/

Skymark fears doom over Airbus A380 cancellation penalty

Bloomberg

Skymark Airlines Inc., Japan’s third-largest carrier, said it’s at risk of going out of business should it have to pay Airbus Group NV a penalty after the planned purchase of six A380 superjumbos fell through.

There is “material uncertainty” over whether the company will remain a going concern as it may have to pay a “large amount” as penalty, the carrier said in a statement Thursday. Tokyo-based Skymark also said it’s considering halting unprofitable flights and borrowing money from financial institutions after its net loss more than tripled to ¥5.8 billion ($56 million) in the fiscal first quarter that ended in June.

The carrier said the ¥26.5 billion it paid to Airbus for the double-decker planes, more than the airline’s market value, may not be returned. Shares of Skymark, whose largest shareholder is former Internet millionaire Shinichi Nishikubo, have been plunging after Airbus terminated the order for six A380s — worth $2.5 billion in list prices — this week, sacrificing the only superjumbo customer in Japan.

“Investors are concerned about Skymark,” said Kazumi Tanaka, an analyst at DZH Financial Research.

Skymark had ¥7.2 billion in cash and near-term assets and ¥39 billion in shareholders equity at the end of June, according to a company statement. The company had ¥2.5 billion in short-term and long-term borrowings and ¥16.3 billion of other long-term liabilities at the end of March, according to data compiled by Bloomberg.

The carrier, which Thursday kept a forecast for a net income of ¥354 million this fiscal year, could face demands for as much as ¥70 billion in penalties, Kyodo News reported earlier this week, citing people familiar with the situation that it didn’t name.

“Compared with Skymark’s net income, a penalty of up to ¥70 billion may make it challenging for the company,” said Hiroki Shibata, a credit analyst in Tokyo at Standard & Poor’s. “Competition with legacy carriers and new LCC airlines is also making Skymark’s position weaker.”

Shibata declined to comment on the credit worthiness of the airline as Standard & Poor’s doesn’t rate Skymark.

Stefan Schaffrath, a spokesman for Airbus in Toulouse, France, said the company doesn’t publicly comment on discussions with other parties.

Skymark slid 3.2 percent to ¥209 at the close of trading in Tokyo Thursday, the lowest since October 2009. The shares have declined 46 percent this year after slumping in each of the past three years.

Airbus had said its decision to cancel the orders stemmed from “the airline’s expressed intentions for the aircraft.” Nishikubo said the two sides had been in talks since April, after the carrier told Airbus it needed to alter plans on introducing the plane because of a weaker yen and competition.

Airbus had asked Skymark to become an affiliate with a larger airline as a condition for altering the contract, and then asked for a cancellation fee after the carrier rejected the request, Skymark’s president said Tuesday. Airbus that day didn’t specify plans for re-marketing the aircraft or say if it would return any of the airline’s deposits.

Internet entrepreneur Nishikubo turned around the unprofitable Japanese budget carrier Skymark after taking a stake in 2003 and becoming its president the following year. Nishikubo, who took flying lessons and became a pilot after purchasing his stake in Skymark, said earlier this week he still wanted to buy A380s.

A graduate of Kobe University, Nishikubo made his fortune through the Internet company Zero Inc., which listed on the Nasdaq Japan-Standard stock market in 2000. He was president of the company through its listing until May 2002, according to data compiled by Bloomberg.

The 59-year-old replaced Skymark’s fleet of twin-aisle Boeing Co. 767s with single-aisle 737s after becoming president, helping the airline post record profit.

The airline announced a decision to buy double-decker A380s and start an international business-class service in 2010, breaking from the company’s current model of low-fare travel using single-aisle Boeing Co. 737s. Nishikubo said at the time he planned to win market share by charging less than half the price of rivals.

Skymark initially signed a firm contract for four A380s in 2011 and later came back for two more. Airbus said in April that Skymark’s first A380 performed its maiden flight and was heading for cabin installation and final painting in Germany.