Drama at Avianca

Madhu Unnikrishnan
June 21st, 2020 at 6:17 PM EDT

  • Drama, drama, drama. It’s never a dull moment at Colombia’s Avianca, hit by one crisis after another. Three years ago, it suffered a 51-day pilot strike. Not long after, a plan to merge with Avianca Brasil collapsed when Avianca Brasil, well, collapsed. Avianca Argentina collapsed too, further tarnishing the Avianca brand. A bitter boardroom battle was distracting. Overexpansion, overborrowing, and excessive aircraft ordering all proved problematic. Colombian market attacks by Latam, VivaColombia, and Copa’s Wingo didn’t help. Rolls-Royce engine problems on Dreamliners. A320 NEO delays. Losses in Peru. Currency volatility. South America’s never-ending macroeconomic headaches.

    Before long, restructuring was inevitable, never mind consistent operating profits. Strategically, Avianca would abandon growth, downsize its aircraft order book, close most of its Peruvian flying, divest non-core subsidiaries, densify A320s, retire E190s, open a new prop-flying regional unit, develop its loyalty and cargo businesses, rebrand its fares, focus on its Bogota hub, and form new partnerships, most importantly with United and Copa. Financially, it would undertake a bankruptcy-like restructuring without actually filing for bankruptcy, getting help from United in the process. Always a decently profitable company at the operating level, even during its most turbulent moments, Avianca, by early this year, seemed to have finally executed the difficult reforms and balance sheet cleanup necessary for more sustainable long-term profitability.

    But then, the Covid crisis. Suddenly, with revenues and government help all but nonexistent, Avianca could no longer survive without bankruptcy protection, which it entered on May 10. It was the carrier’s second filing, having gone through the process once before in 2003. To repeat, Avianca never had much problem earning decent operating margins last decade, supported by a strong market position within Colombia, alongside busy family-visit and tourist traffic in Central America. It was always its net results, and related balance sheet scars, that undermined success. Sure enough, it reported yet another operating profit/net loss combination last week, for the first quarter of 2020.

    The Covid crisis, remember, didn’t hit Latin America until the end of the quarter. And January happens to be a peak month for carriers like Avianca. It thus walked away with an operating margin just above break even for the first three months of the year, but also a $121m net loss. Revenues plummeted 18% y/y while operating costs dropped 17%. Fuel costs dropped 25%, on about 12% less ASK capacity, according to Cirium schedule data. Colombia accounted for a full 44% of total revenues, reflecting the carrier’s heavy downsizing in Peru. Bogota, specifically, was its only major airport which saw capacity expansion. Even Medellin, the carrier’s second busiest market, saw big contraction.

    The company, still run by the same management team led by CEO Anko van der Werff, is now engaged in the arduous task of restructuring and abandoning supplier and union contracts, with the full intent of emerging a healthier airline (few think it will go away). The market situation though, remains awful, with much of South and Central America’s airspace still largely closed, and economies in the region deeply distressed. Government aid, meanwhile, remains elusive.    

DOT Releases Numbers for Frontier, Sun Country

  • The U.S. DOT’s Bureau of Transportation Statistics published Q1 financial data for U.S. airlines last week, providing a first look at how Frontier performed. As a privately held airline, meaning none of its shares are traded on a public stock exchange, Frontier does not self-publish quarterly results or hold earnings calls.

    So how did it do? Exceptionally bad, the numbers show. From January through March, the Denver-based LCC suffered a negative 18% operating margin, worst among all U.S. carriers. Only American came close to such ugliness with a negative 16% drubbing. Clearly, operating costs were an issue, spiking 25% y/y on 26% more ASM capacity, according to Cirium schedule data. That’s a sign of aggressive expansion, which failed to produce any revenue growth when confronted with the Covid shock.

    Q1 revenues in fact declined 1%. During January alone, Frontier’s large Denver operation was largely stable y/y in terms of capacity. But seats from Las Vegas were doubled, and seats from Florida were up nearly 30%. After Southwest exited Newark last year, Frontier jumped in with lots of new flights. Boston was another addition. Philadelphia, Phoenix, Atlanta, and San Juan were key expansion markets. Even in the month of March, Frontier’s scheduled seats were up 30% y/y. To be clear, the ultra-LCC does tend to underperform during winters, despite its rather heavy Florida presence. Last year, its Q1 operating margin was just 6%, below the U.S. industry average. Summers are much better, thanks largely to Denver, still its busiest airport.

    Fortuitously, other airlines report a relatively brisk traffic recovery in mountain states like Colorado, and in beach markets like Florida and Phoenix. Frontier seems to sense opportunity, announcing 18 new summer routes a few weeks ago. Some are markets it flew before while others are brand new. Just last week, it announced some new flying from Cincinnati. Its seat counts for July are down a relatively modest 37% y/y. August seats are down just 20%, though subject to change if demand doesn’t materialize. Miami and Fort Myers in Florida are two markets of note where it’s adding lots of seats. Frontier was an early adopter of screening passengers for their body temperature. To spur demand, it’s offering triple miles for all June bookings (for travel through mid- September). More embarrassingly, it briefly tried charging for blocked middle seats, generating a media firestorm.
  • Sun Country, whose figures were also revealed for the first time by the DOT data, was in the opposite situation as Frontier, reporting a surprisingly strong Q1 result. Believe it or not, Sun Country made money last quarter despite the pandemic’s impact in March. The only other airline for which that was true was Allegiant. Sun Country’s 8% operating margin, however, was still drastically down from its phenomenal Q1 figure of 24% last year. That made it America’s most profitable airline for 2019’s first quarter, though ultimately, its 12% full-year figure for 2019 was identical to that of Frontier. Cirium data show Sun Country’s Q1 ASM capacity was up 4% y/y. But its operating costs rose 10%. Revenues, unfortunately, shrank 8%.

    As a Minneapolis-based airline flying vacationers to the sun, it’s no wonder why Sun Country is now a Q1 profit machine. More challenging are other parts of the year, when it relies quite a bit on charter flying. That’s been hit hard by the pandemic. But fortuitously, the carrier prioritized cargo growth before the shock, signing a deal to fly packages for Amazon. That’s proving a big plus right now. It’s also surely happy to not have any aircraft orders outstanding. If the recovery in leisure traffic continues, it might even be tempted to grab some used planes from what’s now a deeply-distressed market.
  • Back in Latin America, Mexico’s VivaAerobus did not, unlike its rival Volaris, manage a Q1 operating profit. Instead, it posed a negative 4% operating margin, even though the Covid crisis only hit the country late in the quarter. It was, however, a much better Q1 for Viva this year than last year. In 2019, it posted heavy Q1 losses, though it ended the full year with a decent 7% operating margin. Overcapacity was a persistent theme in the pre-Covid Mexican airline market, as the country’s three LCCs received a steady stream of new A320/21 NEOs.

    Viva’s fortunes looked brighter in early 2020 though, as Aeromexico grappled with its lost MAX capacity, and as Interjet struggled to survive. Hence the 21% y/y increase in its revenues last quarter, albeit on 27% more ASK capacity. Operating costs rose by just 9% as fuel costs fell 8%. Mexico’s peso, helpfully, remained more or less stable y/y, depreciating significantly only after the pandemic hit Mexico in late March. The virus is now spreading rapidly in the country, threatening travel demand.

    Taking a relatively relaxed approach to containment, Mexico’s government has already opened its beach resorts to international visitors. But will they come? The U.S., most importantly, is still advising its citizens to avoid all non-essential international travel. Viva’s initial stage of recovery thus depends on domestic travel. It’s also strengthening its cargo capabilities by converting 10 of its A320s into freighters. It’s doing more charter flying. It’s offering free flights this month to all health care professionals. And remember, free flight giveaways can lead to big money for Viva, given that 49% of its revenues come from ancillaries. Many of its passengers are visiting families, a segment that should hold up well during the recovery phase. Multiple rounds of borrowing from private-sector lenders gives it a comfortable cash cushion, notwithstanding Mexico’s unwillingness to provide much airline industry aid.

    A top goal for Viva is to avoid layoffs. Consolidation would help in that regard, with Interjet the most likely carrier to disappear. Aeromexico now says it might be headed for bankruptcy (see Covid Crisis section below). Viva itself, for the record, ended Q1 with 37 planes (roughly half of them NEOs) and a 21% share of Mexico’s domestic traffic.
Madhu Unnikrishnan
June 21st, 2020 at 6:17 PM EDT

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