Avianca And Viva’s Merger Rejected – What Happens Next?

On November 8, 2022, Colombia’s Aeronautical Authority concluded that the integration between Avianca, Viva Colombia, and Viva Peru poses risks to competition in the sector and consumer welfare. Therefore, it has rejected the airlines’ first attempt to merge. With Avianca and Viva's Merger Rejected – What happens next? The rejection Surprisingly, Colombia’s Aeronautical Authority sided with ultra-low-cost carrier Ultra Air when it announced that the integration between Avianca and Viva would be detrimental to the domestic civil aviation industry. After studying the information provided by both carriers (which submitted their partnership on August 8, asking for quick authorization, as it was the only way to secure Viva’s financial future), Aerocivil concluded that a merger would: Generate or reinforce market power in favor of the integrated entity (Avianca, Viva Air, and Viva Peru). The participants participate in 59 domestic routes, which mobilize 93.7% of the country's domestic traffic. Of these routes, they coincide in 29 domestic routes. This economic group would reach 100% participation in 16 domestic routes. The economic indicators used to evaluate this integration show a considerable potential deterioration. In terms of free competition, it would mean a setback and a return to levels not seen in the country for more than seven years. Viva, which has been a relevant player in the Colombian market, has energized competition in the sector and has become a valuable alternative for Colombian and regional consumers, and would disappear as an independent competitor. Other competitors would face new difficulties in growing or entering markets affected by higher entry barriers and greater market power. Consumers could be harmed to the extent that the integrated entity (Avianca, Viva Air, and Viva Peru) would have more facilities, incentives, and lower risks to increase prices, reduce frequencies, cancel routes or reduce complementary services, among others. Free competition is everyone's right and entails responsibilities. The authorities in charge of authorizing corporate integrations have the legal and constitutional duty to protect the market, free economic competition, and, above all, consumers. The backlash After learning about the rejection of the proposal, both Viva and Avianca released statements on the subject. Avianca reiterated its intention to seek approval to support Viva. It added that Viva is currently going through a complex financial situation due to the impact of two years of the pandemic, exacerbated by the sharp rise in fuel prices this year and the devaluation of the Colombian peso. According to Avianca, Viva has delayed its payments to key creditors such as leasing companies. Adrian Neuhauser, President, and CEO of Avianca, stated: "We are concerned about the direction of the decision, as it goes against the needs of the country and ignores the potential effect that the disappearance of Viva would have on users and the market. From Avianca, we reiterate our willingness to actively participate in the rescue of Viva, seeking to maintain connectivity for travelers, strengthen tourism and preserve formal employment. Given this scenario, Avianca and Viva will analyze Aerocivil's decision in detail and evaluate all available legal alternatives to seek the necessary approvals. It is important to clarify that this process is independent of Abra Group, a project in which Avianca and GOL shareholders continue to move forward, Avianca added. Finally, Viva Colombia said that the integration of both companies would have backed the continuity of the low-cost model in the region. The remedy Avianca And Viva’s Merger Rejected – What Happens Next? Avianca and Viva have the opportunity to propose a new integration plan, which includes remedies and commitments to eliminate the anticompetitive effects of integration. They also need to prove that Viva is indeed in a dire financial position, which would make valid their first proposition that the partnership should have been approved quickly. To prove Viva’s financially unstable situation, both companies have to meet the following criteria: Due to the crisis, the company will exit the market and needs to be sold or integrated with a third party. There is no other viable competitor that generates fewer restrictions to economic competition. The damage to competition generated by the approval of the planned transaction cannot be greater than that caused by the exit of the company in crisis from the market. The alleged crisis or the lack of viable alternatives cannot have been generated or be related to the planned integration operation. In this case, although it was proven that Viva is currently facing a relevant financial situation, Avianca and Viva did not prove that Viva's economic crisis is of such magnitude that it affects its viability in the market and, therefore, is doomed to exit the market imminently. Photo: Edgar Jiménez via Flickr.

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