Avi-vederci: World’s second oldest airline bites the dust

June 1, 2020

3 min read

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What's going on here?

Avianca is Latin America’s second-largest airline and the world’s second oldest airline. On 10 May the company filed for Chapter 11 bankruptcy in New York, where it is listed on the New York Stock Exchange, having failed to meet a $66m bond payment deadline. The airline’s plea for aid from the Columbian Government has so far been unsuccessful.

What does this mean?

Avianca employs 21,000 people across Latin America and serves over 50% of the domestic market in Colombia. Since the start of the COVID-19  pandemic it has seen revenues decrease by at least 80% year-over-year, having failed to fly a scheduled passenger flight since late March. Yet, Avianca remains optimistic about the future as they intend to restructure and “right size” through the courts, most likely by cutting jobs.  In court filings the airline stated that, “in the medium to long term, airline travel is expected to continue to play a key part in the global economy… [Avianca’s] core businesses remain strong, and the challenges negatively impacting their industry will likely abate”.

What's the big picture effect?

The Latin American airline industry has seen a 40% fall in passenger traffic year-over-year as of March. However, Avianca is likely to still remain a strong performer in the region. Its main competitor LATAM Airlines, the largest airline in the region, has also filed for bankruptcy protection.

A further issue to highlight is the relationship between Avianca and its partner United Airlines. Previously they had been working on a strategic partnership  with Azul in Brazil and Copa Airlines in Panama for several years. However, at the end of March United said it expects to take a “full credit loss” on a $515m loan it indirectly provided Avianca in 2018. Estimates suggest that United could expect to lose a further $165m in loans from the partnership.

The failings of Avianca cannot be taken as indicative of the entire airline industry; they were already in a weak financial position prior to the pandemic.  Juan David Ballen, chief economist at Casa de Bolsa brokerage, believes Avianca’s collapse is not surprising as the “company was heavily indebted despite the fact it tried to restructure its debt last year”.

Nevertheless, the airline industry has been hit hard by the outbreak of COVID-19. Data from flight-data firm Cirium shows that global flight activity was down 82% year-over-year on 9 May. The IATA says that the airline industry is set to lose $314b this year alone.  In Latin America, Airbus Chief Executive Officer, Guillaume Faury has warned that it could take “three to five years” for passengers to be as willing to fly as before the crisis. Many major airlines are facing challenges. British Airways recently announced that they plan to cut 12,000 jobs due to the slump in demand, while founder of Virgin Atlantic and Virgin Australia, Richard Branson, has considered offering his Necker Island estate in the Caribbean as collateral “to raise as much money as possible to save as many jobs as possible”.

It is without doubt that many airlines are struggling and will face further problems as the COVID-19  pandemic continues to directly affect the airline industry’s profitability, both in the short and long term. It is likely that many more airlines will have to consider restructuring plans similar to Avianca in order to weather through this difficult period. For now, airlines can only wait to see what the return to normal will look like for their industry.

Report written by Kasey Cummings

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