Avianca’s Chapter 11 plan

Avianca has just filed its Chapter 11 plan; the Court is set to have a hearing on it on September 14, as the company positions itself to become the first Latin American carrier to exit bankruptcy following the COVID-19 pandemic. LATAM and Aeromexico will follow next. Now, let’s see Avianca’s Chapter 11 plan - a review. Avianca first filed for Chapter 11 on May 11, 2020. The carrier had no other option since it had faced two crises in a row. First, it had poor management, which led United Airlines and Kingsland Holdings Limited to exercise certain remedies and take over the company in 2019. As of March 31, 2020, Avianca had approximately $5.3 billion of outstanding debt. The new management launched the Avianca 2021 Plan to tackle this, which contained “comprehensive initiatives to provide for significant improvements across the business commercially and operationally.” Right around that time, while the company was trying to execute its Avianca 2021 Plan, the COVID-19 pandemic happened. The airline saw how its traffic and revenue levels fell off a cliff. As of May 2021, 100 percent of Avianca’s fleet was grounded. There was no other alternative than filing for Chapter 11. The last year and a half have been gruesome work for Avianca’s management while trying to recover from the COVID-19 pandemic. Avianca’s finances “The Debtors expect that using the tools afforded by the Bankruptcy Code to reject or renegotiate burdensome contracts will be an important step towards emergence as a profitable enterprise.” As part of Avianca’s Chapter 11, the company received a Debtor in Possession (DIP) funding worth $2 billion. Now, this debt will convert to seven-year exit financing upon emergence, the airline stated. Additionally, Avianca is looking for an alternative investor willing to provide capital to the reorganized company. Avianca explained: “The transactions contemplated in the Plan will strengthen the Company by substantially reducing its debt and increasing its cash flow and will preserve over 10,000 jobs.” In total, Avianca’s transactions will eliminate approximately $3.0 billion of debt from the consolidated balance sheet. Nevertheless, Avianca still has to recover its pre-pandemic levels. Currently, passenger revenue represents around 51.3 percent of Avianca’s total revenue because the South American market continues heavily depressed. Avianca started 2021 with a $311 million net loss. It hasn't updated its financial results so far. Avianca’s fleet Continuing with the review of Avianca’s Chapter 11 plan, let’s see what will be of Avianca’s fleet. Before the COVID-19 pandemic, Avianca took passengers to 65 destinations. It has its main hub in Bogota, Colombia, but also flew from El Salvador, Ecuador, and Peru. Avianca’s Peruvian branch is now closed. This table shows Avianca’s passenger revenue generated in each of the different regions it operates, [caption id="attachment_56699" align="aligncenter" width="580"] Photo: Avianca[/caption] Before the COVID pandemic, Avianca had a fleet of 158 aircraft. The current plan is to exit Chapter 11 with 109 units, including 98 passenger planes and 11 freighters. Additionally, Avianca is in the process of densifying its narrowbody Airbus A320 fleet, increasing capacity by 24 percent. We wrote more about the subject here. Avianca has two plans regarding its future fleet, one with the OEMs Airbus and Boeing and one with the lessors. Avianca intends to take delivery of approximately 58 new leases between 2021 and 2023. It also has an agreement with BOC Aviation to lease ten new A320neo's in 2023 but can reject these leases. Regarding Boeing and Airbus, Avianca has deferred any new delivery until 2024. You can see in this table how many aircraft the airline will receive in the next decade, [caption id="attachment_56700" align="aligncenter" width="580"] Photo: Avianca[/caption] [caption id="attachment_56701" align="aligncenter" width="580"] Photo: Avianca[/caption] United alliance Finally, let’s examine Avianca’s alliance with United Airlines and Star Alliance. The company said: “The Business plan is predicated on the Debtors maintaining their long-term strategic partnership with United Airlines and other airlines in the Star Alliance.” Both parties amended ten total agreements comprised of five bilateral alliances, two codeshares, two frequent flyer programs, and one interline deal. Additionally, both United and Avianca agreed to extend their alliance by seven years until September 2030. You can read Avianca’s Chapter 11 plan here.

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