What lies ahead for Avianca?

Hello All,

The last few weeks have been quite eventful for Avianca. Its CEO and Chairman, Hernan Rincon and German Efromovich, resigned from the board of Avianca Holdings SA (the parent company that owns the Avianca subsidiaries in various countries). In this blog post we will outline the circumstances that led to the change in senior management, including United Airlines’ role. We will conclude by looking at what lies ahead for airline group.

Avianca is the world’s second oldest airline still in operations after KLM. It was founded in 1919 under a different name, SCADTA. The name was changed to Avianca (Aerovias Nacionales de Colombia) in 1940. The Colombian flag carrier was hit hard by the post September 2001 slowdown in aviation, leading to bankruptcy in 2004. German Efrovomich saved the airline with a 63 million USD fund injection. This was the start of an ambitious phase to become a pan Latin America airline group. The official name was changed to Aerovias del Continente Americano.

The airline merged with TACA Airlines from El Salvador in 2009 to create Avianca Holdings SA. The airline group joined Star Alliance in 2012. It is now Latin America’s second largest airline group behind Latam. It has airline subsidiaries in numerous Latin American countries (Brazil, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras and Peru). The group is built on codeshare agreement between its airlines. Synergy Group, via BRW Aviation LLC, is the largest shareholder (51.5% of shares), followed by Kingsland Holdings Limited (14.5%).

Below are Avianca Holdings SA’s financial results:

Year Revenues Operating Margin Profit Margin Debt to Equity Ratio
2019Q1 1151 1.6% -5.9% 8.0
2018 4659 5.0% 0.0% 6.2
2017 4148 7.1% 2.0% 4.1
2016 3880 6.7% 1.1% 3.5
2015 4143 5.3% -3.4% 3.6
2014 4424 6.3% 2.9% 4.1
2013 4225 9.1% 5.9% 3.3
2012 3989 7.0% 1.0% 4.7
2011 3592 5.6% 2.8% 4.0
2010 7.2
Total 34211 6.3% 1.3%

Revenues in millions of USD

The airline group had 4.65 billions USD of revenues, compared to 9.9 for Latam. The financial performance deteriorated since 2013. Even after equity injections in 2011 and 2014, the airlines’ leverage ratio kept deteriorating over time due to sluggish profitability. The debt to equity ratio is now at an alarming 8. Profitability wasn’t up to the debt-fueled expansion. The airline group had to contend with a slowdown in Latin American economies in 2015, pilot strikes in 2017 and Rolls Royce 787 engine issues. Avianca Holdings’ largest shareholder, Synergy Group, has also faced serious financial difficulties in other subsidiaries. As a result it cannot invest more funds into Avianca Holdings at the moment.

Avianca Brasil sought bankruptcy protection in December 2018. The airline was grounded earlier this week by regulators due to concerns over the safety of its operations. Avianca Argentina, launched in 2017, is also in bad financial shape and barely flying. How did issues at some subsidiaries spread to parent Avianca Holdings SA?

One can trace things back to November 2018, when a Joint Venture agreement between Copa Airlines, Avianca and United Airlines was announced. As part of the agreement United Airlines made a $456mm loan to Synergy Group. This loan was backed by BRW Aviation LLC’s shares, Synergy Group’s entire stake in Avianca Holdings SA. One of the loan covenants involved a maximum allowed leverage for Avianca Holdings SA.

This covenant was breached in 2019Q1, allowing United Airlines to seize control of the 51.5% stake (516 million shares) in Avianca Holdings SA. However United Airlines cannot own a majority stake in another foreign carrier due to pilot union agreements. In an interesting twist of events United Airlines transferred the voting rights on shares to Avianca Holding’s second largest shareholder, Kingsland Holdings. Kingsland Holdings Chairman and former TACA CEO Roberto Kriete was appointed new board chairman at Avianca Holdings. Kriete is still looking for a CEO after Hernan Rincon’s departure.

Avianca Holdings SA’s financial situation is strained. The group’s bonds have a credit rating well into distressed territory. The group needs to find enough financing to repay a $550 million USD bond maturing in 2020. United Airlines and Kingsland Holdings are looking to provide $250 million USD of liquidity (with up to $150 mm USD from United Airlines). The airline group faces the daunting task of surviving a liquidity crisis and restoring long term profitability.

Avianca Holdings SA has airlines based in numerous Latin American countries. Each market is relatively small. Each country has its own regulatory requirements, increasing operational complexity in the process. A large part of its business (Colombia, Ecuador, Peru) is in the high altitude Andes. High altitude operations severely limit aircraft’s range capabilities. That is why the airline group operates so many aircraft with good field performance in spite of inferior economics: 15 A318s and 28 A319s.

Avianca Holdings SA already took numerous decisions to improve cash flows. It cancelled 11 routes, including flights to Boston and Chicago that were recently launched. It cancelled 17 A320neo orders and postponed 35 deliveries from 2020-2022 to 2026-2028. This will reduce financial commitments over 2020-2022 by 2.6 billion USD. The airline group also plans to phase out its 8 E190s this year. All its 17 ATR Turboprops are moving to a newly created subsidiary Express Americas. It is worth noting that the airline group’s fleet is quite young (7.4 years average age according to planetspotters.net) so it has plenty of leeway to let it age to lower capital expenditures in the near future.

Avianca Holdings needs to act quickly on one front: convince passengers that it is here to stay. As we saw with Jet Airways and Wow Air passenger trust can disappear quickly, triggering a “run on the airline” that leads to a collapse in a matter of weeks.

On another topic one wonders why United Airlines is trying all it can to keep Avianca Holdings afloat. As it turns out the Chicago based carrier has a smaller footprint in Latin America than American Airlines. This will be exacerbated once the new Joint Venture with Latam Airlines Group becomes effective. Delta Air Lines also has extensive agreements with Aeromexico and Gol. With the advent of Open Skies agreements United Airlines needs to join forces with other airlines not to fall behind. Avianca Holdings has a strong presence in the Andes. Due to geographical constraints neither Copa Airlines nor United Airlines can fly to a number of Andean airports direct from Panama or the United States.

To summarize a debt fueled expansion not matched by profitability up to expectations landed Avianca Holdings SA in financial troubles. The airline group needs to find financing to meet a debt repayment next year. Numerous routes were cut and aircraft deliveries postponed. It will require flawless execution from Avianca Holdings’ new management team to keep passenger trust and the airline in business. United Airlines is ready to provide financial help because it does not want to fall behind American Airlines and Delta Air Lines in the Latin American market. In any case it would be sad to see an airline disappear shortly after celebrating 100 years in operations later this year.

Credit: Avianca


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