Mónica Gil, CEO of the Viva Air Foundation (Photo courtesy: Viva Air)

Major Colombian brands such as Totto (backpacks and luggage), Nosotras (feminine hygiene) and low-cost airline Viva Air’s nonprofit organization, the Viva Air Foundation have joined forces in coordination with Colombia’s Ministry of Education to deliver and donate 3,502 school supply kits, 500 feminine hygiene kits, and 1,000 backpacks, to youngsters in the Colombian department of La Guajira, within the framework of the Colombian government’s “Teaming Up for Education” strategy.

La Guajira is home to several of Colombia’s most well-known indigenous groups such as the Wayúu, Kogui, and Arhuaco people, still with us today. Breathtakingly beautiful, much of the area is challenged ecologically with an arid, almost desert climate, and socially due to its relatively remote location bordering Venezuela, making it an attractive area for smugglers, brigands, and insurgents. The region has undeniably suffered from a lack of attention or investment from Colombia’s central government, making support from the private sector even more crucial.

The donations were transported on three Viva Air flights that took off from the airline’s main headquarters in the Medellín suburb of Rionegro and from the Colombian capital of Bogotá to the La Guajira capital of Riohacha on April 14, 15 and 16. Slightly more than 4,500 care packages were officially consigned by the Colombian Vice Minister of Education, Constanza Alarcón, and representatives of the Viva Air Foundation to 11 schools in the municipalities of Dibulla, Manaure and Riohacha, with the aim of improving the living conditions of La Guajira youth, and empowering them to continue their educational trajectory.

Kogui youths selling fresh coconut water in Tayrona National Park, Colombia (Photo credit: Loren Moss)

“Being part of this project led by the Ministry of Education fills us with pride, because together we are changing the future of children and adolescents in Colombia. The initiatives of the Viva Air Foundation are focused on the well-being of vulnerable populations and the construction of community spaces for education; and being part of this strategy, we are achieving this objective. At Viva we are teaming up for education together with public and private entities that have the same goal: to guarantee education for those who need it most,” said Mónica Gil, CEO of the Viva Air Foundation.

These deliveries will directly benefit young residents of the municipalities of Dibulla, Manaure and Riohacha, so that they can overcome the challenge of acquiring school supplies in these rural, often isolated areas.

Avianca flyers can say goodbye to the full featured seats and legroom they are accustomed to. (Photo: Loren Moss)

Under new management and with a new board, the airline is making some puzzling moves. Even though load factor (Q4 2018 vs Q4 2019) has dropped from 81.7% to 80.1%, meaning the planes are emptier, and passenger traffic has fallen from 7.95 million during the quarter to 7.4 million, with emptier planes and fewer passengers, the airline has decided to do away with one of its main differentiators in economy class: comfortable seats with entertainment screens, charging ports, and industry leading legroom. Finance Colombia has reached out to Avianca for help in understanding the reasoning behind this move but Avianca generally ignores Finance Colombia media inquiries.

As Avianca’s debt goes up, its passenger numbers are plunging.

Relying on reports from Valora Analitik and Reportur, the airline will install new thinner seats in its economy section in the 2^nd quarter of this year. If no changes are made to business class, to fit 24 more seats in per plane, Avianca’s economy class would be significantly more dense than true low cost carrier Viva Air, which has 181 seats in its Airbus A320 aircraft and no first or business class. Though Avianca has historically been in a different market segment, the new CEO Anko Van Der Werff appears intent on remaking the airline’s commercial offer to mirror low cost carriers. The airline cut benefits for Lifemiles loyalty program members, introduced a fare segment that seems to mimic the low-cost carrier model, and now is changing out its deluxe seats for basic models, removing leg space for passengers. The airline still has a sub 80% on time performance rate. More seats won’t fix this, especially when there are less passengers flying on its existing planes.

Van Der Werff, who told Colombian weekly Semana that “Avianca needed some northern European cold heads” (as if Colombians or Latinos were genetically incapable of running an airline) reportedly made the laughable claim that Avianca is one of the “11 best Airlines in the world” per the discredited APEX ratings, which according to Travel Codex, excludes any customers who are dissatisfied with the carrier and switch to another,  or any passengers on a delayed flight!  To be fair, APEX CEO Dr. Joe Leader says APEX can be trusted because he is “a PhD and analytical purist.”

— Dr. Joe Leader (@joepleader) September 14, 2019: 

US Actor Michael Douglas chose low-cost carrier Viva Air over Avianca’s business class & VIP lounges. Pictured here with flight attendant Mauricio Minotta (photo courtesy Viva Air)

Avianca may already be losing its traditional market of business and luxury travelers. As this article was being written, a photo was circulated of veteran US actor Michael Douglas, who apparently of his own accord, chose to forego business class offerings of Avianca or LATAM and flew Viva Air this morning from Medellín to Cali, Colombia.

It is certain that Avianca is saddled with crippling debt, and the new CEO and board, along with patrons United Airlines & Kingsland Holdings appear to be addressing that. However, every operational move that Avianca seems to be making points toward a lack of confidence in a place for a full-service, high touch airline in Colombia. LATAM, with its new Delta Airlines alliance will certainly  take up some of that slack, and COPA on international routes.

True Low Cost Carrier Viva Air just announced a new international Cartagena Miami route. If Avianca’s strategy is to take on budget carriers like Viva Air and Spirit, it is probably doomed. That would be akin to Macy’s trying to take on Walmart in the US, or Vélez trying to make itself into Totto in Colombia. Companies fail when they try to be “all things to everyone.” Instead of fixing its operational problems, by going “downmarket” Avianca is abandoning any reason travelers have to prefer them, and with tons of debt and an increasingly muddled brand, it will almost certainly lose if it attempts to go head to head with operationally efficient, well financed low cost carriers who would only need to further reduce fares and wait until the airline collapses under its debt.

LifeMiles, Ltd. is a coalition loyalty, program and the sole operator of Avianca Airline’s frequent flyer program. LifeMiles has commercial partnerships that allow its members to accrue and redeem miles for different products and services such as airline tickets, hotels, and rental cars among others. For example, LifeMiles can be earned or redeemed at major Colombian retailers like Totto or hotel chain Estelar. LifeMiles is 70% owned by Avianca Holdings, S.A. and 30% owned by Advent International, that stake being taken in Avianca under previous management 4 years ago. LifeMiles reported gross billings of $352 million over the twelve months ended March 31, 2019.

Issuer: LifeMiles Ltd.

• • • Corporate Family Rating, Downgraded to B2 from Ba2

    • Senior Secured Bank Credit Facility, Downgraded to B2 from Ba2

    • Outlook, Changed To Negative From Stable

Ratings Rationale:

LifeMiles’ downgrade to B2 reflects its exposure to the weak credit profile and liquidity pressures of Avianca Holdings, S.A. (Avianca) which increases the risk of additional up streaming of cash flows to shareholders, either in the form of dividends, most likely financed with incremental debt, or anticipated purchases of airline tickets. LifeMiles’ B2 rating also incorporates its good liquidity and solid business model being the sole operator of Avianca’s frequent flyer program, its diversified and sticky base of commercial partners and co-brand credit card growth. Also reflected in the rating are the potential benefits to the company’s growth plan from improved economic dynamics in its largest markets.

The rating of the term loan takes into consideration its secured position within the capital structure of the company. The corporate family rating is at the same level of the senior secured rating given that it is the only debt in the company’s capital structure.

On July 22, Avianca announced it has temporarily deferred payments on some long-term leases and on principal payments on certain loans. On the same date, Avianca announced that it will commence as soon as possible an exchange offer for all of its $550 million senior notes due in May 2020.

LifeMiles has a strong business model that includes unrelated commercial partners and co-branded credit cards, but its single largest contributor to gross billings is Avianca, who together with its air partners, represent around 30% of gross billings. As such, if Avianca were to face operating problems this would hamper LifeMiles’ operation as customers’ interest in purchasing, adding or converting LifeMiles miles into Avianca’s air tickets would decline. Moreover, Avianca’s liquidity pressures may affect LifeMiles’ credit profile in the form of debt-financed dividend payments which will ultimately result in higher leverage. For example, in August 2017 LifeMiles obtained a $300 million amortizing term loan used to pay dividends, and in 2018 and 2019 the company up-sized its outstanding term loan by a total of $195 million which also up streamed to its shareholders. Still, the rated term loan has a mandatory prepayment clause that obliges the use of a percentage of excess cash to pay down the term loan. This clause partly offset the risk of cash leakage at LifeMiles before fulfilling its debt payment obligations. Furthermore, LifeMiles´ solid corporate governance framework, and particularly Advent International´s strong minority shareholder rights, also mitigate the risk of a potential cash leakage before payment of debt obligations. In addition, LifeMiles liquidity policy of maintaining a minimum cash balance equivalent to six months of rewards plus two quarters of debt service also mitigates this risk.

Moody’s estimates that, absent additional indebtedness, LifeMiles’ leverage (adj. debt/EBITDA) would gradually decline from 3.3 times as of March 31, 2019 to below 3.0 times by year-end 2020. Nonetheless, we believe LifeMiles could increase its indebtedness to finance dividend payments over the next few quarters.

LifeMiles has good liquidity. The company generates strong cash flow from operations and has limited capital spending requirements. It has minimum cash requirements to cover six months of rewards plus two quarters of debt service. In addition, LifeMiles benefits from a five-year $20 million committed revolving credit facility, which is currently undrawn.

LifeMiles’ largest contributors to gross billings are its financial partners (50%) and Avianca and air partners (30%), being Avianca its largest customer, responsible for approximately 26% of gross billings. Around 80% of accrued miles are redeemed, with 92% being redeemed into air tickets. The 8% balance is redeemed into non-ticket rewards. LifeMiles benefit from Avianca’s leading market position in Colombia and Central America.

LifeMiles has around nine million members, more than 100 agreements with financial institutions including co-branded credit cards and miles conversion agreements, and more than 700,000 active co-branded credit cards. The number of members has grown steadily at a 9.3% CAGR in the last five years.

LifeMiles’ largest market is Colombia where it generates 42% of its gross billings. It also sells miles in Peru, Costa Rica, El Salvador, Honduras, Guatemala, and the US; being the US the only contributor of more than 10% to gross billings. Moody’s forecasts the Colombian economy will grow by 3.3% in 2019 and 3.5% in 2020. Similarly, Moody’s estimates that, in Colombia, private consumption will grow at a 4% CAGR and retail sales will grow at a CAGR of 4.6% in 2019-2023.

The negative outlook reflects Moody’s view that the company’s credit quality may be negatively impacted by Avianca’s weak financial profile and that LifeMiles will be required to increase its dividend payout.

An upgrade would require an improvement in Avianca’s credit profile and maintaining ring-fencing provisions that limit cash upstream to shareholders, as well as the maintenance of adequate liquidity and profitability. Quantitatively, an upgrade would require LifeMiles to maintain its adjusted debt/EBITDA lower than 4.0 times on a sustained basis.

The ratings could be downgraded if the company’s profitability or credit metrics worsen, with adjusted debt/EBITDA remaining above 5.0 times. A deterioration in the company’s liquidity or profitability, or a change in the company’s financial policy leading to excessive cash distribution to shareholders can lead to a downgrade. Also, any further weakening on Avianca’s credit profile or repetitive amendments to the loan agreement such that the mandatory prepayment provisions are waived or canceled, and excess cash flow is not used to pay down debt could result in a downgrade.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and viewable on the Moody’s Rating Methodologies page.

In addition to the business leaders participating in the event, Colombian finance minister Mauricio Cardenas representing the government, offering that he shares the vision of Endeavor, as he is convinced that entrepreneurship is a tool that helps build a better country. “Employment is the surest, most trusted way to take people out of poverty,” said Mauricio Cardenas.

Bodytech founders Nicolas Loaiza (l) and Gigliola Aycardi.

The purpose of the gala was to recognize some of the most successful entrepreneurs in Colombia. The significant growth of their company and the ability to inspire new business leaders to develop new ideas, were the two most important variables in determining the award recipients. The Endeavor Colombia award had two different categories: The High Impact Endeavor Entrepreneur category and Entrepreneur for Entrepreneurs category.

The winners of the High Impact Endeavor Entrepreneur category were Bodytech founders Gigliola Aycardi and Nicolas Loaiza. Bodytech joined the Endeavor Network in 2007 with 500 employees and 20 fitness centers, and since then have growne to a current 4,200 employees and 140 fitness centers located in Colombia, Chile and Peru.

The Entrepreneur for Entrepreneurs award was given to Yonatan Bursztyn (above), the founder of Totto; a Colombian manufacturer and retailer of backpacks, luggage and apparel. Totto now supports 4,000 jobs in Colombia and more than 6,000 jobs in other countries. Totto operates 550 stores in 35 different countries. Bursztyn was recognized for his strong commitment to his employees and serving as an inspiration to new generations of entrepreneurs.

The awards ceremony also hosted special guests, including Mr. Yehuda Pearl, founder of Sabra Foods in United States; also Munir Falah, Chairman of Cinecolombia and his wife Patricia Tascon.