Colombia’s Transportation Ministry Orders Reconsideration Of Avianca Viva Merger

After finding irregularities in the process that led the Colombian Civil Aviation Authority (Aerocivil) to reject the merger between Colombian airlines Avianca and Viva, Colombia’s transportation ministry sent the merger petition back to Aerocivil for reconsideration.

The Ministry of Transportation released a ruling on Wednesday, January 18 that detailed the irregularities found within the November decision by Aerocivil to reject the merger between Viva Air and Avianca, saying that the anti-competition statutes that were cited in the rejection of the merger failed to consider some exceptions and special conditions written within the law.

“Declare the existence of a substantial irregularity in the processing of this administrative action, which entails taking the corrective measure contained in article 41 of Law 1437 of 2011 [Code of Administrative Procedure and Administrative Litigation], consisting of nullifying all the actions taken from the communication with the file 4100-20222028603 of August 11, 2022, inclusive, for the reasons set forth in this administrative act,” the decree said.

The ministry said that Aerocivil needed to redo the administrative process evaluating the proposed merger between the two companies and to apply the special procedure found in the law previously cited to reject the merger.

The original decision released by Aerocivil in November had said that neither Avianca nor Viva “prove that Viva’s economic crisis is of such magnitude that it affects its viability in the market and, therefore, that it would be doomed to exit the market imminently and unavoidably.

The ministry’s decision, however, says that “[the] creation of an exception to the general rule according to which there is only one single authority in the matter of protection of free economic competition, which is precisely one of the pillars of the law, cannot be understood as an alien, strange or far from the object and essence of the project that was being discussed at that time and that clearly forms part of the legislator’s freedom of normative configuration.”

The ruling doesn’t approve or deny the proposed Viva Avianca merger, but orders it be reconsidered by the civil aviation authority.

While they do not rule on whether the merger should happen or not, the Ministry of Transportation has ruled that Aerocivil must redo the process with these exemptions in mind.

Viva and Avianca are seeking to justify the merger citing the increasing financial pressures on airlines caused by the COVID-19 pandemic. Viva’s financial situation has already worsened to the point where it has decided to to drop three routes departing from Cali’s international airport to and from the Caribbean coast.

“The decrease in our offer of 17 flights per week from Cali to the beach destinations in Colombia is due to the complex macroeconomic conditions that are impacting the air industry and Viva, especially who, by not having an investor financially backing it, can’t bear the over costs caused by exchange rates, inflation, and fuel prices,” the company said in a statement.

However, when the merger was rejected by Aerocivil in November, it was because they believed that a merger between the two airlines would be anti-competitive and detrimental to consumer welfare.

“The economic indicators used to assess this integration show considerable potential deterioration. In terms of free competition, it would mean a setback and a return to levels that were not seen in the country more than 7 years ago,” they said in the November rejection.

Aerocivil also cited a higher barrier for future competitors that won’t be easily-entered, saying in the report: “The other competitors would face new difficulties to grow or enter markets affected by higher barriers to entry and greater market power.”

Edward Russell, a reporter from Skift, estimates that once the Viva-Avianca merger is sealed, over 61% of Colombia’s airline seats would be operated by the merged company, giving it a significant advantage over the 24% seat share of its closest competitor, Latam.

When both companies filed for an appeal in November after the rejection, they were willing to give some concessions to the government to reduce the reported monopoly that they would get if the merger was approved. Avianca itself has promised to continue Viva Air’s consumer-friendly practices.

“Avianca reaffirms its willingness to fully participate in this effort, which will protect Viva’s brand, network and low-cost business model,” the airline said in a statement.

Avianca, which after emerging from its own bankruptcy in 2021 with a new ownership structure, is currently one of the biggest airline operations in Latin America, is also attempting to merge with the Brazilian airline company GOL Linhas Aéreas, with the combined business known under the banner of Abra Group.

Viva Speaks

For its part, Viva issued a statement on Thursday saying (translated):

Faced with the decision taken by the Aeronáutica Civil (Aerocivil) in which they declared null the first instance of the procedure denying the alliance between Avianca and Viva, we would like to inform you:

• That the decision to nullify in the first instance the procedure denying the integration with Avianca to guarantee due process leaves a light of hope for Viva’s permanence in the market, and to obtain a positive response to this in the short term.
• That the urgency that Viva has been expressing in recent months regarding the need for a positive pronouncement that allows the alliance with Avianca, by Aerocivil and the national government, is more valid than ever as the only option to obtain capital from financing that allows it to continue its operation and provision of the essential public service that has allowed millions of Colombians to travel by plane for the first time and connect regions never before served.
• The detailed review of the resolution issued by the authority, on the nullification of the process that denied the integration, opens the doors to a new and detailed analysis by the Aerocivil legal team, which we are sure will allow us to demonstrate, as evidenced with the material sent and the conditions provided, that the best decision is to approve the alliance with Avianca and with it, to allow Viva to remain in the market, with both its brand, and especially the Low Cost model that has benefited so many Colombians. It is key to point out that with this decision, Aerocivil gives guarantees to the companies, including Viva, in the application of due process under the competition rules for business integrations.
• However, time is now the main challenge for Viva’s survival, since the opportunity with which the decision is made is essential, given the imperative need for cash, which presses the day-to-day operation and puts being able to comply with the airline’s commitments to the nearly 25,000 passengers that it transports daily to its 28 destinations. Viva makes a respectful but emphatic call to the national government so that the time invested in the process that was declared invalid, be recovered, based on the competition law, and a decision be made in the very short term, since the authority already has all the evidence at its fingertips.
• We trust that the new review by the Aerocivil team specializing in the subject, and above all, the review based on the “exceptional figure of a company in crisis”, will result in a prompt decision, for the good of the Colombian market, and especially the 5,000 families that depend on Viva, and the more than 41 million passengers transported in its history.