Colombian President Ivan Duque announced a $370 million USD loan to Avianca, where his sister Maria Paula Duque is a top executive, a move protested by other Colombian airlines, who said the preferential treatment was unwarranted. A Colombian citizen filed a lawsuit and managed to obtain an injunction, temporarily blocking the loan, saying it improperly put at risk public funds without adequate guarantees. Avianca has indicated that it is preparing an appeal, and that without the bailout, it likely won’t survive.

Avianca CEO Anko Van Der Werff received almost half of the $10 million USD in insider bonuses.

Avianca in its court filings admits to paying millions in bonuses to seven top Avianca executives while simultaneously furloughing or firing thousands of Avianca employees. Former Avianca pilots in Peru meanwhile, have legal proceedings against the airline for violating early retirement pledges. Spreadsheets of the payments made are shown below.

In a written statement, Avianca responded to Finance Colombia’s inquiry regarding the payments:

As Avianca (AVH) reported within the documents presented in the process of Chapter 11, at the beginning of this year the company made certain payments to its executives. Part of these payments is related to labor obligations corresponding to the year 2019 and with the results obtained in the process of debt reprofiling in 2019.

On the other hand, before Avianca Holdings S.A. (“AVH”) and its subsidiaries will start the Chapter 11 process, the company’s Board of Directors approved retention plans as part of the ordinary course of business and authorized other payments related to a retention that was developed to seek that the company’s management team remain with AVH throughout the Chapter 11 process. Based on the advisors of the company, these plans are best practices for companies that are in the Chapter 11 process and were developed with the assistance of a consultant from independent compensation and by evaluating companies with comparable income.

The Board of Directors considers that AVH employees who are included in these plans are critical to completing the Chapter 11 process and ensuring that AVH continue to operate profitably and safely at the end of this process. All this The information was made public a few weeks ago when it was presented to the Court of New York, where the Chapter 11 process is taking place, and from the beginning of this process, AVH has been open and has complied with the standards, processes and requirements provided in Chapter 11 on these plans.

Filings (see below) show that CFO Adrian Neuhauser Berlin and CEO Anko Van Der Werff both received over $4 million in bonuses, with the rest distributed among EVP of Sales & Marketing Silvia Mosquera Gonzalez, General Counsel Renato Covelo Frutos, CIO Michael Ruplitsch, Chief Planning & Strategy Officer Michael Anthony Swiatek, and SVP of Operations Eduardo Mendoza De La Torre. President Ivan Duque’s sister, Maria Paula Duque who is listed as Avianca’s Senior Vice President of Strategic Relations & Customer Experience does not appear on the insider bonus roster, nor do Senior Vice President of Purchasing Diana Calixto, or Engineering & Maintenance Senior Vice President José Luis Quiros. As of publication, Finance Colombia has not been able to ascertain whether these individuals were paid from a separate operating subsidiary. Many financial disclosures for Avianca’s operating and investment subsidiaries were submitted separately.

Below are three pages from Case # 20-11134 filed with the United States Bankruptcy Court for the Southern District of New York titled: “Payments or other transfers of property made within 1 year before filing this case that benefitted any insider.”

Click on any image below to enlarge for reading.

Above photo courtesy Avianca Holdings

The adopted measures reflect that Avianca’s post-COVID operations will be significantly reduced once flights resume , thus requiring a reduction in personnel to operate the airline.

Since the inception of the pandemic, the company has adopted a variety of alternatives, such as the reduction of salaries by mutual agreement, reduction of hours, unpaid voluntary leaves of absence, and the recent filing for Chapter 11 protection. In Peru, the company has been embroiled in a legal dispute for allegedly reneging on an early retirement dispute with former employees.

Renato Covelo, Chief People and Legal Officer of Avianca, noted that “despite our original intention to maintain all of our workforce , the profound effects that the crisis has had on the company, forced us to take these measures despite the considerable efforts we have made over the past three months. The uncertainty in terms of demand recovery and the impossibility of resuming operations in the short term lead us to adjust the size of the company in line with the projected size of our post-COVID operations. We will continue working to ensure the company’s continuity in the market and adapt to the gradual recovery of demand.”

Anko van der Werff has19 years of experience in the airline industry in companies such as Air France-KLM, Qatar and Aeromexico. His last position was in the Aeromexico Group, where he served as Executive Commercial Vice President for the last five years. He also led key industry processes at Qatar Airways and Air France-KLM.

Van Der Werff is slated to take office July 15

On the appointment of Van der Werff as the Avianca’s new CEO, Roberto Kriete, Chairman of the Board of Directors of Avianca Holdings, said: “Anko becomes part of our team to help us lead this challenging industry moment. His great experience in international airlines will not only allow us to continue our transformation, it will also give us the opportunity to strengthen the loyalty of our customers, to enliven the commitment of our employees and to strengthen the competitiveness of our company and its financial situation.”

Anko van der Werff’s background

Avianca CEO Anko van der Werff

Van der Werff’s last position was in Aeromexico where he served for five years as executive vice president and commercial vice president, where he was responsible for corporate strategy, network planning and itineraries, alliances, pricing & revenue management, sales, distribution, e-commerce and marketing.

Before joining Aeromexico, Anko van der Werff was senior vice president of pricing & revenue management and global sales & distribution of Qatar Airways. He also led KLM’s commercial strategy in the United Kingdom and Ireland, as well as in the Nordic countries. He also had roles with Northwest Airlines and Air France at the beginning of his professional career.

Van der Werff holds a Law degree from the University of Leiden, The Netherlands. He also holds an MBA from Harvard, United States. He is fluent in English, Dutch and Spanish, and he has been a visiting professor at different international university institutions such as Cranfield, in the United Kingdom, Bad Honnef, in Germany and the Qatar campus of Texas A&M University.

With the arrival of Anko van der Werff, Renato Covelo, who assumed the presidency on an interim basis, returns to his position as general secretary and legal vice president of the company.

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