Transaero bankruptcy looming with Kremlin to decide its fate

Negotiations for the takeover of Transaero, Russia's second-biggest airline, by Aeroflot have deadlocked. The final decision is expected to be made at a meeting with Russian Prime Minister Dmitry Medvedev on Thursday.

According to the Russian Interfax news agency, all the negotiators have acknowledged bankruptcy as the only possible way out. A source close to the deal told Interfax there are three reasons for that.

First, the airline's shareholders have not been able to consolidate 75 percent plus one share that were expected to be transferred to Aeroflot.  Secondly, Transaero creditors refused a debt restructuring model, proposed by Sberbank that is overseeing the deal. An the final reason was the Russian Ministry of Finance’s reluctance to give state guarantees of 85 billion rubles ($1.3 billion) for the restructuring of Transaero, which  was promised in the early stages of negotiations.

The banks are opposed to the bankruptcy, but Aeroflot says they should have better assessed the risk when they gave loans to Transaero. According to Aeroflot, the airline had an extremely risky strategy in staying afloat.

Transaero is in such financial straits that it can’t refuel its planes, which is now done by Aeroflot. It said it would stop refueling Transaero planes on September 30, but First Deputy Prime Minister Igor Shuvalov asked Aeroflot to move the deadline to midnight October 2, Russian business media RBK reported.

Shuvalov has promised the government would help the 10,000 Transaero employees who may lose their jobs as well as passengers that had pre-purchased tickets.

At the beginning of September, Aeroflot said it intended to acquire a 75 percent stake in Transaero, which has about $4 billion in debt. Aeroflot's main shareholder is the Russian state, which owns 51 percent stake in the carrier.