The destiny of Colombian ULCC Viva lies with unpredictable government regulators
The fate of the Colombian ultra-low cost carrier Viva has taken many twists and turns during the past year, and the only constant is that its future remains clouded in uncertainty.
Colombia's largest airline, Avianca, announced its plans to acquire Viva nearly a year ago, and now the government has backtracked on its initial decision to reject the agreement.
As Colombian authorities conduct a second review of the Avianca-Viva tie-up, both the South American ULCC group JetSMART and LATAM Airlines Colombia have expressed an interest in acquiring Viva.
As the approval process has dragged on, Viva has been navigating its own precarious financial state, and is now undertaking a voluntary 90-day reorganisation.
Summary
- Colombia's government moved slowly in its deliberations of Avianca's purchase of Viva before rejecting the agreement.
- Now the government is reviewing the transaction once again.
- The South American ULCC JetSMART and LATAM Airlines Colombia are interested in buying Viva.
- Viva is undergoing a voluntary restructuring to negotiate a new agreement with its major creditors.
- The airline's situation proves that even airlines operating in high demand markets still face challenges in the COVID pandemic recovery.
Approval for the Avianca-Viva agreement has dragged on
After it emerged from Chapter 11 bankruptcy protection in late 2021, Avianca set out on a course to change the Latin American aviation landscape.
In Apr-2022 it announced plans to acquire Viva, followed by a more ambitious move to create the 'Abra Group' with GOL.
Viva would also be a part of Abra once its acquisition by Avianca was finalised.
Abra stressed that each entity would retain its own brand and business model.
See related CAPA reports:
- Latin America's airlines continue game of chess: Avianca's planned Viva purchase the latest move
- Avianca continues to shake up Latin America's aviation scene with creation of 'Abra'
But the approval process for Avianca's purchase of Viva has taken quite some time.
In Aug-2022 the airlines asked Colombia's government for expedited approval for the transaction, given Viva's delicate financial state.
In Nov-2022 Colombia's government rejected the tie-up, citing concerns over competition.
Avianca and Viva then offered concessions to push the deal through, including relinquishing slots at the congested Bogotá El Dorado International airport.
In early 2023 Colombia's government said that it was re-examining the Avianca-Viva agreement due to a "substantial irregularity" in its original review.
LATAM and JetSMART have entered the fray for Viva
Now JetSMART, which has operations in Chile, Argentina and Peru, has expressed its interest in acquiring Viva.
JetSMART has been working to establish its own subsidiary in Colombia but has not yet received approval for that venture.
Castlesouth, which holds the voting rights to Viva, has said that JetSMART has not submitted a formal offer for the airline - but the ULCC group has requested extensive due diligence information from Viva.
Castlesouth believes that any discussions with JetSMART or any other third party would take significant time, and even if a transaction materialised, that agreement could be subject to further delays in regulatory approval.
Viva's major shareholder said that, given the airlines critical financial condition, immediate approval of Avianca's acquisition of Viva would be best for the ULCC and its passengers, creditors and employees.
Colombia's third largest airline, LATAM Airlines Colombia, has also expressed its interest in acquiring Viva, its opinion being that the potential purchase presents a growth opportunity.
In a statement, Avianca said that the proposals by its competitors were "by all accounts, unfeasible, late and seem more of a distraction in the face of the request for integration of Avianca and Viva".
Viva opts for a voluntary restructuring as its fate remains uncertain
As a result of the drawn-out process to gain approval for its agreement with Avianca, Viva has undertaken a voluntary reorganisation (made available to Colombian companies as a result of the COVID-19 crisis).
Viva explained that it had been unable to access capital during the past nine months, given the standstill with the Avianca transaction.
The airline said that its voluntary recovery process would last 90 days, with an aim to restructure its debts through negotiations with its major creditors.
Viva said it "will continue to ensure the continuity of operations" during its restructuring.
This is the second restructuring Viva has undertaken during the past couple of years - the first was more informal, and occurred during the COVID-19 pandemic.
During that time the company renegotiated more than 1,000 contracts that included aircraft lessors and smaller venders, and as a result, the airline's unit costs fell 10% below pre-pandemic levels.
See related CAPA report: Avianca faces stiff competitors once it exits bankruptcy
But Avianca and other competitors, including LATAM Airlines Group, also emerged from their respective Chapter 11 restructurings with a much lower cost structure.
A new ULCC, Ultra Air, also debuted in Colombia's market during Feb-2022.
A combination of factors likely led to Viva's current financial situation, including oil price volatility, macroeconomic factors, and Colombia's slowing economic growth.
Despite Viva's troubles, LCC ambitions remain high in Latin America
Viva ushered in the ultra-low cost model in Colombia nearly a decade ago.
During its time in service the airline has built up a steady presence in the market, and is the country's third largest domestic airline measured by seat deployment, with an 18% share.
Colombia: domestic seat share by airline, as of mid Feb-2023
Colombia was one of the fastest growing markets in Latin America before the COVID-19 pandemic, and it experienced one of the quickest rebounds of any country worldwide. It posted record passenger numbers in 2022 of 48 million, according to Colombia's aviation regulator Aerocivil.
But Viva's situation shows that despite Colombia's robust demand, some airlines continue to face tough conditions as the recovery continues.
However, there is no shortage of suitors pursuing Colombia's first low cost operator, which reflects the potential of the low cost model in Colombia and elsewhere in Latin America.
Colombia's government holds the key to Viva's fate
As the low cost model continues to proliferate across Latin America, Viva's destiny remains in the hands of Colombia's government.
Predicting which direction the government will take is somewhat fruitless, given the unpredictability that has taken place in the Avianca-Viva approval process.
Whatever the outcome, it is likely that Colombia's aviation landscape will change over the course of 2023.