Avianca plans to emerge from the Covid-19 crisis as a smaller but stronger competitor, with partner United Airlines at its side, under a new restructuring plan that has been filed with US bankruptcy court.
The Bogotá-based carrier’s plan, which was submitted to the court on Tuesday, lacks any significant additional changes to Avianca. Bogota and San Salvador remain its main hubs with secondary operations in Costa Rica and Ecuador; The airline’s Peruvian subsidiary closed in 2020. Its fleet will shrink to at least 109 planes – 98 passengers and 11 freighters – when it emerges from bankruptcy before growing rapidly with 58 new chartered planes arriving from 2021 to 2023. United and Star Alliance is the mainstay of its international network strategy.
Avianca expects to build on its core strengths, including its strong operating performance, increased capacity, brand recognition, and market leadership position in the vibrant Latin American airline market… its Star Alliance membership, the strength of its LifeMiles program, as well as The airline said in its reorganization plan:
The registration marks the beginning of the end of the Covid-19 reorganization of three major Latin American airlines. Avianca led the way with the introduction of Chapter 11 in May 2020, Latam Airlines Group followed suit later that month and Aeromexico in July. The three airlines – the largest in Latin America – have been hit hard by the sharp drop in air travel and the lack of government support to pay their bills. Their bankruptcy filings came when then-IATA director general Alexandre de Juniac warned that half the world’s airlines could “die” – either collapse or merge with competitors – without government help.
While half of the world’s airlines are not yet gone, many have had to take dramatic steps to survive from laying off tens of thousands of employees to cutting fleets. Most have done so outside of formal restructuring or management processes although Latin American airlines have joined companies such as Norwegian Air and Virgin Australia in these formal processes.
One of the cornerstones of Avianca’s reorganization plan is its proposed joint venture with United. Before the crisis, this was planned as a triple fortification link between Avianca, Copa Airlines, and United covering all flights between South America and the United States. . While Avianca never reneged on the agreement during its restructuring, the bankruptcy process opens the door to shifting airline loyalties.
As part of its plan, Avianca has extended its agreements with United for seven years until 2030, and the US carrier has the option to take a stake in the Colombian airline.
Low-cost airlines pose Avianca’s biggest competitive threat at home. During the restructuring, Viva Air Colombia expanded in its domestic common market, and Mexican competitors VivaAerobus and Volaris revealed plans to expand in the market. Volaris plans to open a new subsidiary in El Salvador by the end of the year. Avianca said in its plan that this expansion “led to significant and lasting downward pressure on prices” and changes in traveler preferences.
In response, Avianca plans to increase seat density in its Airbus A320 family by about 24 percent, according to the plan. This would translate to up to 186 seats on the airline’s A320 based on its pre-crisis 150-seat double-class configuration. Viva Aerobus and Volaris each configure the A320neos with up to 186 seats.
Unlike AeroMexico and LATAM, Avianca has not canceled any of its outstanding aircraft commitments with Airbus and Boeing during the restructuring. The airline has firm orders for 88 A320neo planes due in 2025-29, and two 787-9s due in 2024. Avianca has terminated leases for 12 planes and can refuse another 47 — including 11 ATR 72s. By the time she leaves Chapter 11. In addition, she can turn down 10 more A320neos due in 2023 that she leased from BOC Aviation in early 2020.
Avianca made drastic improvements to its balance sheet through bankruptcy. The carrier has reduced nearly $3 billion from the $5.2 billion in debt it owed at the start of the crisis. In addition, it raised $1.6 billion in bankruptcy exit financing to boost its working capital for recovery.
But these reductions do not come easily to unsecured creditors. Many secondary and cross-company claims will receive nothing on the dollar under Avianca’s restructuring plan. Most secured creditors will be fully compensated, either through cash payments or equity transfers.
A bankruptcy court will hold a hearing on Avianca’s restructuring plan on September 14. Comments or objections to the plan are due by September 7.