Avianca has posted a $68 million loss in the first quarter of 2019. It’s further bad news for the second largest carrier in South America.
Avianca is no fly by night airline. It has been around under one name or another for 100 years. Avianca began in 1919, transporting mail in a Junkers F.13 out of Barranquilla. Over time it has merged with other local airlines, a strategy that has accelerated in the last 25 years. In 2009, Avianca become a major South American aviation player when it merged with TACA.
Now based in Bogota, the Star Alliance member flies 189 aircraft to 26 countries in the Americas and Europe with over 750 daily departures. It’s an alternative to South American powerhouse airline LATAM, bringing competition and choice to passengers in the region.
Quarterly losses are nothing new in aviation, and as yesterday’s report on easyJet indicates, not particular to any geographic region. Like any airline, Avianca faces challenges unique to it and challenges in common with other carriers. Simple Flying has identified three particular problems Avianca faces.
What’s causing Avianca problems?
Like most airlines, Avianca pays for its fuel bill and aircraft leases in USD. But as most of its passengers originate out of Central and South America, it charges passengers in their local currencies, some of which are highly volatile. Avianca is Columbia’s national carrier and the USD has appreciated significantly against the Colombian peso in the last 12 months, adding extra sting to fuel and lease costs.
Avianca has a particularly varied fleet of 11 aircraft types ranging from Boeing 787’s to Cessna 208’s. That means 11 types of training and certification, 11 types of maintenance facilities, and 11 spare parts inventories that must be kept. This creates significant economic and logistical hurdles.
The fallout from Avianca Brasil’s bankruptcy has hit Avianca hard. Despite sharing branding, the relationship between the two airlines was limited to having a common majority shareholder, a holding company called Synergy Group that is controlled by Germán Efromovich. But the financial markets have not appreciated the distinction. The bankruptcy of Avianca Brasil hit the share price of Avianca while providing a bounce to competitors LATAM and Gol Linhas Aereas.
These problems have combined with other challenges Avianca has been dealing with to create a perfect storm for the airline, with some commentary suggesting Avianca’s survival is questionable. However, Avianca is taking steps to improve its situation.
Solutions on the horizon
As Avianca merged with or picked up other South American airlines it often inherited some of their aircraft. This is one reason why Avianca has such a varied fleet. But it is taking steps to reduce this. Avianca is planning to reduce its fleet size to between 150 and 165 aircraft. A first step is offloading its 10 Embraer 190 aircraft as the airline targets maintenance and inventory savings in an effort to improve profitability.
Avianca cancelled an order for 17 Airbus A320neo’s earlier this year and delayed delivery on 35 other aircraft. Avianca already has 113 A320s, nearly 60% of its total fleet and as noted, it does make sense to focus on standardising its fleet. But the cancelled order means Avianca would save USD$2.6 billion between 2020 and 2022 and the airline is focusing on profitability over growth.
As reported in April, Avianca is cancelling its routes into Chicago, Boston, New York and Orlando out of Bogota and other South and Central American cities. In Peru, flights to Trujillo, Juliaca and Puerto Maldonado have been cut. Avianca notes the reasons are due to issues with profitability, routes, and growth.
And then there’s United
There is some speculation that US airline juggernaut United could pick up Avianca. In 2018, Avianca took up an USD$456 million loan secured by 516 million Avianca shares. However, Avianca has breached the covenants of the loan, and as a result the US legacy airline United could be poised for a takeover.
The future of Avianca is by no means assured. It has some serious money behind it and it would be a real shame to see a carrier that provides a vital service in a fast growing part of the world go under. Avianca is taking some serious steps to address its problems and the next 12 months should prove interesting times for Avianca watchers.
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