Is Avianca Holdings in trouble?

• What got Colombia’s national carrier into crisis
• United takes control of Avianca along with the appointment of a new CEO
• Avianca’s transformation plan

Avianca, Colombia’s national carrier hold a whopping 54% share in the domestic market. It is the second-largest airline operator in South America and has demonstrated impressive growth in flights across the continent. The airline grew from a 37 strong fleet in 2004 to an impressive 190 strong fleet presently, with the number of passengers flown registering an increase of 392% during the same timeframe. However, the 99-year-old Latin-American airline is now going through one of its most tumultuous times ever, including a board shakeup and the former CEO, Mr Hernan Rincon, who abruptly left the company.

German Efromovich, a prominent name in the aviation business in South America and once known as the airline’s saviour is now being held responsible for getting the airline in trouble. He was instrumental in the growth of the company and bought the airline for US $64 Mn, thereby saving it from chapter 11 and then doubled its size before merging it with TACA airlines. This helped in transforming the airline into the second-largest Latin American carrier. His impeccable track record was appreciated and hailed by many including the former President, Alvaro Uribe, who also granted the Colombian citizenship to Efromovich in 2005.

However, the good times hit a speed bump back in 2014 when Brazil went through one of its worst-ever recessions. Efromovich, who runs multiple businesses took a loan from an American investment management firm Elliott Management to bolster his shipyard business. Unfortunately, this did not prevent the eventual closure of the said business. Although, Efromovich did not stop here and instead went ahead with an expansion plan for Avianca. In November 2018, Avianca Airlines, United and Copa signed a JV that would allow for these 3 Star Alliance carriers to cooperate on schedules and routes between Latin America and the US and effectively compete against the growing presence of American Airlines in this specific sector. Efromovich’s Synergy Group transferred its 78.1% in Avianca to Delaware holding company BRW Aviation LLC, owned by Synergy to serve as collateral against the loan of US$ 456 Mn offered by the United Airlines. This amount was used by Efromovich to repay loans that were taken by his other Brazilian businesses.

Avianca recently disclosed in a regulatory filing that BRW Aviation has defaulted on an obligation under its loan agreement with the United Airlines, which was secured with the said company’s shares in Avianca. It was due to this breach that the United removed Efromovich from the position of the chairman and revoked his voting rights. However, to ward off breaching its agreement with its pilot union, United transferred these powers to Kingsland Holdings, which is Avianca’s second-largest shareholder. As a result, Kingsland’s Chief Roberto Kriete was appointed as the new chairman by United.

Avianca reported a loss of $US 68 Mn in Q1 2019. Further, the company was downgraded by S&P to CCC+/Negative from B, with the agency backing its rating action by a likely possibility that Avianca would take longer than expected to refinance its US$ 550 Mn bonds due in 2020 if the end-market demand deteriorates or financial markets weaken. Similarly, Fitch downgraded Avianca Holdings to B- based on persistently high leverage ratios, limited financial flexibility and high refinancing risk. While the company ended the March 2019 quarter with US $357 Mn in cash and cash equivalents but has short-term debt due worth c. US $626 Mn along with US $550 Mn unsecured notes due in May 2020. In addition, even though these are separate entities both Efromovich’s Avianca Brasil and Avianca Argentina have filed for bankruptcy.

In spite of the aforementioned issues, there might be a silver lining in United taking control of Avianca. With United’s vested interest in Avianca’s survival, it might aid the debt-laden company to sail through its obligations in the short to medium-term. Additionally, with United’s vested interest in Avianca’s survival, the former has reportedly agreed to loan the amount of US $150 Mn to Avianca provided certain terms are met by financial stakeholders. Separately, Avianca as an airline continues to enjoy increasing demand for domestic and international travel from Colombia’s emerging middle-class. In numbers, the airline enjoys a substantially large market share of the domestic passenger airline market within South America and a 67.5% domestic market share within Central America. Further, with a strategically placed business model combining operations in Colombia, South and Central America, the airline enjoys the flexibility to rotate capacity based on market conditions, thereby maintaining a healthy load factor of about 81.9% on the majority of its routes. Addedly, its LifeMiles loyalty program and cargo business also have been a healthy source of revenue for the company, while the loyalty program registered a c. 13.8% increase in gross billings for Q4 2018 YOY, the cargo business enjoyed a 14% jump in 2018 YOY.

Acknowledging the challenges being faced by the company, Avianca has implemented a transformation plan intending to move from cash generation to a profitability focussed business model. Roberto Kriete, the new CEO has announced a restructuring of the board of directors, which now includes several global airline experts as well as three of the airline’s former presidents. In order to improve its cash flows, Avianca is also rightsizing its fleet delivery plan by revising its aircraft backlog. It cancelled the delivery of 17 aircraft and deferred the delivery of another 35 narrow-body planes. The company is also trying to further increase its focus on domestic air travel within Columbia.  Moreover, Avianca Holdings is launching a publicity campaign in Brazil to distance itself from the negative image of Avianca Brasil and Avianca Argentina.

In conclusion, it can be said that Avianca is just another airline facing turbulence in a rather competitive industry line. A few bad moves from Efromovich and a slew of wrong decisions have led the company to face one of its most challenging times ever. It would not be an exaggeration to say that the future of Avianca is still uncertain. It will be a wait and watch strategy to see the effectiveness of the newly appointed board as well as benefits, if any, reaped out of the transformation plan. Most importantly, it will be highly crucial for the company to be able to seek refinancing of its US $550 Mn senior unsecured bonds due in May 2020.