Why Latin American airlines are going belly-up?

The move allows Latam Airlines Group to keep operating while it works out a plan to pay creditors and turn around the business.

By Ravi Bangar

LATAM, Santiago-based Latin America’s largest airline on 25 May filed Chapter 11 bankruptcy protection in New York after the coronavirus pandemic grounded flights across the region. Before the pandemic, the 330 strong fleet was flying to 125 destinations in Latin America and the Caribbean.

The move allows Latam Airlines Group to keep operating while it works out a plan to pay creditors and turn around the business. The Chilean carrier said it continues to operate on a reduced schedule.

Latam carried almost 69million passengers last year and employs about 41,000 people. Latam, which was forced to cancel 95 per cent of its flights as the coronavirus pandemic hit Latin America had only last week announced plans for a gradual recovery of capacity, targeting growth of 9 per cent in June and 18 per cent in July.

On May 10 Colombia’s national airline, Avianca, filed for bankruptcy protection in a court in New York.

Behind KLM, Avianca is the second-longest continually running an airline in the world. The carrier is the second-largest in Latin America, but its passenger operations have been grounded since March because of COVID 19 lockdown.

The pandemic had cut more than 80% of its income, and it was struggling with high fixed costs. More than 140 of its aircraft have been grounded when Colombia closed its airspace in March. Most of its 20,000 employees were put on unpaid leave.

It may be recalled that Avianca previously filed for bankruptcy in the early 2000s, and was rescued by a deal with German Efromovich, La Paz born Brazilian businessman holding multiple nationalities (Bolivian, Brazilian, Colombian and Polish). The airline grew quickly under his stewardship.

However, the recent history of the airline has seen many ups and downs. In January 2017,Roberto Kriete, the Salvadorean tycoon, the second-largest shareholder in Avianca blamed Efromovich of millions of dollars haemorrhage from Avianca. He claimed that Efromovich unexpectedly announced a transaction latter had arranged with United Airlines, the US carrier. This was a setback and indicative of larger problems bleeding the airline.

Efromovich’s and Mr Kriete’s association began auspiciously when they merged their airlines — Avianca and Central America’s TACA — in 2010. Kriete is credited with steering TACA, family-controlled since 1961, through El Salvador’s civil war, a remarkable achievement. In contrast, Efromovich’s, first job was selling encyclopaedias door-to-door. He later started and sold a quail farm. He only turned to airlines after a client repaid his Brazilian oil company with an aeroplane in 1998. Six years later, he paid US$64m for Avianca, rescuing it from bankruptcy.

In September 2017, Avianca pilots demanding increased salary and benefits went on a strike which lasted 7 weeks. The strike forced Avianca to cancel flights and contract foreign-based crews to serve its important long haul routes to the United States and Europe. The strike cost Avianca lost earnings of US$76 million or US$1.5 million for each day. Boeing sent a dozen 787 pilots to work for Avianca after the carrier fired about a hundred pilots who had participated in the strike.

In May 2018, Efromovich used its 51% stake in Avianca as collateral for the loan from United Airlines. A year later, United Airlines launched a management overhaul at Avianca Holdingsremoving top shareholder Efromovich from controlling the cash-strapped airline. Its growing debt led to a successful boardroom coup against him. It is now run by Kingsland Holdings. The US$ 50 million short term financing commitment was Kingsland Holdings’ support for the new administration and the “Avianca 2021” strategic plan. The commitment was intended to strengthen Avianca Holdings S.A. financial position, while making continuous progress in re-profiling the Company’s debt obligations.Obviously, couple of months later, this proved insufficient to keep the airline afloat.It was also to provide US$ 250 million in further lifeline after re-profiling of debt. That now lies in tatters.

Air India, the national airline of India and Avianca the national airline of Colombia signed a codeshare agreement that came into effect from 28th August 2018. Travellers earn miles on these flights in their respective frequent flyer programs. This codeshare agreement between AI and AV,is the first and the only one, which provides seamless connectivity to passengers travelling between India and Colombia.

Copa Airlines announced this week that the airline will restart its operations on July 3, with 12% of its fleet capacity. Copa had stopped its operations since March 15. The carrier expects to reach 40% of its fleet capacity by the end of the year. Between January and March, Copa Airlines reported $74.3 million profits. However, the airline has estimated $2 billion losses for this year due to the pandemic. According to the carrier, it recorded a monthly expense of $85 million for keeping its 102 aircraft fleet on the ground. It may be noted that the airline has not requested support from the Panamanian government to overcome the crisis. Instead, Copa Holding S.A., which is the Copa Airlines parent company, obtained lines of credit and offered bonds in the international market for a global amount of US$350 million, deferred non-essential expenses and the declaration of dividends this year.

Aerolíneas Argentinas and it’s subsidiary Austral announced that they will merge as part of a bid to cut costs amid the coronavirus crisis. Aerolineas Argentina was privatised in 1990 under president Menem and returned to state control in 2008. The merger of AerolíneasArgentinas and Austral is expected to conclude before 2021. Argentina’s decision on flight ban from and within the country until the start of Sep-2020 is causing concern among the operators. The decision has also created an extra layer of uncertainty over the future of the country’s start-up low-cost airlines.

GOL, Brazil’s largest domestic airline, is taking all the necessary steps to weather the COVID-19 crisis, including cutting its capacity and building up liquidity. The airline is also reassessing its fleet and has opted to cancel a number of its Boeing 737 MAX deliveries.

In view of serious financial crisis, liquidation of TAME, Ecuador’s national airline, is very much on the cards. It could take about 8 months to liquidate the airline if the timelines in the two planned phases are met. The airline’s pre-liquidation is stipulated to take about 60 days and at this stage the assets that can be sold will be evaluated to respond to its employees and creditors. The line has lost money in 9 of the last 12 years and the accumulated loss is of US$ 311 million.

Covid-19 has wreaked havoc on economic activity across the world and the tourism, travel and aviation industries are expected to be some of the worst hit.

Economic headwinds, currency devaluation and political uncertainty have been mainstays in the Latin American aviation industry over the past few years and 2020 is no different.

Alliances and partnerships have taken on a new form, as Delta acquired a share in LATAM, crossing the Oneworld global alliance boundary and reshaping the balance of power.

The coronavirus pandemic has dealt a huge blow to the international aviation industry, as governments impose travel restrictions and confinement measures.

According to the International Air Transport Association (IATA) Global air travel has fallen by 90%. Latin American airlines are estimated to lose $15bn in revenues this year – the biggest drop in the industry’s history.

The grounding of Boeing 737 MAX planes since March 2019 has also been troubling airlines all over the world including in Latin America. This has stymied airline industry growth in Latin America, a region long home to some of Seattle-based Boeing’s top customers.

The grounding has had a notable impact in Latin America partly because the region is home to several carriers that have made the 737 their primary narrow body workhorse.

When regulators grounded the 737 Max in March, 2019 Aerolineas Argentinas, Aeromexico, Cayman Airways, Copa and GOL operated a combined 25 of the aircraft. That may be relatively few in terms of global numbers, but Latin American airlines hold outstanding orders for 270 Max jets, representing a significant chunk of the region’s future fleet. The orders include a 144 aircraft for GOL, 55 each for Copa and Aeromexico, nine for Aerolineas Argentinas, four for Caribbean Airlines and two for Cayman Airways.

The US$2 trillion US CARES Act also addresses the financial needs of the travel industry. The U.S. passenger airlines will have access to roughly US $50 billion, half in grants, and half in loans. So far none of the Latin American governments has come forward to provide such a cushion to its airlines.

The travel, tourism and aviation industry in general in Latin America will witness more turbulence in the foreseeable future. The historic low commodity prices, economic recession, closing down of businesses, rising unemployment, squeezing incomes, continuing impact of COVID 19 lockdowns, fear and anxiety of safety travel issues is all conspiring against aviation sector.

The increasing practice of work from home (WFH), online conferencing and return of travel could further reduce work-related travel. In a memo to staff Qatar Airways CEO Akbar Al Baker summed it up well warning, “The global outlook for our industry looks grim and many airlines are closing or significantly reducing operations.”

(The author is Former Ambassador to Colombia and Ecuador, High Commissioner to Cyprus, Deputy Permanent Representative to the WTO and Deputy High Commissioner to Singapore. At the Ministry, he headed Multilateral Economic Relations, West Africa and East & Southern Africa Divisions. The views expressed are personal.)