Photo: Germán Efromovich in 2012. (Credit: Cruks)

Known as the founder of Synergy Group, the former chairman of Avianca, and the chairman of Colombia’s Movich chain of upscale business hotels, Efromovich continues to grow and manage businesses — most recently Aeroitalia, a new European airline based in Rome — and he has taken to social media, especially LinkedIn and YouTube, where he generously shares his history and insight directly with the public.

Like every magnate who dares to venture — especially in the colorful world of South American dealmaking — Efromovich has seen his share of ups and downs. But, unlike most, he isn’t afraid to discuss them.

In an interview many years in the making, Finance Colombia Executive Editor Loren Moss was able to have an in-depth conversation where they talk “sin papas en la lengua” (his version of the Spanish idiom “sin pelos en la lengua”)* about the recent turbulence in Colombia’s aviation market and what the future may hold.

Finance Colombia: It’s a pleasure finally speaking with you. First, I would like to congratulate you on your new project, Aeroitalia. How is that going?

Germán Efromovich: It isn’t my own new project, actually. I’m not an investor. I was recruited to be in charge of the intellectual part and build the company along with a group of people from Italy. They invited me because of my experience, and since I like aviation, I gladly accepted. We started 15 months ago with the certification request, and in four months we were already flying.

Today, the company is a bit more than a year old, and it already makes profit — there isn’t any loss. I know that, historically, when speaking of the commercial aviation business, that isn’t common.

“If you start selling tickets cheaper than your cost, how can you compete? … It’s impossible. So, I don’t call it low-cost — but ‘kamikaze-cost.’ It makes no sense.”

– Germán Efromovich

Finance Colombia: You have a very successful track record, but there’s something else that stands out: You tell your experiences to the public. Once a lot of successful people arrive at this point, it’s difficult to know anything about them. They live in secret. But you now have a YouTube channel where you openly share your lessons with your followers. I think it’s very noble. Why do you do it?

Efromovich: Thank you very much. I don’t know why it shouldn’t work this way. I think that if humans share more about their experiences — good and bad — we would all help the world be a better place. However, people forget. We don’t learn so much from others’ experiences, right? Otherwise, we wouldn’t be going through so many issues right now globally. If we look back to all we’ve gone through as humans — all those wars — if we paid real attention to the experiences, I think we would have a more civilized and peaceful world.

Viva Air made a big splash in Colombia by giving millions a new low-cost option, but it began to struggle in recent years before ultimately exiting the market after an unsuccessful acquisition by Avianca. (Photo credit: Viva Air)

Finance Colombia: I recall you saying, maybe 10 years ago, that the low-cost airline model was unsustainable and that it was a never-ending road. I remember your skepticism. At the time, everybody was saying, “well, he’s more traditional,” but here we are in 2023 and there has basically been an earthquake of the Colombian aviation market — with two local low-cost carriers disappearing in a month. Why have the low-cost airlines failed in Colombia? What happened and why?

Germán Efromovich: If you start selling the product way for cheaper than it cost you, you won’t be able to maintain it for long — unless you have a lot of money to waste. In Latin America, I always said that the term “low-cost” is wrong. Somebody invented it and it really doesn’t exist — not even in Europe.

In Europe, what is wrongly called “low-cost” works because the price of the plane, the crew, and the gasoline doesn’t change. It only varies a little. The question is how much you sell the ticket for. And you will sell a cheaper ticket if you have a subsidy. And in Europe, there are alternative airports where, in England, for example, they pay the airline to land. This is in contrast to Heathrow, which charges airlines many, many pounds to land.

So you, as an operator, get paid and you can incentivize clients that are willing to arrive at an airport one hour — or more — away from to the city. But in Latin America there is no airport that pays you for landing. If you start selling tickets cheaper than your cost, how can you compete? How can you, with an asset of about $50 million USD per plane, compete with a bus that costs $100,000 USD?

It’s impossible. So, I don’t call it low-cost — but “kamikaze-cost.” It makes no sense.

So, you ask, what happened? At first, the low-cost carriers in Colombia survived. But then, everything we have now seen happen started to happen.

Actually, Viva Air didn’t end up bankrupt. It was bought by Avianca. Then, Avianca decided to stop it or close it, but it wasn’t declared bankrupt. But what happened before the buying? Why did Viva give up and sell the company? Because when Ultra arrived, they start competing and selling their tickets at a lower price than their cost, and miracles don’t exist. That, yes, I saw it many years ago.

READ MORE: Viva Air: The Chronicle of a Death Foretold

There are some countries with subsidies For example, in the United States — you will say they don’t pay to land there — and they have airlines like Southwest and Frontier. What did they do to sell cheaper tickets than American Airlines, Delta, and United? They re-designed the planes, people flew in fetal position. They transferred them into Hayden [Colorado]. They removed service and charged a bit less — but not a lot less.

So, Southwest, Spirit, and others, they all did very well because Southwest had a vision and good luck many years ago. They started to use fuel hedging. At the time, I believe it was like $25 USD or $30 USD when fuel was $100 USD. They grew a lot that way because they transferred the benefit to the passenger.

Finance Colombia: And the larger carriers responded by cutting costs as well.

Germán Efromovich: Exactly. At that time, they were very inefficient and they provided bad customer service. So, what happened? In order to compete with the low-cost airlines, these companies started to become more efficient. A company like Delta — which many years ago was absolutely inefficient and almost went bankrupt — had to ally with Northwest Airlines.

“There will always be a market for those willing to quit taking a suitcase and who don’t want to pay for comfort. But I think the majority of travelers would choose a better, more respectful service with more attention to detail. That’s going to come back. It’s cyclical.”

– Germán Efromovich

Nowadays, it’s a very efficient company. Moreover, the difference between Delta and “low cost “almost doesn’t exist, because if you want to fly with any company and take a carry-on with you or pick a seat, you will have to pay the difference either way. You may have to pay a bit more, you have a loyalty program, a better seat, and the service is better — but prices are very similar now. I had an experience in Europe 3 weeks ago… If you want to buy a last-hour ticket, can you? Ryanair it’s twice the price of British Airways.

Finance Colombia: You have to pay for the luggage, the water — even the toilet!

Germán Efromovich: Exactly. I saw it when it first started. To me, it was obvious that we would see what is happening today.

As I already said, the difference between the tiers is very small because the low-costs started with brand-new planes that were used for three years without maintenance or any trouble. They didn’t have a history.

An experienced company has a history, it has processes, it has had some fines. And the bigger ones went through Chapter 11. Look what happened in the United States. Every company went through it at least once — most of them two or three times. Many big companies disappeared.

Let’s go down through history. Where is Pan Am, Eastern Airlines, or Braniff Airways?

Finance Colombia: USAir.

Germán Efromovich: Exactly, USAir. Today it’s American. They bought American and kept the name because it was stronger, but its first name was Allegheny.

Finance Colombia: I remember it! I’m so old I remember it, and my two aunts were supervisors of passenger service for Eastern Airlines in Miami.

Germán Efromovich: Allegheny was the original name. It turned into USAir after two Chapter 11s. In the end, they end up being stronger after Chapter 11 because they didn’t pay to the dollar and they bought American Airlines. Then Northwest and CEO Richard Anderson bought Delta and transformed it. He kept the Delta name because it was stronger in the market.

READ MORE: Ultra Air 2nd Colombian Airline To Cease Operations In 1 Month

Finance Colombia: I remember doing the math when I was advising tourists in Colombia that were thinking about flying with Spirit. I said, look carefully, because if you have two suitcases, the ticket will cost the same as with Avianca. You believe it’s cheaper because you are the bait.

I find it interesting that the legacy carriers are losing some advantages because they are trying to compete with the low-cost airlines. I mean, if LATAM or Avianca — or United and others in the United States — try to sell low-cost, and try to sell everything piece by piece, they’re also losing.

Germán Efromovich: I think Avianca will have to come back with some new service. Lowering it, as it happened, in my opinion, was a wrong move. Even though, in terms of the number of passengers, it’s going well, what about their loyalty? What about the business traveler? It was forgotten in this case.

I think they should be getting profit out of it — otherwise it would be nonsense. You don’t see a Delta or LATAM lowering their service level or increasing density in an aggressive way. All in all, as I said, the difference between the two types of business practically doesn’t exist — or it’s very small.

There will always be a market for those willing to quit taking a suitcase and who don’t want to pay for comfort. But I think the majority of travelers would choose a better, more respectful service with more attention to detail. That’s going to come back. It’s cyclical.

Finance Colombia: I think it’s pretty noble that, some time ago, thanks to low-cost airlines, some people could fly for the first time because of cheap tickets. But there are also business travelers on a tight schedule who would like to be treated accordingly. Many don’t care about paying an extra $25 USD. I think the most important thing is that there are airlines who care about those clients. It’s important to have different sectors of the market that suit everybody’s needs.

“There are no miracles. The passenger has to be careful. When someone sells a plane ticket cheaper than a bus ticker, the client must know this company may not last.”

– Germán Efromovich

Germán Efromovich: No doubt. But regarding these low-cost companies, if you arrive a day before or at last minute, without luggage, are you going to pay the same? Or will you pay more than the other way? You’re going to pay even more.

There are no miracles. The passenger has to be careful. When someone sells a plane ticket cheaper than a bus ticket, the customer must know this company may not last. It will go bankrupt and leave the customer without service, like what happened with Ultra.

Finance Colombia: I’ve seen they sell them sell plane tickets cheaper than bus tickets. How is that workable?

Germán Efromovich: It isn’t.

* “Sin papas en la lengua” (without potatoes on the tongue) is Efromovich’s rather famous personal take on the Spanish phrase “sin pelos en la lengua” (without hair on the tongue), meaning to speak directly, without fear of offending the listener.

This interview has been been edited for length and clarity

Efromovich is said to have stipulated that he would not pay managerial compensation or severances as part of any such deal, and reports say that Shaw and other investors have already rejected the offer. According to Colombian daily El Tiempo, Ultra Air owes $8 million USD in bank debt and $14 million USD in outstanding accounts payable.

In Colombian aviation, truth is stranger than fiction.

Bolivian-born Germán Efromovich entered the airline business when a debtor in Brazil paid him in kind with a single aircraft. He ended up purchasing a controlling interest in then-struggling Colombian airline Avianca in 2004, growing it into a thriving international airline until disputes with minority shareholder Roberto Kriete and a crippling pilots’ strike led to operational problems and Avianca’s bankruptcy soon after the COVID pandemic began. When Efromovich couldn’t pay back a loan from United Airlines collateralized by his shares in Avianca, he lost control of the airline and was unceremoniously ousted and replaced by his nemesis Kriete.

Efromovich, who still owns assets such as Medellín’s iconic Intercontinental Hotel and his Movich chain of business hotels, has been on something of a comeback after launching Italian carrier Aeroitalia, and has even become a popular youtuber.

If Efromovich were to acquire Ultra, or another Colombian airline asset, it would set up an interesting “rematch” of sorts between himself and Roberto Kriete, now chairman of Avianca. Efromovich’s Avianca purchased Taca Airlines, started by Kriete’s father and run by Kriete out of El Salvador. At first a friendly deal, the two tycoons fell out when Kriete accused Efromovich of mismanaging Avianca and self-dealing to the detriment of shareholders. It must have been bitter when United Airlines booted Efromovich and replaced him with arch-nemesis Kriete as chairman. Efromovich, who has spoken publicly in the past about his distaste for the low-cost airline business model, would find himself back to take on his former airline now run by a man who sued and eventually replaced him.

It has yet to be seen where this leaves the serial entrepreneur William Shaw. Originally from Mexico, he has bet big on Colombia with his two creations, Viva and Ultra both grounded within a month. Neither airline has yet entered liquidation, so conceivably, one or both could possibly fly again. Stay tuned.

The problem, at least as both competitors and Colombian airline regulators saw it, was that a combined Avianca – Viva merger would control too much of Colombia’s domestic aviation market. Aerocivil, Colombia’s civil aviation regulatory authority originally rejected the merger, but then on appeal by the two airlines, Colombia’s Ministry of Transportation (Mintransporte) ordered Aerocivil to at least reconsider the deal, which it is currently (as of publication) doing. All parties expect a ruling shortly.

Complicating the situation, competing airlines Jetsmart and Latam, both out of Chile, have in the last month, submitted competing offers for Viva, much to the consternation of Viva’s controlling shareholders. The way this plays out may mean the difference between dominance and diminution for Avianca, though with multiple suitors, the survival of Viva seems to be more secure than last autumn when Aerocivil first ruled against their deal.

Here are some of the major actors in the hunt to acquire Viva:

MOBI FIA — MOBI Fundo de Investimento em Ações Investimento no Exterior was the controlling shareholder of Brazil’s GOL airlines, controlled by Constantino de Oliveira Junior.

GOL — Founded in 2001, GOL Linhas Aéreas Inteligentes S.A. (NYSE: GOL e B3: GOLL4) is Brazil’s largest airline. Operating on the low-cost model, Gol is primarily a domestic airline serving many Brazilian cities, but also flies to several international destinations throughout Latin America.

Avianca — Once controlled by Germán Efromovich, a South American Magnate with ties to Bolivia, Brazil and Colombia, he lost control when he defaulted on a loan from US based United Airlines collateralized by his controlling interest in Avianca.

South American magnate & former Avianca chairman Germán Efromovich

Avianca was founded in Barranquilla, Colombia by German entrepreneurs over 100 years ago, but had its corporate domicile in Panamá. After filing for bankruptcy, Avianca still has a Colombian base of operations but is domiciled in London.

Today, Avianca is owned by private equity firm Elliott International L.P., United Airlines controlled South Lake One LLC, and Kingsland International Group, which is controlled by Efromovich nemesis, El Salvador magnate Roberto Kriete. Kriete’s father started TACA airlines which Kriete merged with Avianca in 2013, giving him a minority stake in Avianca through his Kingsland Holdings. Kriete and Efromovich soon fell out though, after Kriete accused Efromovich of mismanagement and self-dealing. Ironically, Kriete opposed Avianca’s dealings with United Airlines.

In May of 2022, Avianca shareholders, through a vehicle called Castlesouth Limited, acquired a controlling economic interest in Fast Colombia S.A.S., the legal name of the airline known as Viva. Avianca could not yet take voting or operational control of Viva as the deal would have to be approved with regulators. It is analogous to acquiring non-voting shares in a company. Avianca shareholders also hold a convertible debt instrument from Chilean low-cost carrier Sky Airline S.A. In other words, Sky owes money to Avianca through a loan, but that loan can be converted into equity.

United Airlines — One of the largest legacy carriers in the United States, United (NASDAQ GS UAL) participates with Avianca and Panamá’s Copa Airlines in the Star Alliance. United became a major shareholder in Avianca when Germán Efromovich defaulted on a $400 million USD loan from United collateralized with Avianca shares. Apparently Efromovich took out the loan in an attempt to save his faltering Brazilian and Argentine airlines, which eventually failed.

United now holds its interest in Avianca through an entity called South Lake One LLC.

Abra Group — MOBI FIA entered into a deal with Avianca’s owners, South Lake One, Kingsland International Group, and Elliott International to combine GOL and Avianca under one UK-based holding group called Abra Group Limited, while retaining separate brands (at least initially). The new entity would conceptually look something like Europe’s International Airlines Group, that operates European airline brands Iberia, British Airways, Aer Lingus, Level and Vueling under one umbrella holding company. The Abra Group also seeks to add Viva to this, but so far their plans have been thwarted by Colombian regulators.

Roberto Kriete is chairman of Avianca, Abra Group, and Kingsland Holdings

Roberto Kriete is the chairman, Constantino de Oliveira Junior is the CEO, while Avianca’s CEO Adrian Neuhauser and GOL’s CFO Richard Lark are co-Presidents.

Jetsmart —Chilean low-cost airline that has also announced its desire to buy Viva. Jetsmart is majority-controlled by US-based Indigo Partners, an aviation private equity firm. American Airlines also has a minority stake in Jetsmart, though American is said to be interested in taking a stake in Colombian low-cost airline startup Ultra Air.

Jetsmart already flies between Colombia and Chile, but the airline has also been seeking entry into Colombia’s domestic aviation market. Last year, Colombian regulators tabled but did not reject Jetsmart’s entry, asking for more information on the airline’s relationship with American Airlines, and also expressing doubt that Jetsmart had the fleet capacity. This year, Jetsmart is due to take delivery of 14 new Airbus A320neo and A321neo aircraft, and has the stated ambition of a 100 aircraft fleet by 2026.

Indigo Partners — US-based aviation focused private equity firm established by William Franke. Indigo is an investor in Norway’s Wizz Air, Frontier Airlines in the US, Volaris in México, Cebu Pacific in the Philippines, and Canada’s Enerjet. Indigo also invested in Spirit Airlines and Tiger Airways. Though Indigo is an investor in Volaris with Kriete and Kingsland Holdings, its Jetsmart is acting against the interests of Kriete’s Kingsland, Avianca and Abra Group by competing for Viva.

Latam—Another Chilean airline, Latam is the largest airline based in South America, though it holds a minority position in the Colombian market. Latam was formed in 2012 when Chilean LAN and Brazilian TAM agreed to merge. The airline rebranded itself from the LAN and TAM brands to LATAM in 2015. Latam participated with American Airlines in the Oneworld alliance, but Delta Airlines broke that when it took a 20% financial stake in Latam in 2019. Qatar Airways also has a minority stake in Latam. This month, Latam also announced its intentions to compete for the acquisition of Viva.

Castlesouth—Castlesouth Limited is the UK based entity that acquired the majority economic interest in Viva air last year from Irelandia Aviation, but must wait on approval from regulators before it, Avianca, or Abra can take over voting and operational control. Castlesouth, like Avianca, is owned by Kingsland Holdings, Elliott Management, and South Lake One (United Airlines). Castlesouth through its lawyers,  Philippi Prietocarrizosa Ferrero DU & Uría, has publicly stated its strong preference for its deal to go through between Avianca and Viva rather than between Viva and competitors Jetsmart or Latam; to be expected as Castlesouth is controlled by Avianca’s shareholders.

Elliott International — Elliott International is an investment vehicle owned by Elliott Investment Management, a US based hedge fund controlled by billionaire Paul Singer. In the past Elliott has invested in projects of former Avianca controlling shareholder Germán Efromovich, and has since then held interests in Avianca through its bankruptcy to the present.

Irelandia Aviation —An aviation private equity firm with a track record of successfully developing early-stage airlines. Irelandia was instrumental in the launch and growth of Viva, and also Mexico’s Viva Aerobus, Singapore’s Tiger Air (now merged with Scoot), US-based Allegiant, and its original success, Ryanair.

Viva was the brainchild of Mexican entrepreneur William Shaw, who now runs Ultra Air.

Kingsland Holdings — This is the investment vehicle of El Salvador tycoon Roberto Kriete. Kingsland Holdings holds Kriete’s shares in Avianca, and in Mexican low-cost carrier Volaris. Kriete’s father founded TACA airlines which merged with Avianca in 2013. Though Kriete sued Avianca because of its dealings with United Airlines, United ended up installing Kriete as Avianca’s chairman after ousting Germán Efromovich, who initially did the deal with Kriete. Kingsland is now a shareholder of Abra Group, and of Castlesouth Limited.

Viva — The subject of it all, Fast Colombia S.A.S. was the brainchild of Mexican entrepreneur William Shaw, Juan Posada, Gabriel Migowski, and Frederik Jacobsen. The concept of a Colombian low-cost airline was actually the subject of Shaw’s Stanford University MBA thesis. The four presented the idea to Irelandia Aviation’s Declan Ryan who agreed to fund the startup, along with other investors, such as Colombian insurance and banking concern Grupo Bolivar. None of the founders remain with the airline, though Shaw went on to form competing low-cost carrier Ultra Air, and is a vocal opponent of the Viva-Avianca merger. Viva also owns a Peru subsidiary that operates domestic routes throughout the neighboring country.

Viva is run by Argentine-born former Latam executive Felix Antelo, who has guided the company through rapid international expansion and the COVID pandemic. Unlike Avianca and LATAM, under Antelo’s leadership, Viva has been able to avoid filing for COVID-related bankruptcy, though the company has recently entered a voluntary debt mediation process under Colombian law. UPDATE: Felix Antelo resigned last week and has been replaced by Viva executive Francisco “Pacho” Lalinde.

Viva is run by Felix Antelo

Viva’s growth has come largely at the expense of Avianca, with Avianca carrying 36.3% of Colombian domestic passengers, and Viva at 16.2%. Before Viva’s launch and a devastating pilot strike and lawsuits between shareholders Kriete and Efromovich, Avianca controlled over 60% of domestic traffic. Viva is quick to point out that their low-cost model also competes with terrestrial bus lines in Colombia and Peru, and the airline is proud of how many passengers have flown for the first time with Viva because of its accessible fares.

Latam held 20% market participation, Wingo, a Colombian low-cost subsidiary of Panamanian carrier Copa held 4.5%, Easyfly, a Colombian carrier specializing in smaller cities had 4%, and government owned Satena, which flies to more remote destinations, 2.9%. Other airlines held 18.1% of the market. Ultra air has rapidly been growing and this year we can expect it to have gained significant market share.

Viva’s management has issued several carefully worded statements urging the Colombian government to approve its acquisition by Viva, though both airlines prefer to call it an “integration” as Viva and Avianca shares would have a common owner. Avianca has pledged that Viva would continue to operate separately under its own brand.

American Airlines — American Airlines (NASDAQ: AAL) holds a minority stake in Jetsmart, which has submitted an offer for Viva. American Airlines had a close working relationship with Latam which was ruptured when competing US legacy airline Delta took a stake in Latam, as the airline seeks to expand its presence in South America.

Delta Airlines — Delta Airlines (NYSE: DAL) holds a minority stake in Latam, which has submitted an offer for Viva.

Qatar Airways — Qatar Airlines holds a minority stake in Latam, which has submitted an offer for Viva.

Sky Airline – This Chilean low-cost carrier owes money in the form of a convertible loan to the shareholders of the Abra Group. This loan could conceivably convert to equity, in which case the Abra Group would also become a part owner of Sky.

Ultra Air — Colombian low-cost carrier formed by Viva co-founder William Shaw, who after several years, left Viva on somewhat bitter terms after building the company and finally serving a short stint as CEO. Though the airline was his brainchild, he never had control of the airline’s board, and his shares in the company became diluted though multiple capital raises. On behalf of Ultra, Shaw has been a vocal opponent of the Avianca-Viva merger.

Analysis: A missed connection?

Should Abra Group manage to consolidate Avianca, Viva, and Gol, it could potentially dominate the South American airline market, especially the Colombian domestic market where it would have a dominant position. Strong competition would remain for international routes from carriers like Latam and Copa. On the other hand, should Jetsmart or Latam manage to acquire Viva, it would spell bad news for Avianca, which would continue to face a strong competitor, now financially rejuvenated. Avianca, once known as offering a higher-end passenger experience, now suffers from a dismal reputation with travelers, and a muddled brand that is stuck somewhere between a legacy full-service carrier and a low cost competitor to Viva.

If Avianca’s shareholders are unable to acquire control of Viva, they will have to seriously revamp its brand strategy and determine an identity, because Colombia’s aviation market is becoming intensely competitive. New airlines are entering; we already have spoken of Ultra Air, but other new carriers are coming such as Arajet. Low-cost carrier Wingo is still relatively small, but is wholly owned by Panamá’s Copa, which is financially very healthy and enjoys an excellent market position.

A decision regarding the Avianca-Viva tie up is due soon. Should Aerocivil reject the deal again, expect Avianca shareholders, through Castlesouth to fight it again, conceivably appealing as far as Colombia’s supreme court. Avianca has stated publicly that the acquisition is to save Viva, but there is no doubt that this deal is critical to Avianca’s survival strategy, as Viva has been Avianca’s single biggest competitive threat.

In any case, it is unlikely that Viva will be alone for long, as alternative deep pocketed suitors remain in a holding pattern.

Stay tuned, and be sure to subscribe to Finance Colombia for timely updates and breaking news on this and other important deals relevant to investors and executives active in Colombia.

The offer comes after Colombian government regulators initially rejected a Viva – Avianca merger, but later agreed to reconsider the deal. After the Colombian Ministry of Transportation and its subordinate civil aviation regulatory authority Aerocivil slowed the deal down, low-cost carrier Jetsmart submitted an offer, and now Latam.

“The Colombian subsidiary of the Latam group is prepared and has the capacity to strengthen its operations in the country. In this way, an eventual acquisition of Viva Air Colombia becomes a growth opportunity offering Colombian consumers the best value offer in the local market in terms of service, and the country new alternatives for strengthening its connectivity and the development of tourism,” said Latam in a statement shared with Finance Colombia.

“Latam Airlines Colombia has been operating in the Colombian market for 11 years, and in its trajectory, it has had a constant concern to invest in the Colombian market. For this reason, we believe that this potential operation would be the best option to strengthen the conditions of free competition, as well as to offer the necessary support that will allow us to respond to the financial situation of Viva Air Colombia and its creditors, which will result in the strengthening of the Colombian airline industry.”

Based on passenger volume, Latam is almost eight times as large as Viva, with a route network that extends throughout Latin America, the Caribbean, North America and Europe. This new twist further weakens Avianca’s position in line to purchase Viva, as the Colombian government initially opposed the tie up because the combined company would dominate the Colombian domestic travel market. Avianca, due to a dismal service record, has also garnered plenty of enemies even in Colombian government.

Viva is run by CEO Felix Antelo

Friends and allies

Viva is currently an independent airline, run by former Latam executive Felix Antelo. It was backed by airline venture capitalist Declan Ryan’s Irelandia Aviation. Ryan’s father, aviation legend Tony Ryan established European low cost airline Ryanair, but Declan Ryan is no longer involved in Ryanair, choosing instead to develop low-cost airlines across the globe, including Viva Aerobus in México, Allegiant in the US, Tiger Air in Singapore (now merged with Scoot, a unit of Singapore Airlines), and of course Viva. Viva has no relationship with Ryanair, and is not affiliated with Viva Aerobus in México, but has done some limited codesharing agreements in the past with the latter. Declan Ryan last year joined the board of Avianca after Avianca announced its intention to acquire Viva and form, along with Brazilian airline Gol, a South American airline group called Abra.

Latam is backed by both Delta Airlines and Qatar airways, Delta snatching an alliance with Latam away from American Airlines in 2019. American Airlines now backs Jetsmart with a minority investment, though the two airlines have distinct operating models. American Airlines, like Qatar, Latam and Delta are legacy airlines, while Jetsmart, like Viva, is a low-cost carrier.

In the case of Avianca, United Airlines ended up with a significant stake in the airline after former chairman Germán Efromovich defaulted on a $400 million USD loan collateralized by Efromovich’s shares in Avianca. United Airlines ended up appointing Efromovich’s business nemesis, Roberto Kriete as chairman, a post he still holds.

Viva’s growth in market share over the past several years has come largely at the expense of Avianca, though Viva is quick to point out that with its ultra-low-cost model, it competes as much with the country’s terrestrial bus lines as it does with other airlines.  A merger with Viva would create a competitive fortress in Colombia, especially if the merged airline is not forced to surrender routes or gates at congested Colombian airports such as Bogotá’s El Dorado, or Medellín’s José María Córdova international airport.

On the other hand, a Viva merger with a deep pocketed partner that does not currently have a comprehensive domestic route network—Jetsmart, Latam, or perhaps Copa subsidiary Wingo—would be potentially disastrous  for Avianca; an airline that recently doesn’t seem sure what it wants to be, as the post-bankruptcy legacy carrier more and more mimics Viva’s low-cost, a-la-carte passenger offering. So far, neither Panamá-based Copa nor its Colombian low-cost subsidiary Wingo have expressed interest in Viva.

Expect more of the unexpected as this aviation drama plays out. Will the victorious suitor absorb Viva, or keep it as a separate, subsidiary operation? Will the Colombian government rule in favor of original suitor Avianca? In their original negative ruling, they said that Viva had not sufficiently shopped for savior investors, and that the merger would be anti-competitive and bad for Colombian travelers. Or will regulators rule in favor of Avianca by virtue of it being first in line chronologically?

Be sure to share your own comments and opinion in the comments section below!

Last August, the two brothers were arrested in São Paulo on charges related to fraud in the contracts between the Transpetro subsidiary of state owned petroleum company Petrobras and the Efromovich brothers’ Estaleiro Ilha S.A. (EISA) shipyard in Brazil. The Efromovich brothers were accused of paying bribes and committing “irregularities” in the bidding process to win contracts, costing the government approximately $110 million USD. Ilha S.A. went bankrupt in 2015.

Judge Marcus Vinicius Reis Bastos, of the 12th Federal Court of Brasilia ruled that the prosecution’s case “does not contain a description of the crime and all its circumstances,” as “it does not indicate the antecedent of the crime necessary for the configuration of the crime of money laundering, or because it does not contain a logical narrative of the facts.”

Though briefly arrested, the Efromovich brothers were released to defend themselves. Born in Bolivia and of Polish descent, Germán Efromovich holds multiple citizenship and is well established in the Colombian corporate milieu, most notably as the former controlling shareholder of Avianca Airlines.

For those passengers who have already purchased business class tickets, renamed to XL and XXL, if the aircraft has already had their business class seats removed, Avianca will assign them to the first three rows of the aircraft with the middle seat unavailable.

Now, upgrades, which Avianca will still give out as before, will mean the passenger gets to sit up front. So far, the airline has not announced any removal of business class on international flights.

Analysis

Avianca’s post-bankruptcy strategy seems to be to compete with emerging low-cost carriers like Viva, Spirit and Wingo by becoming one, rather than staying with a full service model such as Copa or Delta, attractive to business travelers.

The airline has already kicked out many of its most loyal fliers from its lounges, changed its redemption model to make it more expensive to attain elite status, and then United Airlines reduced lounge access for Star Alliance travelers including Copa and Avianca.  so the question becomes: “Why fly Avianca—an airline that once differentiated itself on service and comfort? An airline that defined itself a few years ago as something of a regional Emirates or Cathay Pacific of the Andes?”

It’s true that business-class domestic didn’t get the passenger much more on the flight itself. All flight segments within Colombia are less than two hours in length. No food was served on Avianca’s previous domestic business class. Passengers essentially got a bigger seat and priority boarding.

Domestic business class was still worth the cost for many frequent business travelers as status with Avianca and the Star Alliance once brought with it upgrades and lounge access the Star Alliance network. When Avianca began to have operational difficulties beginning with the 2017 pilot strike and its aftermath, Avianca would often find hotels for stranded Lifemiles elite passengers while leaving regular customers to sleep overnight on the airport floor.

Still, with business travelers, time is money. The most exquisite lounges in the world (which Avianca does not offer) cannot make up for canceled flights, missed meetings and connections, and unpredictability. Avianca’s previous management led by Germán Efromovich lost control of the company and a new team was brought in, but even months before the COVID pandemic hit, board chairman Roberto Kriete was caught on a leaked video calling Avianca “bankrupt” before the pandemic and flight groundings forced the airline into real, legal bankruptcy.

Most airlines that have tried to be all things to all people have failed. Panamá based Copa does own Colombia-based Wingo but manages it as a separate operation with its own infrastructure, management and marketing. Copa does very well as an all-international airline (with the exception of one domestic route to and from Davíd, Chiriquí), a serviceable—though overcrowded lounge in its Tocumen International Airport home base, and little direct pressure on its routes.

Avianca still flies a few trans-Atlantic flights after filing for bankruptcy, but for Latin American and Caribbean destinations, US travelers who want to stay in Star Alliance can connect to most destinations, even within Colombia through Copa, and Delta passengers now have Latam as a partner. Low-cost travelers, and even business travelers who aren’t beholden to a legacy network can choose from aggressive new low-cost carriers and connecting flights between Colombia and Florida in the US are under 4 hours—short flights where first and business class options are less important to the passenger.

Most airlines know they can’t be all things to all people, and don’t try to. Ryanair doesn’t try to be Emirates, and Spirit doesn’t try to be Delta. Automakers face the same challenge. Mercedes and BMW fared very poorly when they tried to launch economy low-end models. Toyota and Nissan set up separate operations, Lexus and Infiniti in order to move upmarket. The question here is: Is Avianca trying to be Wingo or Viva? It does not have the DNA of a low-cost carrier.

If Avianca wants to be a low-cost carrier, what is its value proposition to customers? Why fly Avianca instead of the real low-cost carriers? Lifemiles no longer gets passengers what they once did. The lower Avianca’s fares, the less Lifemiles the passenger collects (unlike before, when they were based primarily on miles flown), and now, unless passengers are flying on a 1^st or business class international ticket, Avianca & Copa status travelers can no longer benefit from many Star Alliance lounges.

In fact, independent lounges not run by an airline are becoming more popular. The Lounge Medellín operates in the José Maria Córdova international airport, open to any passengers that wish to pay admission or join lounge networks like Priority Pass. This option is trending as airline operated lounges have been restricting admission or tightening requirements to members of third-party networks like credit card perk programs or Priority Pass.

Can Avianca successfully reinvent itself as a low-cost carrier? Is there some other strategy that they are implementing? Removing business class from short haul commuter flights is not a big deal by itself. In fact, it makes a lot of sense. But what is Avianca’s strategy? What does the airline want to be, and more importantly, what kind of airline, if any at all, is it capable of being in the future?

The investment, said to be $70 million USD of convertible credit, brings the airline into proximity with both bankrupt Colombian carrier Avianca and Mexican carrier Volaris. Volaris was founded by Roberto Kriete, who previously sold El Salvador-based Grupo Taca to Avianca, but later fell out with then Avianca Chairman Germán Efromovich. After United Airlines took Efromovich’s shares as collateral for a half-billion dollar loan, the US carrier appointed Kriete, and his Caoba allies José Guardian and Rodrigo Salcedo to Avianca’s board of directors.

Caoba is Spanish for Mahogany

Guardian and Salcedo, through Caoba Capital, also have a stake in Kriete’s Volaris. Caoba founder José Guardian previously worked for Roberto Kriete as vice president of finance, treasury, and strategic development for Taca Airlines. Salcedo also served on the board of directors of Volaris.

The deal has caused speculation to take flight on whether there will be any potential tie-ups between Sky Airlines, Avianca, and / or Volaris. Volaris and Sky are both low-cost carriers, but Avianca has a legacy model that would conceivably be harder to integrate. Not only this, Avianca is heavily dependent upon its membership in the Star Alliance, and partnership with United Airlines of the US and Copa Airlines of Panamá.

Caoba Capital, as an investor in Avianca, is well positioned to assemble an alliance involving one or more of the three airlines. In fact, a source told El Mercurio that Caoba will “obviously” seek synergies with Avianca to create a stronger South American network.

All three airlines with ties to Caoba may see their networks under siege, as Colombian low-cost carrier Viva has already begun offering routes into Mexico and filed for permission to begin routes to Chile. Mexico’s unrelated Viva Aerobus has begun Colombia routes, and Avianca’s own Star Alliance Partner Copa’s Wingo subsidiary is cannibalizing Avianca’s home turf alongside Viva.

Volaris seems to be doing well. S&P just this afternoon returned Volaris to its IPC Mexican index, but Sky and Avianca are in much weaker positions facing competition from highly-liquid Copa Airlines and its Wingo subsidiary, and fast-growing Viva, backed by the deep pockets of Cartesian Capital and Irelandia Aviation. Avianca will need to repay the debt-package it is assembling in the hopes of emerging from Chapter 11 bankruptcy in the US court system, and also re-engineer itself to compete in a hotly contested Andean and Central American market that it completely dominated just five years ago.

The debt includes $220 million of existing notes, with secured note holders adding $290 million in new loans. Total financing including existing debt is expected to be approximately US$ 2.0 billion, consisting of a US$ 1.27 billion Tranche A senior loan and a US$722 million Tranche B subordinated loan. The DIP financing includes approximately US$ 1.217 billion of new funds consisting of US$881 million in Tranche A and US$336 million in Tranche B.

The $722 million Tranche B DIP (Debtor in Possession) loan includes $336 million of new money, and a $386 million refinancing of existing debt. While Kingsland Holdings participated in the new financing, Avianca says that United Airlines only participated in the refinancing of its existing debt.

United Airlines took control of the majority of Avianca stock after former controlling shareholder & chairman Germán Efromovich defaulted on a $456 million USD loan last year. United’s Latin American strategy depends largely on Avianca’s route network, so the airline’s recovery is critically important for the US carrier. Beyond taking control of the stock, United, along with Kingsland Holdings made an additional $250 million convertible loan to Avianca in November of last year.

Kingsland Holdings is the 2^nd largest shareholder behind BRW Aviation, the investment vehicle controlled by United Airlines (UAL). Kingsland Holdings is the investment entity controlled by Roberto Kriete, arch-nemesis of former chairman Efromovich. Kriete was the former chairman of El Salvador-based TACA Airlines which Avianca acquired in a stock-swap, completing the merger in 2013. That merger made Kriete the second largest shareholder in Avianca. Three years later, Kriete sued Efromovich for mismanagement and “plundering” the airline. Kriete also sought to block Avianca’s strategic alliance with United.

Last year, Kriete’s relationship with United took a turn for the better, with United Airlines, after taking control of Avianca, ousted Efromovich and installed Kriete as Avianca’s new chairman of the board. The two parties collaborated on additional financing for Avianca, by then struggling under crippling debt, dismal labor relations and increased competition,, They installed Anko Van Der Werff as CEO, but their fragile plans for recovery were laid waste by the Coronavirus COVID-19 Pandemic. The company filed for bankruptcy in May of this year after the Colombian government grounded all passenger flights to prevent the viral contagion.

“We are extremely pleased with the support received from a large number of third-party institutional investors and our existing lenders. We believe this demonstrates the market’s confidence in Avianca’s future as a strong, competitive, and profitable airline. Securing these financing commitments is another concrete step forward in our Chapter 11 reorganization process and we look forward to the U.S. Court approval of our proposed DIP financing package. We have resumed operations in most domestic markets and plan to add more domestic and international destinations in the coming weeks, while we remain focused on refining our reorganization plan to fully address the current industry landscape and the effects of COVID-19, enabling our team to continue driving efficiency and margin expansion and positioning Avianca to successfully serve Latin America’s air travel needs for many years to come,” said CEO Anko van der Werff.

The DIP loans are secured by Avianca’s key assets (including the airline’s ownership stakes in its LifeMiles and cargo subsidiaries, as well as by its key brands and cash accounts). Both tranches are secured by a lien on all available collateral, with Tranche B subordinated in right of repayment to Tranche A. The collateral pool for these DIP financings was recently substantially increased via a series of agreements previously announced by Avianca.

The financing is subject to U.S. Court approval, with a hearing scheduled for October 5, 2020, and other customary conditions.

Seabury Securities LLC is serving as Avianca’s investment bank and financial advisor. Goldman Sachs Lending Partners LLC and JPMorgan Chase Bank, N.A. are serving as co-lead arrangers and joint bookrunners of the Tranche A DIP Loans. Milbank LLP is serving as Avianca’s legal advisor.

According to Brazilian government sources, the Efromovich brothers were arrested today in São Paulo on charges related to fraud in the contracts between the Transpetro subsidiary of state owned petroleum company Petrobras and the Efromovich brother’s Estaleiro Ilha S.A. (EISA) shipyard in Brazil. The Efromovich brothers are accused of paying bribes and committing “irregularities” in the biding process to win contracts, costing the government approximately $110 million USD. Ilha S.A. went bankrupt in 2015.

Also read how Efromovich was ousted from Avianca Airlines (click here)

A court in Curtiba, Brasil ordered prison for the brothers, but that order was modified to house arrest with electronic surveillance due to the Coronavirus COVID-19 Pandemic. 70 year old Germán Efromovich was born in Bolivia to a family of Polish immigrants and holds Brazilian, Colombian & Polish citizenship.

The charges so far do not indicate any criminal wrongdoing related to Avianca Airlines Colombia, or Avianca Airlines Brasil, both formerly controlled by Efromovich & both now bankrupt.

The Medellín based bank, Colombia’s largest, offered 3 justifications for its decision:

1. United Airlines (NASDAQ:UAL) decided in the first quarter of this year, to write off its $456 million USD loan to BRW Aviation collateralized by Avianca stock.
2. Avianca’s net assets at the end of Q2 were negative $355 million USD,
3. Under Avianca’s presented DIP financing plan, the B Tranche financing of $700 million USD will be convertible into stock in 2022 diluting any residual value left to current shareholders.

Furthermore, the bank expressed doubts that the DIP financing and associated reorganization plan would even be successful, as it depends on authorizations from various entities that have not been obtained and is subject to restrictions.

Breaking News: Former Avianca Chairman Germán Efromovich Arrested On Corruption & Bribery Charges (click here)

2020’s economic conditions combined with the travel restrictions and COVID-19 Pandemic make it an uncertain time even for solvent airlines, so much more challenging for financially weak airlines such as Avianca.

“We consider that the likelihood that Avianca’s stock has any tangible value is significantly low.”—Bancolombia

Bancolombia makes the observations that according to Avianca’s DIP financing plan, the airline seeks to add an additional $1.2 billion USD, bringing the total debt to $1.989 billion. Most Avianca 2023 bondholders such as United Airlines & Kingsland Holdings have decided to cede the guarantees of their former debt to the new debt in order to encourage other investors to participate in the DIP financing.

Tranche A debt is targeted at $1.289 billion, with the Tranche B being $700 million convertible into stock in 2022.

Avianca has also negotiated a path to retake complete ownership of its Lifemiles loyalty program, part of which was sold off to raise capital three years ago under the airline’s previous management team, controlled by South American magnate Germán Efromovich.

Termination of coverage

“In conclusion, in view of the different shareholder market signals mentioned in investor considerations, the high risk of investing in a chapter 11 company the difficult conditions of the air sector, we have decided to finalize the fundamental coverage of Avianca which was (already) under review.”—Bancolombia

Above photo: Bancolombia’s Medellín headquarters buiding