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Avianca says it will 'right size' through bankruptcy, resume flying as coronavirus abates

May 11, 2020
7 min read
Avianca says it will 'right size' through bankruptcy, resume flying as coronavirus abates
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Avianca is optimistic about its future after the coronavirus pandemic. The second-largest carrier in Latin America plans to restructure through bankruptcy and emerge a smaller, leaner and stronger airline carrying passengers well into its second century.

Bogotá-based Avianca became the largest airline to restructure under court protection since the outbreak of the coronavirus. The company filed for Chapter 11 bankruptcy in New York, where it is listed on the New York Stock Exchange, on Sunday. The airline has been hit by the outbreak of COVID-19 with revenues down at least 80% year-over-year and commercial passenger flying suspended — with no restart date in sight — since the end of March.

But Avianca's bankruptcy should not be read as a sign that the airline industry has no future. Instead, the already financially weak airline plans to "right size" through the courts with the outlook for its core business — air travel in Colombia and Latin America — positive.

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More: What does Avianca’s bankruptcy filing mean for the LifeMiles program?

“In the medium to long term, airline travel is expected to continue to play a key part in the global economy... [Avianca’s] core businesses remain strong, and the challenges negatively impacting their industry will likely abate," the carrier said in a court filing on Monday.

Avianca's LifeMiles loyalty program is not expected to change, at least not yet. LifeMiles is a separate company and not part of the Chapter 11 proceedings. In addition, Avianca says the program is an "important source of profitability and cash flow" for it.

LifeMiles had 9.7 million members at the end of 2019.

However, Avianca itself has struggled as air travel has all but ground to a halt around the world. Data from flight-data firm Cirium shows that global flight activity was down 82% year-over-year on May 9, and down a comparable level during the week prior.

Related: Avianca enters bankruptcy due to coronavirus, will remain grounded

ARTURO MERINO BENITEZ AIRPORT, SANTIAGO, CHILE - 2019/03/19: An Avianca Airbus 319 taxiing at Santiago airport. (Photo by Fabrizio Gandolfo/SOPA Images/LightRocket via Getty Images)
An Avianca Airbus 319 taxiing at Santiago airport. (Photo by Fabrizio Gandolfo/SOPA Images/LightRocket via Getty Images)

In Latin America, passenger traffic fell nearly 40% year-over-year in March, according to the latest data from trade group the International Air Transport Association (IATA). However, the region did not begin to feel the brunt of the crisis until later in the month.

"We’ve seen a number of airlines failing at the rate they have to burn up [cash]," said IATA chief economist Brian Pearce in April. "The situation is extremely fragile as the recession starts to take its toll."

Other airline restructurings include Virgin Australia and RavnAir, the largest regional carrier in Alaska. However, the latter has ceased operations and plans to liquidate.

Related: Virgin Australia goes bust, enters administration

Avianca's restructuring plan is multi-fold. The airline plans to shrink its fleet that consisted of 158 passenger aircraft and 13 freighters at the end of 2019. The numbers include 10 Embraer E190s that it parked at the end of December.

Initially, the carrier is seeking court authority to reject leases on 14 jets: two Airbus A319s, seven Airbus A320s, two Airbus A321s, two Airbus A330-300s and one Boeing 787-8, a filing on Monday shows. It plans to negotiate further fleet reductions with leasing companies and lenders.

Avianca will also shrink its network. Unfortunately for Star Alliance travelers, the airline plans to close its Peru operation and end its service between Lima (LIM) and Cusco (CUZ), the closest airport to Machu Picchu. The move will leave Avianca's daily flight between Bogotá (BOG) and Cusco, which it operated prior to the pandemic, as the only Star Alliance offering to the Peruvian city.

The move will consolidate LATAM Airlines' dominance in Peru. The Santiago, Chile-based carrier had a 64% share of seats in the Peruvian domestic market in 2019, according to Cirium schedule data. LATAM, a partner of Delta Air Lines, is Avianca's primary competitor in South America.

Related: Avianca celebrates its centenary

 

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Avianca and it’s partner United on the ramp at Washington Dulles

A post shared by Ned Russell (@airbus777) on

When Avianca restarts flights, it plans to focus on its operations in Colombia and Central America. Avianca has large connecting hubs in Bogotá and San Salvador (SAL) in El Salvador, the latter the result of its 2010 merger with TACA Airlines.

Avianca has a three-fold restart plan: one, domestic flights primarily in Colombia; two, operations in Central and South America; and three, long-haul flights with wide-body jets to Europe and the U.S.

Avianca's relationship with its partner United Airlines is a question mark in the bankruptcy proceedings. The carriers have been working on a strategic partnership with Azul in Brazil and Copa Airlines in Panama for several years. However, at the end of March United said it expects to take a "full credit loss" on a $515 million loan it indirectly provided Avianca in 2018.

United could take a larger equity stake in Avianca — or have its financial position wiped out entirely — through the bankruptcy process.

Avianca's restructuring comes just months after it marked its 100th anniversary in December. The carrier is globe's second oldest carrier after KLM Royal Dutch Airlines.

Related: Azul could join giant Latin America alliance sought by United, Avianca, Copa

Featured image by AFP via Getty Images

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