Colombian Government Rejects Avianca – Viva Merger; The Airlines May Appeal

Yesterday, Colombia’s civil aviation regulatory authority, Aeronáutica Civil, known as Aerocivil for short, issued a ruling denying the merger of Colombian Airlines Viva and Avianca into a holding company called Abra, that would also include Brazil’s Gol airlines.

In denying the move, Aerocivil said that the merger would increase the risk to consumers, and overly consolidate the Colombian aviation market. The ruling said that should the merger go forward, it would:

1.  Generate or strengthen market power in favor of the integrated entity (Avianca, Viva Air and Viva Peru). The three entities participate in 59 national routes, which mobilize 93.7% of the country’s domestic traffic. Of these routes, 29 national round-trip routes participate coincidentally.
2.   This economic group would reach 100% of the participation in 16 national routes. (route monopolies)
3.   The economic indicators that were used to evaluate this integration show a considerable potential deterioration. In terms of free competition, it would mean a setback and a return to levels not seen in the country more than 7 years ago.
4.   Viva, which has been a relevant player in the Colombian market, has stimulated competition in the sector and has become a valuable alternative for Colombian and regional consumers, would disappear as an independent competitor.
5.  The other competitors would face new difficulties in growing or entering markets affected by higher barriers to entry and greater market power.
6.  Consumers could be harmed to the extent that the integrated entity (Avianca, Viva Air and Viva Peru) would have more facilities, incentives and fewer risks by increasing its prices, reducing frequencies, canceling routes or reducing complementary services, among others.
7. Free competition is a right of all that entails responsibilities. The authorities in charge of authorizing business integrations have the legal and constitutional duty to protect the market, free economic competition and, above all, consumers.

Aerocivil: “What crisis?”

Furthermore, Aerocivil criticized the justification for the merger. Viva and Avianca have positioned the merger in the public as “saving” Viva, though Viva has been growing, and Avianca emerged from bankruptcy less than a year ago. Aerocivil bluntly stated that Viva has not been behaving as a company in crisis:

“We recommend that Viva adopt the pertinent internal and alternative measures in order to overcome the financial situation it currently faces.”—Aerocivil

The Avianca and Viva companies did not offer remedies; in fact, they requested that the transaction be approved in an expedited and comprehensive manner, applying the exception of a company in crisis. 

The company in crisis exception consists of the situation in which the competition authority allows a business concentration operation to be carried out that, under normal conditions, would be objected to as a consequence of the possible adverse effects on competition, due to the critical situation of the company being acquired. This exception only has legal support if the intervening parties prove compliance with the following criteria:

 Due to the crisis, the company will go out of the market and it is necessary to sell it or integrate it with a third party.

1.  There is no other viable competitor that generates fewer restrictions on economic competition.

2. The damage to competition generated by the approval of the planned operation cannot be greater than that which would cause the exit of the market of the company in crisis, and

3. The alleged crisis or the lack of viable alternatives cannot have been generated or related to the planned integration operation.

In this case, although it was proven that Viva is currently facing a relevant financial situation, Avianca and Viva did not prove that Viva’s economic crisis is of such a magnitude that it affects its viability in the market and, therefore, it is condemned to exit the market. imminently and unavoidably.

Regarding the search for alternatives, through options other than for sale or going to other less anti-competitive buyers, Viva did not prove that it had explored and exhausted other alternatives and that they were unfeasible. For example, there is no evidence in the file to prove that Viva applied for loans from financial entities and/or sent offers to potential buyers such as investment funds or groups of investors.

On the other hand, Avianca and Viva did not prove that the harm to competition generated by the transaction was less than that which would cause Viva’s exit from the market. On the contrary, Avianca and Viva limited themselves to recounting the effects of Viva’s supposed exit from the market, but did not compare them with the effects that the approval of the transaction would generate.

For this reason, taking into account that Avianca and Viva had the burden of proving compliance with all the requirements of the exception of a company in crisis, and in this case the application of that exception was the support for the approval of the projected transaction, the same was objected.

Aerocivil says that it moved quickly on this decision due to the urgency expressed by both Avianca and Viva. It stated that the companies may appeal the decision within 10 days, or resubmit an application for approval, though it would only be considered if the market competition concerns are addressed, though Aerocivil warned that it would “take the time that is appropriate, guaranteeing in any case the right to due process.”

Any revised proposal, according to Aerocivil will still be rejected unless the companies demonstrate that:

1.  The companies propose, and Aerocivil approves, remedies and commitments, which in Colombia are called conditions, that identify and isolate or eliminate the anticompetitive effects of the integration, in such a way that, once said remedies are implemented, the transaction does not affect the competitive structure of the market; either
2.  That the parties manage to prove that the exception of company in crisis is configured.

Viva is surprised

Viva issued a statement saying that:

With respect to the decision taken by Civil Aeronautics (Aerocivil) in relation to the request for alliance between Avianca and Viva, we would like to inform the following:

We respectfully but with surprise received the decision taken by the Civil Aeronautics in which it denies the request for the alliance process between the two companies, which in itself would have constituted an endorsement of the continuity of the Low Cost Model in the region. Under the suggestions delivered by the authority when giving its concept, we will review the alternatives presented to us, given that this alliance is necessary for the continuity of Viva, to continue enhancing the country’s air connectivity at low prices and the source of work of the more than 5,000 direct and indirect collaborators of Viva.

For our part, and while studying the possibilities that we as a company have for the review of this decision, we will continue to operate as we have done throughout our ten years of operations, and in recent months despite the difficult macroeconomic environment we face, committed to promoting air inclusion in Colombia and the region, hand in hand with our “Super Low Cost” model that has generated higher levels of connectivity and development for the country and the region.

Avianca moving forward with Gol

Avianca says that it was informed by Viva’s aircraft lessors about delays in the payment of their financial commitments.

Avianca, again positioning itself as a rescuer for Viva, issued a statement saying:

Avianca is concerned about the recent negative decision made by the Civil Aeronautics regarding the joint application of Avianca and Viva to be part of the same business group.

This request, which seeks to protect passengers and jobs and boost connectivity in the country, would have allowed Avianca to support Viva to turn around the financial situation of the low-cost airline.

Adrian Neuhauser, President and CEO of Avianca stated: “We are concerned about the direction of the decision, as it goes against the needs of the country and ignores the potential effect that the disappearance of Viva would have on users and the market. At Avianca, we reiterate our willingness to actively participate in rescuing Viva, seeking to maintain connectivity for travelers, strengthen tourism and preserve formal employment.”

In view of this scenario, Avianca will make a detailed analysis of the Aerocivil’s decision and will evaluate all available legal alternatives to seek the necessary approvals.

It is essential to clarify that this process is independent of the Abra Group, a project in which Avianca and GOL shareholders continue to move forward.