On December 5, 2019, Avianca (AVHOQ) celebrated its 100th birthday and the fact that it is one of the oldest operating airlines across the globe. Yet the company had little time to throw a massive party, as one crisis preceded another and Avianca (AVHOQ) was forced to enter Chapter 11 bankruptcy protection, becoming the first out of the three biggest Latin American airlines to do so, in May 2020. So, what happened? Was it just a case of being caught with your financials down or is there more to it?

“Avianca (AVHOQ) is facing the most challenging crisis in our 100-year history as we navigate the effects of the COVID-19 pandemic,” concluded the chief executive officer of Avianca Anko van der Werff. In late-2019 and early-2020, the airline saw its first positive results from the “Avianca (AVHOQ) 2021” business plan, which essentially restructured the carrier’s business.

“January, February results were absolutely stunning. Great, fantastic results,” said van der Werff. Yet with the whole industry, and essentially the world, coming to a halt in March 2020, the fantastic results were overshadowed by the eventual Chapter 11 bankruptcy in May 2020.

This is the second part in the series about the bankruptcies of three Latin American airlines. Part I is available here:

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A trifecta of bankruptcies affected the Latin American aviation industry, as Aeromexico, Avianca and LATAM all are operating under Chapter 11 bankruptcy proceedings. But where did it all go wrong?
 

Leadership drama

Seemingly, the goal of the transformational plan named “Avianca (AVHOQ) 2021” was to trim the unneeded fat of the airline.

First things first, leadership changes occurred as Hernán Rincón resigned from his position as chief executive in April 2019. Rincón joined the company at times of peril as well. He began his tenure in March 2016, when the airline was rumored to be for sale. German Efromovich, who was the hero of the day when Avianca (AVHOQ) was also bankrupt in 2004, was forced to deny the rumors:

“Avianca (AVHOQ) is not for sale. Alliance conversations happen constantly every day,” Efromovich told local media in June 2016.

The Colombian airline was looking for a partner, both an airline and an investor, to help it weather the storm in 2016. Already then, the airline set out its path, called “2020 Flight”, to center around the customer in terms of the service it provided. The financially shaky year was combined with the fact that Efromovich, who was holding a majority stake in Avianca (AVHOQ) via Synergy Group, was close to default on a couple of debts to a hedge fund called Elliott Management. A confusing web of ownership resulted in the Columbian airline looking for a helping hand.

United Airlines emerged as the front runner. Yet Kingsland, the number two shareholder at the time, was not happy about the development – so much so, that Kingsland sued Synergy to stop the negotiations between it and United. In November 2017, both parties decided to withdraw their lawsuits. At the time, Rincón explained that the “lawsuit was meritless and filed prematurely.”

“Avianca (AVHOQ) is now looking beyond the litigation, and we are pleased that negotiations with United are progressing.”

Finally, after tough negotiations throughout 2017 and 2018, Avianca (AVHOQ), Copa Airlines of Panama and United Airlines entered into a proposed joint-business agreement in November 2018. However, the drama continued on in 2019, before eventually resulting in the “Avianca (AVHOQ) 2021” plan.

More loans and bankruptcies

In December 2018, Avianca Brasil filed for bankruptcy protection. While the two companies were officially unrelated, they were owned by the same Synergy Group, belonging to Efromovich.

Avianca Holdings, the parent company of Avianca (AVHOQ), was licensing the brand name Avianca (AVHOQ) to Brazilian and Argentine airlines. Avianca Brasil filed for bankruptcy protection in December 2018, while Avianca Argentina ceased operations in January 2019. The Brazilian airline lingered on for a couple of months and eventually ceased operations in May of the same year.

United Airlines, which borrowed $456 million to Synergy Group and its subsidiary BRW Aviation, through which Efromovich held a majority stake in the Colombian carrier, had enough as well. Since BRW defaulted on its loan from United, the latter removed the shareholder from controlling Avianca (AVHOQ) and moved BRW’s voting rights to the aforementioned Kingsland in May 2019. With the Colombian carrier’s chief executive resigning a month prior, changes were set in motion. A new chief executive, namely van der Werff, joined the airline in June 2019, and, together with new management across the company’s board, launched “Avianca (AVHOQ) 2021” in July 2019.

The goal of the plan was to “achieve sustainable and competitive growth, doubling current operating margins while maintaining disciplined capital investments,” to generate a steady flow of cash that would help the company achieve conservative leverage levels by 2021. To ensure liquidity short-term, Avianca (AVHOQ) would look to restructure its debts to “ensure adequate liquidity.”

The airline began to trim its fat and reduce unnecessary expenditures. The move to sell regional subsidiaries, namely Costa Rica-based Sansa and Nicaragua-based La Costeña, included the departure of thirteen Cessna 208 and two ATR 42 aircraft from Avianca’s (AVHOQ) fleet. The deal was closed on May 31, 2019. Three months later, the company announced further measures, which included the sale of four non-strategic assets. In addition, extra aircraft were sold as well, including 10 Airbus A318s, four A320s and 10 Embraer E190 jets.

“During the weeks we have been in the company, we have redesigned the network, starting by canceling 25 routes that are not profitable; we sold 24 aircraft in our fleet and we continue to divest from non-strategic businesses like Getcom, Sansa and La Costeña, sales that represented the exit of 15 additional aircraft,” commented the chief financial officer (CFO) of Avianca Adrián Neuhauser on August 15, 2019.

To help its partner, United Airlines, with the addition of Kingsland, agreed to a $250 million loan to the Columbine carrier in October 2019. Finally, in December 2019, Avianca (AVHOQ) completed its financial reprofiling and with additional financing from other investors was ready to take on the world.

Abrupt halt

Unfortunately, much like the rest of the globe, the airline was forced to stop its operations in March 2020.

“One by one, every single of our hubs basically shut down. Yeah. We weren't really 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,” commented van der Werff on the beginning of the crisis. The same financial restructuring was supposed to bring in positive results, yet the airline had no chance of doing so due to the abrupt halt.

Furthermore, some financial commitments had been delayed until 2020. A bond worth up to $550 million was due to mature in May 2020. While 88.1% of the bond was tendered, it was still a cash-drain. However, before creditors could go checking Avianca’s (AVHOQ) pockets, the airline entered Chapter 11 proceedings on May 10, 2020.

“One following out of last year and necessity but definitely also seeing that this was going to go long,” van der Werff explained the airline’s decision during CAPA Live in November 2020. While Avianca (AVHOQ) had not received state aid in terms of a cash injection or a state-guaranteed loan, “reductions on VAT, on fuel, slot waivers” were aplenty, commented the executive.

While the airline plans to be smaller in the future due, it remains hopeful. After all, Latin America is considered an emerging market, especially for US-based airlines. They have been keen to invest in the Latin American market, American Airlines (A1G) (AAL) codeshare agreement with GOL, Delta Air Lines stake in Aeromexico and LATAM, and the aforementioned United Airlines investment in Avianca (AVHOQ).

However, the ghosts of its past can come back to haunt it.

“Avianca (AVHOQ) will need investors and we have put ourselves forward in the Chapter 11 process via Avianca’s (AVHOQ) lawyers in New York with a group of investors willing to invest with me so we can return to Avianca (AVHOQ) and leave it stronger than when I left,” stated Efromovich, the former chairman of the airline, as he was placed under house arrest due to corruption charges.

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The history of Latin America’s leading airline and its current struggles.