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CAPA Live: Avianca makes tough choices for long term success

Analysis

Avianca Holdings was just beginning to reap the benefits of a restructuring it undertook in 2019 when, in Mar-2020, the COVID-19 pandemic upended the global aviation industry.

And now Avianca and its large network peers in Latin America, LATAM Airlines Group and Aeromexico, have all been thrust into Chapter 11. 

As it works to rightsize, Avianca is recognising that it and the industry need to make structural cost changes in order to withstand the next exogenous event, whatever form that may take. 

Despite the long road to recovery, Avianca does believe that there is the potential to reach its pre-COVID-19 size in five years, and that more consolidation could emerge in Latin America

Summary

  • Avianca was making progress in a restructuring outside Chapter 11 before COVID-19 forced the company into a formal reorganisation.
  • The company could be up to 40% smaller as it works to rightsize in the current environment. 
  • Avianca believes there is the possibility for some consolidation to occur in Latin America.

Avianca embarked on 2020 with momentum from restructuring it undertook in 2019

Avianca spent most of 2019 shedding unprofitable routes and restructuring debt. The company also named a new CEO, Anko van der Werff, in 2019, who said that Avianca had been growing too fast.

“If you see that your operation starts to get stretched and you can’t fulfill basic KPIs of running a decent company, then you have to wonder, have we gone too far [?]”, he has previously said. 

See related report: Avianca Holdings makes important moves in gaining financial support

Mr van der Werff recently spoke at the CAPA Live November conference and said that “by and large” Avianca was successful in its 2019 restructuring.

“So January [Jan-2020] and February [Feb-2020] were very strong months for us…it was very upbeat…we had momentum.” 

Then in Mar-2020 every one of Avianca’s hubs basically shut down, and the airline was not in a position to “really show to the market how successful we had been already in at least starting that real turnaround in restructuring work”, said Mr van der Werff. 

As the airspace closures spread across Latin America, “there was still stuff that we had from that restructuring work of last year”, Mr van der Werff explained. Avianca had a bond payment due in May-2020 that required significant cash.

Let’s be very practical about it. We knew, at that stage already, well this is not going to go well”, Avianca’s CEO said. 

Insights from Avianca CEO Anko van der Werff during CAPA Live, 11-Nov-2020

Avianca has solid financial footing without a promised loan from Colombia 

Avianca sought Chapter 11 in May-2020, and its large network peers [LATAM and Aeromexico] followed suit. 

The fact that Latin America’s three largest airlines have sought Chapter 11 bankruptcy protection is stunning, and a big driver in that development was the lack of financial support from governments in the region. 

Eventually, the Colombian government offered Avianca a USD370 million loan, but that funding remains hung up in a court challenge. Avianca obtained bankruptcy court approval for approximately $2 billion in debtor-in-possession (DIP) financing in October. If the government’s pledged financing does not materialise, “then at least we’re fine”, van der Werff said. 

He did, however, cite support from the government in other areas, noting that Colombia was quick to issue slot waivers and tax reductions, and to ensure that rules prohibiting refunds were in place. 

“We have been allowed not to refund, which of course, is very painful”, Mr van der Werff explained, acknowledging that the airline understands that as a business it is necessary to resume providing refunds to make “sure passengers are happy.”

But if Avianca had to issue refunds early on during the pandemic, “you wouldn’t have had the cash to continue. And then the impact on the economy would have been infinitely worse”, he said. 

Avianca is working to determine its size in the current pandemic environment 

Avianca has been vigilant in communicating with employees during the COVID-19 crisis and the company’s Chapter 11 reorganisation. 

“[What] I’ve been telling the organization for months is that we will be smaller”, Mr van der Werff explained.

The airline is attempting to determine the size of its reduction in terms of routes, aircraft and employees. Avianca could be 30% to 40% smaller in 2021, but a firm decision has not been made. “The difference is of course between 30[%] and 40[%], [and] that’s a sizeable number of aircraft...this is where we’re heading and it’s where we’re trending”, Mr van der Werff said.

Data from CAPA’s Feet database show that as of mid-Nov-2020, Avianca Holdings had 62 aircraft in service and 77 that were inactive.

Avianca Holdings: fleet summary as of late Nov-2020 

Even as Avianca prepares to be markedly smaller for the immediate future, the airline has some optimism for the medium to longer term. 

During the CAPA Live conference Mr van der Werff was asked to offer his perspective on how the company would evolve five years into the future. He cited Latin America’s status as an emerging market, and explained that the airline “could be back to our size or bigger”, adding that “I also think, probably in Latin America, there’s still space for consolidation. I think that’s still out there.” 

The current iteration of Avianca is a product of consolidation. Avianca and the El Salvador-based airline TACA merged more than a decade ago, and their merger preceded the consolation of LAN and Brazil’s TAM Airlines.

Avianca's CEO believes airlines need much more flexible cost structures

The COVID-19 pandemic has now been a part of everyday life for more than eight months, and airlines have been forced to adapt quickly to a vastly different reality from the one that was the case just a year ago. 

As an executive that has had a front row seat to markedly changing market conditions, Mr van der Werff also believes that most airlines are focused on a few key issues, including structurally lowering their costs and making those costs much more flexible in order to withstand other events that could occur.

Mr van der Werff said: “There could be a SARS three…a COVID-23. Anything can happen in the next few years”. 

Avianca makes tough decisions in order to remain competitive in the long term 

Avianca’s expectations have changed dramatically for 2020 and beyond, now that COVID-19 will remain a challenging reality for the foreseeable future. 

Colombia’s largest airline, Avianca, has had to make tough decisions in a relatively short period of time. And even as the aviation industry faces a tough climb out of the crisis, Avianca is taking the necessary steps to make sure that it is positioned favourably for the long term. 

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