The advantages and challenges of the Avianca

Last Friday, the shareholders of Avianca and Viva Colombia decided to operate jointly under the same holding company of the Avianca group. The announcement shocked the Latin American airline industry in the latest consolidation move in the region. What does this mean for the future of the region? What are the advantages for both carriers? Let’s find out.

Under the same farm

The shareholders of the two companies have approved Viva joining the Avianca holding company. This would have an impact on Viva Colombia and Viva Peru. Nevertheless, Viva and Avianca would remain independent in terms of brands while belonging to the same holding company.

This transaction would strengthen the aviation industry in Colombia and throughout South America. Between January and March, Avianca and Viva carried 5.4 million passengers, holding 50% market share in the country, according to data provided by Aerocivil, Colombia’s civil aviation authorities.

“The newly created entity Avianca Airlines and Viva Air will dominate more than 65% of the Colombian domestic market (in terms of capacity), and it should bring significant cost synergies allowing the new entity to reduce costs while optimizing the turnover. performance and margins, said René Armas Maes, vice president of Jet Link International LLC, an analyst in the region.

For Avianca, this would be the last consolidation movement in the region. In the past, Avianca acquired TACA, ACES, SAM and a few additional airlines, consolidating their presence in Central and South America.

However, not everyone is happy with the news. Frederik Jacobsen, co-founder of Viva and former chairman and CEO, said he didn’t think the alliance would serve the Colombian market well. He added that a holding company with a 65% share will not provide the level of competition needed to advance products and services to the level needed, urging regulators not to endorse the union.

Viva will partner with Avianca. Not everyone is happy. Photo: Live.

What are the benefits?

To cope with the impact of the COVID-19 pandemic, several Latin American low-cost carriers have been looking for new investors. Chile’s JetSMART has an agreement with American Airlines (GOL, not an LCC, has done the same); Mexico’s Viva Aerobus is considering a deal with Allegiant Air, and Chile’s Sky Airline was considering merger options with Avianca. Nevertheless, in an unexpected turn of events, the shareholders of Viva and Avianca announced their alliance under the same holding company.

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When asked what benefits this alliance could bring to Viva and Avianca, Armas Maes replied:

“As the two companies continue to work to collaborate successfully, one can observe the logic behind it. For example, it helps to gain market share and access to a wider customer base. can explore efficiencies and economies of scale on existing cost bases, and will be able to simplify and streamline routes, schedules and fleet plans, and will allow Avianca to benefit from new connecting opportunities passengers and the ability to succeed in previously abandoned markets/cities (e.g. Peru) and strengthen its market position to compete against LATAM Airlines and other expanding ULCCs in the region.

By adding Viva to its holding company, Avianca could eliminate one of its main competitors.

Incoming fleet

Avianca has an order for 88 Airbus A320neos to be delivered by 2031. Additionally, Avianca has increased its narrowbody fleet by adding seats to each aircraft. Currently, Avianca has a fleet of 135 aircraft in Colombia.

Meanwhile, Viva is yet to receive 27 narrow-body units from Airbus in the coming years (out of an initial order for 50 airliners).

Viva has a fleet of 21 aircraft in Colombia and two in Peru.

Viva has a fleet of 23 aircraft. Photo: Guillermo Quiroz Martínez via @gquimar.

Rationalization of routes and optimization of load factors

Although two carriers mainly based in Colombia, Avianca and Viva do not compete on 44% of their routes. Their alliance enables a route streamlining process on highly competitive and mission-critical routes, Armas Maes said, allowing it to diversify its product and service offering, accelerate organic growth in key markets, lower fares and challenge other key players in the region.


Viva has primarily pivoted its growth from Medellín International Airport (MDE). Here, Viva has launched a low-cost connectivity point across the Americas (similar to Copa operating in Panama City). Viva has launched many new international routes in recent months, for example to Miami, Mexico City, Cancún, São Paulo, Lima and Buenos Aires.

Avianca has historically operated out of Bogotá, but has diversified its mapping route in recent years. Additionally, after exiting Chapter 11 proceedings, Avianca cut costs and reshaped its offering, looking more like a low-cost carrier than a traditional carrier. Currently, Avianca offers more than 100 routes and more than 2,680 weekly flights; it plans to expand to 200 routes over the next year.

“The new entity created by Avianca and Viva can make it possible to optimize load factors, which the pandemic has particularly affected in the region. Additionally, airlines in Latin America have an urgent need to optimize load factors and contain costs due to escalating jet fuel prices, which are expected to remain volatile in 2022.” said Armas Maes.

In the past, Avianca merged with other carriers. Photo: Getty Images.

Challenges

However, the integration of Avianca and Viva under the same holding will have some challenges. The first challenge will be to obtain the required approval from the Colombian and Peruvian authorities (at least).

This means that until the companies apply for and obtain such authorizations, the control and management of Viva in Colombia and Peru will not be part of the same holding company. Consequently, Viva will continue to compete with the Avianca group in the meantime.

“Another key challenge is cultural integration, as the two companies have very different business models and ways of doing business. Perhaps cultural integration tops the list of major challenges ahead. said Armas Maes.

Although not discussed at this stage, Avianca may consider exiting the domestic market and focusing entirely on the international segment.

“The main purpose of adding a low-cost carrier to a newly merged operation is to allow a full-service carrier (FSC) to compete with low-cost competition while retaining the primary brand at higher In the event that a mixed model is a viable option, the FSC needs to consider whether two different brands would generate substantial synergies and whether it can effectively leverage a dual and coordinated management model Can Avianca and Viva Air execute this It is to be observed”, said Armas Maes.

Moreover, this is not the first time that an incumbent carrier has had a low-cost subsidiary. In Latin America alone we have the Copa Airlines-Wingo project. In Europe there is Lufthansa-Eurowings, and in Canada there is WestJet-Swoop.

Armas Maes added,

“Through this model, FSC focuses on premium and high-yield traffic while being able to optimize international load factors and further stimulate (through a lower cost structure) a domestic market that it operates alone with marginal profit.”

What do you think of the alliance between Avianca and Viva? Do you think this will usher in a new era for the Latin American aerospace industry? Let us know in the comments below.


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