Avianca Says Viva Deal Is Dead, Viva Liquidation Is Now Likely
This morning, Avianca issued a statement saying that it would not go forward with the acquisition of Colombian low-cost carrier Viva. This means the fate is almost certainly sealed, and Viva, which ceased operations February 27th of this year will likely die as a brand and a company.
Almost exactly a year ago, Avianca shareholders purchased Viva from Irelandia Aviation and minority shareholders and placed it in a holding entity, while seeking regulator approval. This highly unusual move did not seem to contemplate the resistance from regulators or other competitors, which is exactly what happened. With Viva placed in limbo and unable to seek additional capital, Colombia’s aviation regulators after several months rejected the merger saying it would not be in the best interest of Colombian aviation consumers.
After Avianca and Viva appealed, Aerocivil, the regulatory authority made some concessions, but not until March of this year, after Viva ran out of cash and stopped operating. When lessors began to repossess Viva aircraft, there was less to negotiate over, and Viva’s market value continued to diminish.
In today’s written statement, Avianca blamed Aerocivil for not giving them the terms they desired, and also threw shade on competing airlines for filing claims opposing the merger saying that it primarily would concentrate the most valuable slots at Bogotá’s El Dorado international airport in the hands of Avianca shareholders.
“Unfortunately the conditions of this resolution, which is already the firm decision, make it impossible to rescue Viva by making it not only unviable as an airline, but, if integration occurs under the conditions imposed by Aerocivil, it would put at risk the stability of Avianca and the connectivity of Colombia. From the beginning of the integration application we have been respectful of the process. However, it is our responsibility to protect Avianca and put it at the service of the country as a key piece of development, while taking care of our employees and our customers, and responding to shareholders who have believed in us by investing billions of dollars over the past few years,” said Adrian Neuhauser, CEO of Avianca.
“Unfortunately, this long process puts at imminent risk of disappearance Viva, the airline that brought the low-cost model to the country, put millions of Colombians on the fly at competitive prices and gave direct and indirect employment to thousands of families. Now the challenge for the country will be to advance plans to protect the sector and prevent Colombia from continuing to lose competitiveness, diverting the flow of passengers to countries such as Panama, Chile and Peru,” concluded Neuhauser.
Plenty of blame to go around
Bureaucracy and red tape
On one hand, it is true that Aerocivil took an inordinately long time to come to its initial decision. During its review, the Colombian government changed, meaning different leadership being appointed to Colombia’s Ministry of Transportation and its civil aviation dependency, Aerocivil. This change of leadership was no surprise, and something the airlines could have foreseen and taken into account.
A weird structure
When companies are bought and sold, there is usually a tension between the seller, who wans all the money up front, and the buyer, who wants the seller ‘on the hook” for any contingencies…such as the deal being blocked by regulators. In this case, the buyers paid up front for Viva, placing it into a holding company, before even applying—or waiting for—regulatory approval. Good for the seller, not good for Viva, passengers, or even the buyer.
With Viva out the way, Avianca’s primary competitor on domestic routes has been eliminated. The money paid for Viva last year seems to have come not directly out of Avianca but its investors, meaning the purchase still could make sense in a cold calculating way, as they have paid to get rid of competition. Even if Avianca’s shareholders in good faith wanted to keep Viva as a going concern. The company still benefits from Viva’s disappearance.
Viva now will almost certainly go into liquidation, where the now tainted brand might be purchased. As previously reported in Finance Colombia, the airline uses a Microsoft cloud IT infrastructure, leases its Medellín office space from We-work, and leases aircraft, operating in an “asset-lite” modality.
It has yet to be determined who will answer for the thousands of passengers, suppliers and travel agencies that have outstanding travel plans, accounts receivable or commissions.