Brazil’s Maxmilhas Files for Bankruptcy Protection, Blames 123milhas Crisis

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Bloomberg Línea — The crisis of Brazilian travel platforms that promise and sell airfares and packages well below the market average took a new turn this Friday with Maxmilhas filing for bankruptcy, with debts totaling $45.66 million. This means that the company, which was acquired by 123milhas earlier this year, wants to stop paying creditors, including suppliers, for a period that can extend up to six months.

“Even though Maxmilhas operates independently, the online travel agency market has been significantly impacted, which has greatly hampered Maxmilhas’ financial capacity,” the company acknowledged in a statement sent this Friday.

With a total debt of $513.11 million (including Maxmilhas’ liabilities), 123Milhas suspended ticket and package issuances at the end of August, putting the online ticket and package market under scrutiny by the Ministries of Justice and Tourism, with an “explosion” in the number of consumer complaints of being deceived.

Both companies, based in Belo Horizonte, have engaged in a price war with traditional players in the package tourism market in recent years, gaining ground in the lower-income consumer segment, mostly from class C.

This is a segment historically dominated by travel agencies, particularly led by Brazil-based CVC, which has faced difficulties too: with a gross debt of $151.62 million, it recently received a $20.16 million investment from the Paulus family, founders of the company.

With the crisis of the 123milhas and Maxmilhas business models, CVC and its competitor, Argentina’s Despegar, are expected to benefit from the trend of consumer migration.

Preliminary data from sales between August 13 and September 3 showed a 64% increase in demand for Decolar and a 20% increase for CVC, according to the Brazilian newspaper Valor Econômico.

The business model of 123milhas was analyzed by Júlio Damião, president of IBEF-MG (Brazilian Institute of Finance Executives of Minas Gerais), on a LinkedIn post in August, partially reproduced in a Bloomberg Línea article on August 31.

“They thought [123milhas’ leadership] of the business in a scalable way (approximately $243 million in marketing in 2022 and approximately $480 million in marketing in 2021), not prioritizing margin, financial cycle, and profit,” he said.

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“The company sold an airfare at a price below the market (Programa Promo 123), kept the money, and bought this airfare (with miles from other customers) ten days before your trip, running the risk of paying a higher or lower price. In finance, this is called speculation (stock options); in business, it’s called ‘not hedging’ (importing without ‘locking’ the dollar, betting that the exchange rate won’t rise until the day of payment),” explained the finance expert.

This “mismatch” in cash reached approximately $466 million, the amount stated in the bankruptcy filing. In the addendum filed yesterday, this amount was corrected to approximately $513 million, including the approximately $45.66 million related to Maxmilhas’ debts.

The president of IBEF-MG highlighted that 123milhas “financed its inefficient operation through receivable interest at approximately 0.3% per month, and when it increased to approximately 1.5% per month, ‘the water began to rise in the neck.’”

The purchase of competitor Maxmilhas at the beginning of the year - “gaining scale without synergy” - further depleted the cash. “They tried to do what struggling fintechs did, seek an investor or fund to stop the cash bleed - ‘offered 30% of the company for approximately $20.16 million.’ But it was not successful.

What happens now Maxmilhas said in the statement that it will avoid, if possible, the suspension of packages and trips. The court had not yet announced a decision accepting the bankruptcy filing as of 4:00 PM this Friday.

“The company believes that by doing so, it can accelerate the payment of all amounts due and restore its financial and operational balance as quickly as possible,” the company stated.

The company also stated that it has no labor disputes among the debts covered in the bankruptcy filing and that it continues its activities. In ten years of operation, Maxmilhas claimed to have facilitated more than 12 million trips in Brazil and around the world.

What the bankruptcy filing says

The document filed in the 1st Business Court of Belo Horizonte with Maxmilhas’ bankruptcy filing identifies MM Turismo & Viagens S.A., referring to Maxmilhas, and Lance Hotéis Ltda. together with 123 Viagem e Turismo and Novum Investimentos Participações as applicants. The petition was prepared by the TWK and Bernardo Bicalho Advogados law firms.

In justifying the filing, the lawyers mentioned the risk of Maxmilhas’ activities being suspended.

“Given the seriousness of the crisis faced by the Applicants, with various orders for blockages, limited access to credit, and early maturity of contracts, they had no choice but to file this petition today, under the risk of not being able to preserve their activities,” they wrote.

The decision to file for bankruptcy was associated with the negative impact involving 123milhas, according to the document.

“The reported filing of this Judicial Recovery has caused great commotion, with numerous sensationalist journalistic reports about the economic situation of the Applicants, which tainted the credibility of the Applicants, who share corporate structures,” argued the defense.

The document detailed the impact of the 123Milhas bankruptcy on Maxmilhas’ finances. After 123milhas’ bankruptcy filing, Maxmilhas reported a 70% decrease in revenue from airfare sales and a 90% decrease in hotel bookings in 30 days.

“Contracts were terminated, and entities rushed to file lawsuits with requests for interim orders to freeze funds, which can be fatal,” the petition added.

More than 950 lawsuits Maxmilhas may be cited in a new wave of lawsuits. “Furthermore, 959 filed lawsuits were monitored in which the applicants have not yet been cited, demonstrating the evident danger of harm and risk to the useful result of the process in this case,” the petition stated.

According to the document, there are 385 collection lawsuits, of which 67 cases have interim orders granted against them.

“Eight requests for restrictions on the accounts of the applicants, related to credits subject to this proceeding, have already been granted, totaling approximately $17,122.14, with approximately $6,975.52 already effectively blocked,” it detailed.

Banco do Brasil is identified as the primary creditor of 123milhas (approximately $15.04 million) and Maxmilhas (approximately $3.82 million), followed by Europlus Viagens e Turismo (approximately $1.66 million), LDS Operadora Turística (approximately $1.50 million), and Flytour (approximately $1.48 million), as reported by Valor Econômico. Other creditors listed include Sicoob (approximately $425,101), Bradesco (approximately $200.40 million), and Santander Brasil (approximately $101.21 million).

‘Cascade effect’

“This is not an independent request for bankruptcy, but an amendment to the 123milhas’ bankruptcy request to include Maxmilhas and Lance Hotéis Ltda. in the procedural consolidation. According to the petition, there was a kind of ‘cascade effect’ because 123milhas’ bankruptcy request affected group companies that were not in difficulties at the time,” said Leonardo Ribeiro Dias, head of Litigation, Arbitration, and Insolvency at Marcos Martins Advogados, to Bloomberg Línea.

In the lawyer’s view, 123milhas and Maxmilhas lost access to credit in the market, cannot receive intercompany loans, and experienced a drop in revenue and sales.

“The reasons for the problems of 123milhas and companies in the same group are specific and mainly result from a business model that was, at the very least, mistaken and caused a crisis of confidence in consumers and the market in general regarding 123milhas, which directly affected other group companies,” Dias evaluated.

-- With the collaboration of Tamires Vitorio.