Spanair's bankruptcy provides valuable lessons on the uncomfortable union of public and private investments. 

The collapse in late January of Spanair, Spain’s 4th largest airline, drew attention to the pitfalls of government running private industry. The Catalunya region owned 89.1% of Spanair—which it planned to re-brand as Barcelona Airways—through a consortium of government institutions.

Catalunya viewed Spanair as a strategic investment in Barcelona’s airport when it acquired 80% of the struggling airline from Scandinavian Airlines in 2009 for the nominal sum of one Euro. Nevermind that Spanair was still reeling from a 2008 crash in Madrid, or that it was set to have an EBITDA of – €4.7mn for 2009. A forecast by the Boston Consulting Group projected a rapid turnaround after implementation of cost cutting measures and route optimization.

It was not to be. In spite of a significant increase in passengers that made Spanair the largest carrier by passenger volume at Barcelona El Prat, the airline lost €30mn in 2010 and €115mn in 2011. With Spanair needing cash injections to continue operations, Catalunya issued convertible debt that diluted SAS’s remaining ownership interest. In order to sidestep an EU threshold for municipal investments, it obligated other municipal entities to step in, such as the city’s convention center (though ultimately the risk fell to Catalunya as the largest shareholder in those entities).  

The problem was that, in an industry increasingly dominated by low-cost airlines and large flagship carriers, Spanair was caught awkwardly in the middle. It could not beat Ryanair or Vueling’s costs on nearby destinations and its long-haul network did not reach Asia or North America. Spanair could fill seats by accepting lower margins, but could not convert those passengers into loyal customers.

The collapse was perhaps a microcosm of the enterprise’s general untidiness. After an 11th-hour deal with Qatar Airways fell through, Spanair ordered its entire fleet to return to Barcelona, stranding 22,700 passengers around Europe. Though Spanair may have had enough cash on hand to continue operating for 2 more days, according to local press, executives worried about flight safety as personnel began to abandon their posts. The concern for safety is commendable, but the lack of a contingency plan in case of a cease of operations is scandalous.

Now the focus turns to Catalunya’s financial health. Since Spanair leaves debts of €350mn on assets worth just €100mn, shareholders will have to write down their investments to zero (Scandinavian Airlines has already done so with its minority stake). The cash injections, which totaled €150mn, look like money thrown away. And it’s not like Catalunya is awash with cash, either. It recently went under review for downgrade with rating’s agency Moody’s after the unusual move last December to meet cash obligations by issuing bonds to its citizens via savings banks. Moody’s warns that Catalunya may have difficulty meeting its compulsory deficit limit of 1.3% gross regional product in 2012 after direct debt rose 25% in 2011.

Nonetheless, the bankruptcy could be a blessing in disguise for Catalunya. Without having to prop up the airline, Catalunya won’t have to fund non-performing assets and could actually see improvement in its net debt and interest expense, which both sit at about 3 times 2006 levels.

Above all, Spanair shows the headaches that governments go through when running private companies. In the opinion of El País, Catalunya was to blame for “The absence of any public-sector supervision proportionate to the financing supplied, and the inanity of [Spanair’s] leadership.”  Perhaps the better decision for Catalunya (take note, European governments) would have been to not invest in the first place. 

*[The title is a play on Spanair’s slogan, meaning “The one for all.” Deuda means debt.]

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