Avianca CEO Rebuilding the Airline for a Future With Half the Business Travelers

Avianca's new CEO Adrian Neuhauser in April took over a carrier that was a year into its Chapter 11 bankruptcy restructuring in the U.S., and which all but shut down early in the pandemic. It faced increasing competitive pressures from low-cost carriers in its home Colombian and Central American markets.

Six months later, and travelers are returning. Avianca plans to fly 65 percent of its 2019 capacity this winter. A bankruptcy exit is in its sights before the end of the year, and Neuhauser has a vision for a very different travel market once the Covid-19 pandemic is in the past.

Business travel, long the bread-and-butter of legacy carriers like Avianca, is gone in a significant way, Neuhauser said at the IATA Annual General Meeting in Boston on September 5. He disagreed with the optimistic outlooks of the likes of Lufthansa Group CEO Carsten Spohr and United Airlines CEO Scott Kirby, and shook his head before declining to comment on Emirates President Tim Clark's prognosis of a full business recovery by the end of 2022.

"The threshold for a meeting to be in person has gone up," he said. "We don’t think it’s a [down] 20 percent issue or 30 percent issue, we think it’s a 50, 60 percent issue of business travel going away. That impacts the entire design of our network, it impacts the entire design of our cabin — our commercial strategy.”

That severe — but possibly realistic — outlook shaped the reorganization plan that Avianca submitted to the court in August. Under that plan, the airline will add seats to its Airbus A320 family narrowbodies — A320s will go to 176 seats from 150 seats today — add more point-to-point routes from secondary bases like Medellin, Colombia, and San José, Costa Rica, and implement a long-planned commercial partnership on U.S.-Latin America routes with United.

Avianca still wants to be attractive to business travelers, even if it only sees half as many as it did before the pandemic, says Neuhauser. To that end it is keeping what he described as "differentiators" that set it apart from discount competitors like Volaris and Viva Air Colombia. One such differentiator is the passenger density on its aircraft, which Neuhauser said will be about 10 fewer seats on an A320 than budget carriers with a yet-to-be-named premium product up front. Avianca's frequent flyer program, LifeMiles, also sets it apart from competitors while also being a "profit center" for the airline.

"We don’t want to lose our historical customers — we want to keep a differentiated product to address them but on the other hand we have to acknowledge that our competitors has a much lighter product," said Neuhauser. "We try and find that balance.”

Nonstop flights from secondary cities, like Cali and Medellin to Buenos Aires, and San José to Los Angeles, are another type of differentiator. The new international routes — more than 22 have been announced since August — primarily target visiting friends and relatives (VFR) and leisure travelers, the primary flyer segments that Neuhauser said he sees growing out of the crisis. But they also allow Avianca to be more efficient, particularly when it main hub at Bogotá's El Dorado Airport is congested and faces frequent weather issues.

“To the extent that we can make our Bogotá flying more point-to-point, we reduce the dependency of every [other point] and give [passengers] better service," he said. "But it also means that the planes are in the air more, and planes are not generating revenue when they’re not in the air.”

Avianca is one of three major Latin American carriers restructuring under the U.S. Chapter 11 process. Aeromexico and Latam Airlines Group are also moving through the process. The former submitted its reorganization plan to the court on October 1 with a focus on growing its Mexico City hub and leveraging its relationships with Delta Air Lines and other SkyTeam Alliance partners. Latam has until October 15 to submit its plan.

Merger Chatter

With all the talk of Avianca differentiating itself from discount competitors, the reports of a potential merger with Chile's Sky Airline — one of South America's ultra low-cost carriers that Neuhauser wants to set Avianca apart from — is an interesting development. Asked about the reports, and he declined to comment but he did speak positively about consolidation in general terms.

“Do we believe in consolidation as a good thing for the industry across the region? We do," said Neuhauser.

Avianca is not the only legacy Latin American carrier embroiled in merger talk. Azul has made public overtures for Latam's Brazilian operation. Latam has since ended its codeshare with Azul and said its business is not for sale, and doubled down on growing its Brazilian operation in the recovery. And Gol will acquire Brazilian regional carrier Map Transportes Aéreos in a combo that would boost its presence at São Paulo's sought-after Congonhas Airport as well as in smaller destinations around Brazil.

The Avianca-Sky proposal is complicated. Reports indicate that the combo would be led by private equity firms Caoba Capital and Elliot Investment Management that are reportedly set to close a significant investment in Sky in October. Several Caoba executives either sit on the Avianca board or at those of its creditors, while Elliot holds an undisclosed share of the carrier's $723 million debtor-in-possession Tranche B financing. The Tranche B debt will convert to equity in Avianca under the airline's proposed new capital structure when it exits bankruptcy. That equity holding and other connections would, according to reports, be the basis for a merger with Sky.

Other Tranche B debt holders include United — Avianca's commercial and potential future joint venture partner — Kingsland Holdings led by Roberto Kriete who was instrumental in Avianca Holdings formation as well as a co-founder of Volaris, and the hedge fund Citadel Advisors.

In a U.S. Securities and Exchange Commission filing on September 4, Avianca said it had "no knowledge" of any potential transactions considered by its Tranche B debt holders. This included any combination proposal with Sky.

The bankruptcy court is expected to rule on Avianca's restructuring plan during a hearing on October 26.