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Avianca: Another one to bite the dust?

 

  • Covid-19 provides a fresh blow to Avianca Airlines
  • Implication of filing for Chapter 11 bankruptcy
  • Is the government likely to provide support?

 

As the Covid-19 pandemic continues to badger industries worldwide, one of its recent victims includes Avianca Airlines: the world’s second oldest operating airline. After missing on a bond repayment (worth c. US$ 65.6 mn- bond principal, US$ 2mn- interest), the airline announced on May 10th, 2020 that it was initiating voluntary re-organization proceedings by filing for Chapter 11 bankruptcy protection. While its flights have been on hold since mid-March, Avianca reports that its revenues have plummeted by ~80%. Whilst the Covid-19 impact has certainly been significant for Avianca, the airline had already been struggling for a while now, with its balance sheet severely debt laden. The airline had in fact implemented a restructuring plan in 2019 – ‘Avianca 2021’, which intended on transitioning the company’s focus to being a more profit oriented company from simply being focused on cash generation in addition to re-emphasizing its focus on domestic travel within Columbia. Additionally, the plan included a restructuring of the board of directors as well as rightsizing its fleet delivery plan in order to boost cash flow generation. Already riddled with a host of issues,  (read our previous blog ), Covid-19 presented the airline a fresh blow, thereby pushing it into one of the most challenging crisis in the airline’s 100 year flying history. The airline has also delayed filing of its annual report (until June) and says it will include a warning suggesting that there was substantial doubt regarding the company’s ability to stay in the business.

 

Implications of having filed for Chapter 11 Bankruptcy (In New York court)

The airline’s planes have been grounded since late March with majority of its 21,000 strong employee force being sent on unpaid leave. In addition, the company had also cancelled planned investments and deferred lessor payments. By filing for Chapter 11 bankruptcy protection, the airline is essentially opening up a way for court supervised reorganization. The process allows for postponement of obligations to its creditors of a US based company, thereby offering it time to re-organize its debt or sell a part of its business. By filing for Chapter 11 in the US, Avianca avoided a messy bankruptcy filing in Latin America and benefits from an orderly and quick procedure in addition to receiving debtor-in possession financing. By doing this, Avianca aims at resuming its flight operations in addition to preserving jobs at a time when flying restrictions are lifted by the Columbian government. Anko van der Werff (CEO, Avianca Airlines) said, “the move was needed to ensure the New York-listed airline emerge as a better, more efficient airline that operates for many more years". In relation to commencement of its voluntary reorganization proceedings, one of the motions filed by Avianca includes a list of five of its major creditors:

                        Source: 6K filing, El Tiempo

For now, the court has approved Avianca’s initial proposal to preserve wages as well as allowed it to continue flights as well as fulfil its obligations towards travel agencies. Next, it will need to negotiate revised terms with creditors as well as chalk out a plan on how to move forward and have the court approve it- the next due court date is June 11th. Once the short-term measures are approved, it will need to figure out a long-term plan, both with creditors and stakeholders. Presuming, Avianca is in fact able to achieve this, a newly restructured Avianca will emerge (similar to what it did in 2003), which will likely have its existing shareholders wiped out along with its creditors taking a severe hit to their existing loan terms.

Is the government likely to offer any help?

Latin America’s air travel has been reduced by c. 93% on the back on ongoing global travel bans, with Columbia and Argentina facing some of the strictest bans compared on a global scale. Avianca’s pleas for Covid-19 aid from the Colombian government so far having been unsuccessful, albeit the company says the talks are still ongoing. Many analysts expect the government to step in and support the airline, given its importance to Columbia’s air traffic (an integral part of its economy). While countries such as the USA or the EU have already provided rescue packages to their airlines, at a time when the aviation industry has taken a severe hit owing to Covid-19, Columbia might not be in a position to offer similar help given its constrained financial resources. In fact, Alberto Carrasquilla (Finance Minister), has clearly mentioned that the government does not intend to take ownership stake in Aviana, thereby suggesting that aid will likely in the form of either loans or loan guarantees. However, given the talks are ongoing and the criticality of the airline to Columbia’s economy, any developments in this regard are possible.

While Avianca is battling it out, another airline to have joined the list of Covid-19 victims includes LATAM Airlines. Latin America’s largest airline, LATAM airlines, also has recently filed for bankruptcy protection in a New York court, stating that it intends to keep flying both passengers and cargo when flying operations resume whilst restructuring. Meanwhile the German government has handed out a €9 bn bailout package to Lufthansa with the intent to allow it to cope with the losses incurred during the Covid-19 pandemic. As the pandemic continues to badger economies worldwide, airlines with diminished operations in the midst of travel bans, have taken a blow like no other. While Avianca managed to make a comeback in 2003 when it had yet again filed for bankruptcy, the current times call for more challenging times for the airline to survive, let alone thrive.

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