Aerial Combat: United Airlines Ejects Avianca Chairman Efromovich, Replaces Him With Arch-Nemesis Kriete

Last week United Airlines (NASDAQ: UAL) moved to remove longtime chairman and controlling shareholder Germán Efromovich from Avianca’s  (NYSE: AVH) (BVC: PFAVH), board of directors. Adding insult to injury, United installed Roberto Kriete as the board’s new chairman. All this while Avianca remains without a permanent CEO as the former CEO Hernan Rincón, an industry outsider who previously worked in software, resigned after a tumultuous 3 years at the head of the Colombian international airline. Adding ridicule to injury, upon this news, Avianca’s stock surged over 30% in one day, showing that the market strongly approves of the board coup.

United has given control of Avianca to Roberto Kriete’s Kingsland Holdings, just 3 years after Kriete sued United and Avianca to block them from negotiating a strategic partnership.

When contacted late Friday, a United Airlines spokesperson told Finance Colombia “While Avianca will remain an independent company and continue to run their own airline, United strongly supports their company-wide focus on transformation.  As we move forward with our Joint Business Agreement with Avianca and Copa, which is separate from today’s action, we will see better benefits for our customers and for our company if Avianca is a reliable, successful partner.”

Avianca’s Net Loss for 1Q 2019 was $ -67.9 million, compared to Net Income of $ 3.5 million in 1Q 2018. Net income margin for 1Q 2019 reached -5.9%. Operating income (EBIT) reached $18.5 million, with a 1.6% operating margin. Further, operating revenues reached $1.2 billion for the quarter; a 1.5% year-on-year decrease.

1. Germán Efromovich ousted by United from Avianca board after defaulting on a loan
2. Roberto Kriete appointed to lead Avianca Board by United with the mandate of finding new leadership
3. Efromovich’s Synergy Group defaulted on a $456 million USD loan made in November 2016
4. United has offered Avianca another $150 million in cash to support operations and stabilize finances. Kingsland may add another $100 million USD of liquidity.
5. Ousted from board: Germán Efromovich, (brother) José Efromovich, Rafael Alonso (former Airbus Latin America president)
6. Appointed to board: Roberto Kriete, Fabio Villegas, Juan Emilio Posada (both former Avianca CEOs)

The History

Germán Efromovich, purchased a financially troubled Avianca in 2004 but was able to successfully nurse the airline back to health, and Avianca enjoyed over a decade of growth and prosperity. Apparently some of his other businesses in petroleum, shipyards, and other airlines weren’t doing so well. Still, based on the success of Avianca, he was able to engineer a merger in 2010 with TACA. In the same year, Chilean rival LAN acquired Brasil based TAM to create LATAM, a South American juggernaut. Avianca combined with TACA would give it the scale to compete internationally.

Roberto Kriete Ávila, the 2^nd generation head of TACA agreed to the merger, leaving Kriete with a 22% stake in Avianca. Like many marriages, things that start out well can sour over time. Allegedly due to Efromovich seeking money for his other business interests, Kriete’s Kingsland Holdings sued Avianca in 2017 to block a deal Efromovich was negotiating with United Airlines which would have created a “strategic investment” but according to the lawsuit, contained a “side deal” with Efromovich’s Synergy Group.”

 “I don’t want to, and I am not going to sell Avianca—“Germán Efromovich in a December 2018 interview with Portafolio (Spanish)

The Kingsland suit was harsh in its criticism of Avianca, saying that Efromovich has “plundered” the airline and wanted to reach a deal with United solely for personal gain. “The United transaction diverts the vast majority of the consideration United is paying for a partnership with Avianca — a valuable asset that may provide United with an estimated annual profit in excess of $75 million USD — to Efromovich’s financially shaky affiliates,” stated the lawsuit, according to Bloomberg. Later that year, Kingsland Holdings and Avianca dropped lawsuits against one another and announced that they had agreed to negotiate privately, though a spokesperson for Kingsland Holdings warned: “If those negotiations cannot be completed successfully, the ‘without prejudice’ dismissal of the litigation allows the parties to bring new actions against each other addressing existing and future disputes.”

As it turns out, while Efromovich was negotiating another “strategic partnership” with United Airlines—he was negotiating another loan with United, but this time not for Avianca, but for his own Synergy Group. Synergy would put up its shares in Avianca as collateral in a holding company, BRW Aviation. If Synergy didn’t pay back the loan as agreed, United Airline would get those shares, which constitute a controlling interest in Avianca.

Avianca Chairman Germán Efromovich (left) and ex CEO Hernán Rincón. Rincon abruptly quit, and Efromovich was ousted as Avianca’s chairman of the board. (photo courtesy of Avianca)

A year earlier, Efromovich and Avianca’s board appointed Hernan Rincón as Avianca’s new CEO. Rincón had been the CEO of Microsoft Latin America before taking the position as the airline’s new leader. The company’s previous CEO was Fabio Villegas, a Colombian economist and politician.

In 2015, when Villegas was still under Efromovich at the airline, Avianca sold a 30% stake in its LifeMiles Loyalty program for $343.7 million USD. (Now, Villegas, along with Avianca former CEO Juan Emilio Posada have been appointed to Avianca’s board of directors after Efromovich’s ouster.)

While all this was happening, in 2017 one of Avianca’s major pilots’ unions, ACDAC, went on strike.  According to the union’s Jamie Hernandez, Avianca’s pilots made 30% to 70% less than Avianca’s pilots in other countries. Avianca Brasil and Avianca Argentina use the Avianca name but are not related to Avianca Colombia beyond licensing the name, and their joint control by Germán Efromovich.

The strike lasted almost 2 months, and was costly both for the airline and the union. The Colombian courts declared the strike illegal and ordered the pilots back to work. Avianca successfully fired some of the pilots who organized the strike, (including Jaime Hernandez) but the airline had lost millions, pilot morale was shattered, and pilots began to leave at a rate faster than Avianca could replace them. Throughout 2018 passengers suffered chaos as flight cancellations and delays were so bad that Avianca had to suspend ticket sales completely at one point.

United Airlines has agreements with its unions that forbid United from operating a foreign airline. There are also agreements in place, such as foreign ownership restrictions that would subject any direct takeover of Avianca by United to regulatory approval in multiple Latin American countries. However, United now seems to have indirect control as a majority shareholder. Right before the notice of default was publicized leading to United’s control of the airline, Rincón abruptly resigned as CEO, saying he wanted to “study astronomy.” This less than a week before it became public in an Avianca SEC filing that on April 10, BRW Aviation informed Avianca that it was in breach of the loan covenants with United. A material change in control such as this affects Avianca’s ability to obtain financing, which resulted in Avianca’s credit rating downgrade by Standard & Poor’s.

“In connection with the delivery by United of a notice of default to BRW, Kingsland Holdings Limited, AVH’s largest minority shareholder, has been granted independent authority to manage BRW, which remains the majority shareholder of AVH,” indicated United Airlines in an SEC filing. United has given control of Avianca to Roberto Kriete’s Kingsland Holdings, just 3 years after Kriete sued United and Avianca to block them from negotiating a strategic partnership.

What happens next?

Avianca’s future seems assured for now. It has a new strategic alliance with United Airlines and Copa Airlines, it has United Airlines as a patron, and is probably insulated by regulatory complications from a direct takeover by United. It has new liquidity, and will be unshackled from the drama of Avianca Brasil and Avianca Argentina. There will also be a chance to cleanse any bad blood between the unions, executives, and the previous leadership.

Now Kriete is in control of Avianca, with United’s blessings. Efromovich is having an extremely bad week, losing control of Avianca, and his Brazilian airline shut down by the government. Can the 69 year old industrialist engineer a comeback?

Who is Who

• Kingsland Holdings: Bahamas based investment vehicle of Roberto Kriete
• Roberto Kriete Ávila: El Salvadorean who inherited from his father and controlled TACA Airlines
• TACA Airlines (Transportes Aéreos de Centro America) was the 2nd largest Central American Airline behind Copa until Kriete agreed to a merger with Avianca in 2010, leaving Kriete with a 22% holding in Avianca. Kriete is also a co founder and board member of Mexican airline Volaris.
• Germán Efromovich: Bolivian businessman, son of Polish Nazi Holocaust survivors, naturalized citizen of Brasil and Colombia. Efromovich purchased Avianca in 2004 during a previous era of financial difficulty for the airline. Efromovich also controlled (or still controls; it is unclear) Estaleiro Ilha (EISA) a Brasilian shipbuilder that went bankrupt in 2015, and Estaleiro Mauá shipyard which closed in June of the same year but was able to reopen.
• José Efromovich: Germán Efromovich’s brother and business partner. José Efromovich operated Avianca Brasil and sat on Avianca Holding’s board of directors until last week.
• Synergy Group: Brasil based holding company of Germán Efromovich that held 78% of Avianca Holdings until they were placed into BRW Aviation as collateral for a loan to Synergy, Ostensibly to help save Efromovich’s other airlines such as Avianca Brasil and Avianca Argentina, which while controlled by Synergy and use the Avianca name, are not part of Avianca Holdings and are legally unrelated to the Colombian airline.
• BRW Aviation LLC: A Delaware (USA) holding company set up to hold the Avianca shares as collateral for the United Airlines loan to Efromovich’s Synergy Group. By setting up this entity in the US and Efromovich transferring the shares there beforehand, any legal action in the case of a default would take place in US courts, United Airlines’ home turf.
• Avianca Holdings: The corporate parent of Avianca Airlines, based in Colombia
• Avianca Brasil: Bankrupt Brazilian airline previously called Ocean Air, launched as an air taxi service by Efromovich. The airline publicly had its planes repossessed by lessors last month. On May 24, Brazilian regulators effectively shut the airline down.
• Avianca Argentina: Formally known as Avian Lineas Aéreas, this airline, also controlled by Efromovich is in danger of suffering the same fate as Avianca Brasil, according to reports.
• United Continental Holdings: The holding company of United Airlines, a major US based global carrier. United is a member of the Star Alliance, along with Avianca and Panamá based Copa. United has well known desires to increase its strength in Latin America, though regulatory and contractual hurdles would make a direct takeover of Avianca a complicated undertaking. In any case, it now has a controlling stake in Avianca, due to Efromovich’s default.
• Hernan Rincón: Avianca’s former CEO for the previous three years. He resigned days after his boss Efromovich’s BRW Aviation defaulted on its loan from United Airlines, right before the news became public. According to reports, coming from Microsoft’s toxic culture at the time, he was widely disliked by Avianca executives reporting to him.
• Renato Covelo: Avianca’s current interim CEO. The new board has retained him in that interim position, though the search for a permanent CEO continues.
• Rafael Alonso: Former President of Airbus Latin America, and until last week, board member of Avianca.
• Fabio Villegas: An economist, professor, politician and diplomat, Villegas was appointed by Efromovich to head Avianca from 2005 to 2016. Last week he was appointed to Avianca’s board of directors.
• Juan Emilio Posada: Former CEO of Avianca, then CEO of low-cost competitor Viva Colombia (now Viva Air) from 2014 to 2016. Last week he was appointed to Avianca’s board of directors.
• Advent International: Private Equity firm with experience and specialization in loyalty programs. Avianca sold them a 30% stake in Lifemiles, but a change in control of Avianca could trigger forced buyback provisions.

Headline photo credit: Loren Moss