’s fleet is not flying at the moment, FreightWaves research shows.
Western Global dispatched two MD-11s on June 4 to Roswell Air Center, a desert graveyard for aircraft located in New Mexico, according to Flightradar24. The flight tracking service also shows the last flights of five MD-11s were to Fort Myers, including four in June and one on April 27. Another four MD-11s have returned to the Shreveport maintenance base since April 19. And one 747 freighter arrived in Fort Myers on Thursday. Six other aircraft have no flight history for the past 90 days.
Planespotters.com identifies 11 Western Global aircraft as parked. The airline did not respond to inquires about the latest developments.
Western Global burned through $52 million cash during the first three quarters of 2022. At the end of September, it held only $27 million in cash and Moody’s estimated it would generate free cash flow of only $20 million over the next year if capital expenditures normalize.
The airline has also faced difficulty attracting and retaining pilots. At one point last year, the airline was unable to transport cargo on westbound routes to Asia because it couldn’t meet minimum requirements for the number of pilots operating aircraft.
The Bloomberg report said Western Global defaulted on a loan earlier this year and its servicing bank is looking to sell debt for 40 cents on the dollar.
Fitch placed Western Global’s total value, before rumors of a potential bankruptcy, at $60 million.
Dedicated cargo airlines are likely to face continued top-line pressure this year, with low prospects for greater cross-border shipping levels. A large influx of passenger services, especially in the Asia-Pacific market, as airlines bounce back from the pandemic has increased cargo capacity and helped push down rates.
Although the air cargo market has shown flickers of bottoming out since mid-June, the International Air Transport Association projects demand will shrink a further 3.8% this year. Cargo volumes are down about 1% to 4% from a year ago, according to various reporting entities.
Western Global tends to offer short-term contracts in line with a strategy of meeting high-margin, last-minute demand, but the shorter contract durations increase the airline’s exposure to downward freight rates.
Meanwhile, Western Global Airlines is defending itself from an employee suit alleging the airline’s owners overvalued the company when they sold shares to the employee stock ownership plan (ESOP), causing the plan to lose $188 million over two months.
The plaintiffs claim that James and Carmit Neff, who founded Western Global 10 years ago, created the retirement plan in June 2020 to buy 37.5% of the company from them for $510 million. The deal valued the company at $1.3 billion, which the employees said is at least 20 times higher than deserved. The suit charges the Neffs with violating their fiduciary responsibilities under the Employee Retirement Income Security Act by self-dealing and not giving employees seats on the board.
The complaint said that Western Global tried to finance a loan for the ESOP to purchase its share by issuing more than $400 million in junk bonds, but when the company was unable to attract enough investors, Jim Neff personally purchased the majority of bonds at an above-standard rate of 9%, saddling the ESOP with huge debt from the start.
Within two months, the company reported that the shares were worth only $328 million. ESOP participants were therefore forced to purchase Western Global shares for their 401(k) accounts at $1,360, even though they were worth just $875 on the day they were actually allocated to their accounts, according to the complaint. Despite the loss in value, the ESOP must pay yearly principal and interest payments on the full $510 million loan it received from Western Global.
The debt will cost nearly $40 million each year to service, according to the complaint, which is virtually all the $46 million in earnings that Western Global has averaged over the past five years.
Two federal judges earlier this year sided with the plaintiffs against the Neffs’ claim that the dispute must be resolved by arbitration as required under the retirement plan.
Law360.com and The Loadstar previously reported on the lawsuit.
In 2019, logistics provider Flexport sued Western Global for substituting MD-11 aircraft for 747s called for in the charter contract because of maintenance delays.
Click here for more FreightWaves stories by Eric Kulisch.
Air cargo’s busy season looking more like a molehill than mountain peak
Western Global Airlines asks DOT for permission to expand fleet
Western Global Airlines orders 2 Boeing 777 freighters