Spanner In The Works: Spanair's collapse

In August 2008, following the crash of flight JK5022 at Madrid airport and the death of 155 on board, I asked whether Spanair could recover or whether the flames of Barajas would come to engulf it.

At the time of the crash Spanair was in a dire financial position. Its major shareholder, Scandinavian Airlines, which had founded the airline together with the travel division of the now bust Grupo Marsans, was desperate to find a buyer. It eventually did. A consortium from Catalonia handed over one euro.

Spanair's operations at Palma airport were mostly closed down, leaving behind only call-centre staff and some ground crew, now out of a job. Everything was shifted to Barcelona, and the newly reconstituted airline hoped for better days.

The better days didn't materialise, however. A year ago, almost to the day of the announcement on Friday that the airline would be suspending activities and filing for bankruptcy protection, its future was placed on notice, owing to its financial situation having become an emergency.

The sale of Spanair, though for a nominal amount and for which Scandinavian Airlines retained a minority shareholding, was ill-conceived. The Catalonian government was keen for the kudos of an airline which had Barcelona's El Prat as an international hub, and so public money, along with investment from private sources was put into the airline.

There was a logic to the wish to develop El Prat as an international hub, but there was far less logic to the Spanair business model. What sort of an airline was it? And more importantly, how was it financed?

The decision by Qatar Airways to not inject funds into the airline and to not become a substantial shareholder was the nail in the coffin, the lid of which had been closing because of questions as to public funds. Spanair had been massively reliant on money from the Catalonian government and Barcelona town hall which had revelled in Spanair being the airline of the flag of the city. On Friday, reality finally caught up with the Catalonian public authorities that hold over 50% of the shares, and Spanair, without a white knight or public finance, was doomed.

In truth Spanair has been a bankruptcy disaster waiting to happen. Economic crisis certainly didn't help, but its losses were unsustainable - 116 million euros in 2010, 186 million in 2009. Its main shareholder, Iniciativas Empresarials Aeronàutiques (IEASA), the mish-mash of various public and private organisations which in total hold over 80% of the airline, blamed a combination of economic crisis, the rise in the price of fuel, competition and pure lack of finance for making the shortlived revival of Spanair shorter than might have been wished.

The collapse of the airline doesn't come as a surprise. It may have been picked up on the cheap but it had an underlying liquidity problem, one further exacerbated by a reliance on public money. Its 2009 reconstitution was always a highly risky proposition, given the depth of the economic crisis. Moreover, the huge amounts of public money were distinctly questionable in a different way; accusations of illegal subsidies were denied on the grounds that payments were investments and not subsidies, but Qatar Airways would have been uncomfortably aware of potential retrospective action by Brussels biting them.

The cost of fuel and the level of competition were not central to the collapse. One of Spanair's main rivals, Vueling, while operating similar routes and from the same airport, hasn't encountered the same financial problems. Part of the reason why it hasn't is that its business model is one predicated on low cost.

The mistake was that, in seeking to create a prestige airline for a prestige hub, the Catalonian government and its partners engaged in a vanity project without the financial wherewithal to support it, yet it is one that has ended up costing taxpayers a small fortune.

Perhaps there was a hope that the Spanish Government might step in. It has, but only to threaten huge fines for the way in which the suspension of activities was performed. Moreover, the national industry and tourism minister, José Manuel Soria, while lamenting the airline's collapse, has said that it should also cause there to be "very serious reflection" as to public funds to airlines. Soria is dead against subsidies, and however the funds to Spanair were described, they still amounted to subsidies.

In the end, it wasn't the flames of Barajas that engulfed "Spanner", as it was sarcastically referred to, but the absence of an adequate financial base. It has spent the past three years on borrowed time, and now the time has run out.

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