Western Global Airlines acquired more aircraft under the mistaken belief the bull rush in air cargo during the pandemic would continue, leading to a cash crunch, defaults to vendors such as Delta Air Lines and, ultimately, to Monday’s filing for federal bankruptcy protection, according to court documents.
The Estero, Florida-based freighter operator will use $15.7 million raised to fund its bankruptcy restructuring to partially repay Delta and other vendors deemed critical to ongoing operations, the company’s restructuring specialist said in an affidavit laying out the reasons for the bankruptcy filing and motions for maintaining business functions.
Delta TechOps, the maintenance, repair and overhaul division of Delta Air Lines (NYSE: DAL), is owed nearly $5 million, according to Western Global’s bankruptcy declaration. Western Global Airlines is also $10.4 million in arrears to Lufthansa Technik (DE: LHA), another aircraft repair company, and $7.4 million behind to GE Engine Services Distribution (NYSE: GE). Evergreen Aviation Technologies, a repair station in Taiwan, has a $4.5 million claim against Western Global.
In a motion to the U.S. Bankruptcy Court for Delaware, the airline said it must prioritize payments to third parties that provide spare parts, engine accessories, fuel maintenance, flight navigation and flight training services to ensure the business can function. Attempting to replace highly sophisticated and regulated entities would be time consuming and costly, if even feasible, it argued.
Other entities owed money include Eurocontrol ($388,000 for navigation fees) and the Shreveport Airport Authority in Louisiana ($292,573 for rental of a maintenance hangar).
Another Western Global motion seeks to reimburse Japan Airlines for $125,000 in credits for shipment allocations it prepaid and Shanghai-based Pioneer Logistics $145,000 paid for flights that were canceled. The motion says the company will lose those customers to competitors, damaging its ability to generate future revenue, if it doesn’t honor their claims.
The bankruptcy filing actually shows Pioneer Logistics with a total claim for $575,873, but it isn’t clear what the balance of the claim covers.
Disputes with customers have also weighed on Western Global’s recent ability to conduct normal business, but the company seems less willing to fulfill those claims.
The bankruptcy filing shows Trans-Caribbean Cargo with a $6.7 million claim against Western Global. Trans-Caribbean Cargo is a Miami-based freight forwarder that “suffered substantial monetary and reputational damage when WGA breached its contract to fly cargo” between Miami and South America in 2020, Geoffrey Travis, a partner at Shutts & Bowen, the company’s outside counsel, said in a message to FreightWaves. Trans-Caribbean sued and won a final arbitration judgment in May, but Western Global has not paid any portion of the damages.
A former Western Global employee, who spoke on condition of anonymity because of the ongoing legal issues facing the freighter operator, said Western Global abandoned several long-term customers to grab larger, more lucrative business from online retailer Amazon at the height of supply chain disruptions caused by the pandemic.
Trans-Caribbean Cargo has slapped liens on Western Global property, including its aircraft, and a court early last month ordered JPMorgan Chase to garnish funds in Western Global’s primary bank account to fulfill the arbitration award. The order froze access to more than $7 million and has severely impacted the airline’s ability to conduct regular business, according to bankruptcy documents. Western Global is challenging the garnishment, claiming that a limited liability company that founder Jim Neff created to buy $115 million of distress debt from secured lenders for $45 million and prevent liquidation takes precedence as a secured lender over Trans-Caribbean’s junior status as an unsecured creditor.
“The debtors intend to seek expedited relief from the court to address the garnishment dispute and regain access to its accounts held at Chase,” the affidavit said.
Radiant Global Logistics in March sued Western Global for nonpayment of $556,000 in freight transportation services.
Market miscalculation and debt
Western Global, which provides on-demand charter and long-term dedicated rental flying, began operation in 2014 as a low-cost carrier.
Officials say the company delivered operating profits every year until the market tumbled. In 2018, the airline generated $252 million in gross revenue and $107 million of earnings before tax and accounting measures. That went up to $373 million in sales and $197 million in EBITDA for 2020, when freighters were a hot commodity because the pandemic shut down passenger flying, scrambled ocean shipping and triggered a tsunami of e-commerce buying by people isolating at home. The carrier claimed $386 million and $427 million of gross revenue in 2021 and 2022, respectively, and about $179 million and $100 million of EBITDA.
More than 20% of its business is with the U.S. Department of Defense, which contracts with airlines that participate in the Civil Reserve Air Fleet for emergency call-ups.
Robert Del Genio, the co-restructuring officer from FTI Consulting, characterized Western Global as a victim of an unforeseen downturn in the air logistics market, especially a decrease in exports from China. Operations were also negatively impacted by rising fuel costs, the ban on overflights of Russian territory, turnover of pilots and mechanics, and loss of three major contracts.
The narrative in the court filing is that Western Global’s misfortune didn’t start until late 2022, but the bleeding was underway well before then, according to blue-chip ratings agencies. 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 ratings agency Moody’s estimated it would generate free cash flow of only $20 million over the next year if capital expenditures normalized.
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.
Most air cargo industry experts knew the pandemic bubble wouldn’t last and that volumes and freight rates would normalize as ocean shipping bottlenecks disappeared and more capacity returned with the restoration of passenger airline services. Cargo charter operators like Western Global, scheduled freighter operators, express carriers and passenger airlines that carry cargo as a side business have all seen sharp declines in cargo revenues and profits. Several cargo airlines, including FedEx and UPS, have dialed back flights and temporarily parked some planes that aren’t needed. But none of them are on the verge of bankruptcy.
And high fuel prices likely impacted Western Global more than many competitors because its fleet consists of older model 747s with four engines and tri-engine MD-11s that are being phased out across the industry in favor of more fuel-efficient twin-engine aircraft.
Western Global was particularly harmed by the loss of three major customers in the past nine months. FreightWaves has confirmed that Amazon suspended its contract in January. Other customers also prematurely canceled contracts or sought rate reductions that Western Global said were unsustainable.
“These unforeseen factors have caused Western Global’s liquidity to decrease to unsustainable levels and Western Global now finds itself unable to satisfy its debt obligations and key operating expenses,” Del Genio wrote the court.
Western Global’s leadership also invested heavily to expand its fleet after concluding that the spike in demand would be sustained by a shift to online shopping, less reliance on passenger aircraft for cargo transport and freight forwarders signing up for dedicated charter capacity to ensure customers greater reliability. The escalation in industry orders for new freighters and passenger-to-freighter conversions reinforced management’s assumption that the changes were permanent. Instead, e-commerce sales have normalized to their pre-COVID growth rate of about 10% per year versus 26% in 2020, passenger aircraft are hauling more cargo again and logistics companies are eager to exit long-term contracts for self-controlled freighters.
Western Global purchased and upgraded four freighters — including three MD-11s from Lufthansa Cargo — as well as engines at the market peak. Earlier this year it quietly canceled an order with Boeing for two factory-built 777 freighters.
Meanwhile, the airline said COVID-related costs didn’t decline when shipping prices went south. Cockpit crews continued to expect hazard and overtime pay offered during the pandemic, while inflation increased costs for parts and maintenance facilities took longer to fix planes because of labor shortages and increased demand from passenger airlines.
The airline’s narrative also blamed nationwide lockdowns in China at the end of 2022 and into 2023, due to the resurgence of COVID, for halting exports and motivating the three big customers to suspend contracts for Western Global services. The claim doesn’t fully stand up to scrutiny. Many large cities were forced to quarantine in the late summer of 2022, but by December Chinese authorities lifted all COVID restrictions despite an increase in cases. Chinese exports have faltered this year for reasons having to do with labor shortages around the Lunar New Year holiday and weak overseas demand for goods as the global economy slows.
Western Global said it also lost pilots and mechanics to mainline passenger airlines that were rehiring and offering signing bonuses, increased salaries and benefits, and reduced flight obligations.
“Western Global lost numerous pilots during 2022 and 2023 and has only been able to replace some of those lost. The high levels of pilot and mechanic attrition have prevented Western Global from taking advantage of certain revenue-generating opportunities and also significantly increased costs related to the payment of overtime and the need to recruit and train new pilots,” the affidavit said.
Western Global currently has about 120 pilots, who unionized in 2021. The Air Line Pilots Association argues that Western Global’s unwillingness to provide industry-standard pay and work conditions is the reason for the crew shortage and inability to fulfill demand.
Several pilots said in online chat rooms that the company is in its current condition because Neff managed on a shoestring and arbitraged assets between his personal companies and Western Global.
The cash squeeze was compounded by $560 million in debt, including $142 million in credit facilities. Western Global defaulted on a credit installment payment last September and a larger bond payment in February and received an extension for a $4.5 million interest payment in March. It had a $21 million coupon payment to bondholders due in August, Fitch previously reported.
Two prospective sales of 16 unneeded aircraft engines fell apart for reasons that included the lenders’ unwillingness to release liens on the assets. In a last-ditch effort to raise capital, Neff agreed to buy the engines for $26 million without unfavorable terms sought by outside buyers.
Management in May unsuccessfully tried to find a strategic partner, raise new capital and maintain liquidity by selling surplus assets. The initial plan for attracting investors and avoiding bankruptcy contemplated the elimination of less desirable MD-11s from the fleet in favor of a few Boeing 747-400s, which are easier to find pilots and mechanics for because they are more prevalent. But lenders didn’t want to finance a restructuring that would allow other lenders to have priority over collateral for a secured loan, according to the declaration.
When no serious offers for the company materialized, the secured lenders in June recommended the company be closed down.
Flight-tracking sites show Western Global is only operating a third of its fleet. Three of five jumbo jets and about four or five of 15 MD-11s are currently in revenue service, with the rest parked or in storage. The average age of the fleet is more than 28 years.
Neff, the majority stockholder, in late June purchased $115 million of senior secured debt after lenders said they were ready to liquidate the company within 24 hours, which immediately provided relief from restrictive financial payment terms and the runway to pay important expenses and plan the reorganization, according to court documents.
On Tuesday, Judge Karen Owens agreed to consolidate bankruptcy filings for Western Global and 18 other Neff-affiliated companies to simplify administration.
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