Sources told Chilean daily El Mercurio that private equity firm Caoba Capital, backing both Sky and Avianca that it was “obvious” the shareholders would seek synergies between the two South American airlines, and Elliot Management has is also backing both airlines along with Caoba. Local and industry journals report that Sky Airlines President and shareholder Holger Paulmann would lead the merged company, becoming the alpha lead in the binational partnership.

In response to all the buzz, Avianca filed a Form 6-K with the United States Securities and Exchange Commission on October 4^th, reminding interested parties that current shareholders will be wiped out by the proposed reorganization plan in favor of DIP creditors, who will become the new shareholders; but the firm also said that Avianca has not participated in any negotiations with Sky.

According to Colombian daily La República, Caoba Capital and Elliot Management are set to control 70% of Avianca & 40% of Sky.

However, Avianca company management is not necessarily privy to negotiations or decisions taken by outside shareholders, and it would behoove those DIP (Debtor In Possession) shareholders to keep preliminary negotiations outside of the company. Were the company management at this stage directly involved in any merger talks, it could complicate bankruptcy proceedings, but shareholders are free to do and say as they wish.

Avianca denied company-to-company negotiations but did not flatly deny talks.

“Avianca has no knowledge of any future decisions the Tranche B investors may take, as potential controlling shareholders of the Company, once the Plan is confirmed,” the company said in its 6-K filing, going on to clarify:

“Avianca has no knowledge of any investment of its Tranche B investors in Sky, nor the terms and conditions of any negotiation that any of the Tranche B investors may have pursued with Sky or its shareholders.”

Current shareholders, likely to be wiped out by any agreement, have until October 19 to object to the reorganization plan, and votes may be submitted to approve or reject the reorganization plan up until October 15, both 4pm Eastern time. The court will hold a hearing October 26 at 10am to consider approval of the reorganization plan.

Court filings and other documents related to the Chapter 11 process in the US are available at www.kccllc.net/avianca.

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.