Editors discuss why Colombia made a rescue of LCC Viva almost impossible.
Don't miss a single episode. Subscribe to Aviation Week's Window Seat Podcast in Apple Podcasts and Spotify.
Rush Transcript!
Karen Walker: Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport Podcast. I'm Air Transport World and Aviation Week Network Air Transport Editor-in-Chief, Karen Walker. Welcome on board.
Well, there's been a lot happening among airlines in Central and South America of late, and another big event just occurred when Colombian carrier Avianca announced that it was ending its long-running bid to acquire low-cost carrier Viva. Avianca was clear that it felt cornered into this decision by Colombia regulator Aerocivil, which first delayed a decision on giving approval for the merger and then demanded multiple conditions including significant numbers of airport slot give up. Avianca CEO Adrian Neuhauser described those conditions, as I quote, "impossible to comply with." So the big question now is, what happens next? And to talk about that, I'm delighted to be joined by my colleagues, Aaron Karp, the Senior Editor at ATW and Routes, and Lori Ranson, the Senior Analyst America's at CAPA. Aaron, Lori, always great to be together again, and thank you so much for joining me today. Aaron, let's start off with you, if I may, because you covered this breaking news story that happened on Sunday with Avianca. Just tell us, what did Avianca say?
Aaron Karp: Avianca essentially ended or did end its nine-month quest to acquire Viva, which is a low cost carrier in Colombia. And they had been sort of sparring with Aerocivil for months, first saying that Aerocivil was dragging its feet and putting Viva at risk. Viva grounded its fleet in February and finally Aerocivil did approve the merger, but they attached a lot of conditions to it. And over the weekend, as you said, Avianca not just said they were withdrawing their effort to acquire Viva, but issued I thought a very blistering critique of Aerocivil, saying that the shortcomings of their resolution outlining conditions for the merger to go through were numerous and made several points about how they thought Aerocivil's reasoning was internally contradictory. And they said they would've given 75% of Viva slots at Bogota El Dorado Airport up. They said that wasn't good enough and the authority demanded, as they said, the return of such a number of slots, that it would've not allowed Viva to base a single aircraft at the country's main airport efficiently.
It would make Viva economically unviable and it would actually, even, they said, threaten Avianca's stability. So obviously the merger is over Viva, it's been grounded and I think it's about a hundred percent now that it's not coming back. And so the Colombia aviation market is in a bit of turmoil, and I think we should note it's the second-largest aviation airline market in South America after Brazil, and the 12th largest in the world. So this is a very significant market, and pretty big deal that they've lost a carrier that was their first low-cost carrier, had been a pretty prominent actor for some time in the market.
Karen Walker: Thank you. Aaron. As you've said, this has been going on for some time. There was a lot of frustration from Avianca and Viva. Viva kept saying, effectively, we're running out of time. We need to be able to move ahead with this. And so first of all, there was this long delay, and then now this, this is where it's ended. Lori, you've been tracking this for some time. First of all, were you surprised at the announcement on Sunday?
Lori Ranson: Not particularly. Even way back in August of last year, Avianca and Viva went to Aerocivil and said, look, Viva's financial situation continues to deteriorate. Can we please have an expedited process to approve or not approve this merger? And so the card started falling at that point in time and with fuel costs and currency fluctuations in Colombia, probably just Viva's own financial difficulties, the writing was on the wall probably at least earlier this year when it sought its own kind of internal reorganization, and then ceased operations, it said it would be for a temporary period of time. I think we all knew that that was not likely. So not very surprised at all. And it's been really interesting just to see how much the government on the outside hasn't really listened to the carriers, or paid attention to the market. It just seems like it's turned a blind eye to the concerns that were expressed or to the market. So it'll be interesting to see how the government interacts with airlines and airlines that are trying to enter the market going forward.
Karen Walker: Yeah, I'd like to pick up on that about the Colombia government involvement to this and attitude to this in a second. But can we just be clear, do both of you now think this is it for Viva? I mean, there's no coming back for Viva?
Lori Ranson: They actually just recently put out a statement on LinkedIn saying, we're essentially out of business, we're done. This is kind of the nail in the coffin, definitely.
Karen Walker: Right. Okay. And LATAM, a major airline of that region of course, has been watching all this very closely. What's your thoughts on how they will respond to what's happened here?
Lori Ranson: Since Viva has ceased operations and another smaller local ultra low cost carrier, Ultra Air ceased operations, LATAM says they've added five aircraft to Colombia's domestic market and 200 employees, I believe. LATAM was the second-largest airline in Colombia before the two airlines ceased operations. So they're going to seize on market opportunities. I think they said recently they have a 24% domestic market share and they're looking to build on that. For the reasons that Aaron said, it's a fast-growing market, it's the second-largest market in Latin America. So if you're the second-biggest player there, and two other airlines have recently gone out of business, you're going to try and capitalize on those opportunities.
Karen Walker: So Aaron, as you said, it's a large market. It's one that other carriers see the potential to grow, but Viva was a low-cost carrier. That's been a really fast-growing segment across South America and Mexico. I don't know, I still find it surprising where the Colombian government and Aerocivil has gone with this, why they put up essentially so much resistance and hurdles to keeping an LCC going. What are your thoughts on that?
Aaron Karp: Yes, I mean, if you look at before this process started, you had Viva, which was a low-cost carrier. You had Avianca, and then end result of this process is Viva's out of business. So I think there's no other way to look at it than competition is now reduced in Colombia. And so by definition, I think it's a less competitive market than it was before this. So yes, it is a bit perplexing. I think that they were so adamant about this, and it just seemed to not want to approve it unless... I think they just feared that maybe the optics of a merger would have this anti-competitive feel about it. But it may be that they were a little bit too clever and that they kept trying to create conditions for the merger to such an extent that not only did the merger not happen, but an airline completely collapsed.
So I think it leaves uncertainty in the market and particularly in the low cost sector in Colombia because that was Ultra and Viva's role were the low cost carriers in the market, and now they've disappeared. And so it's hard to see how that will end up in lowering airfares for consumers in Colombia. So I agree with you. It is perplexing that Aerocivil was so adamant about this, and as I said before, I thought it was striking about how blistering the response from Avianca was, because they're still going to be regulated by Aerocivil, and there was very little nuance or we're looking forward to working with them in other areas. It was basically, this didn't make any sense. It hurts the market, it hurts us. And so I think there's a lot of uncertainty going forward.
Karen Walker: Right, yes. And what as you say, is maybe even more perplexing about this is, you've got a lot of different things going on when you look from country to country across South America and some frustrations that there are some countries, Argentina, that just never seemed to get the importance of the aviation industry to them. They layer on taxes and things. Colombia seemed to be one of the good guys in all of this, seemed to get aviation, seemed to want all this growth, and its economy is driving as a result. So it does seem sort of counterintuitive what they're doing here. At the end of the day, I get what you are saying, Lori, is that LATAM is sort of obviously going to say, hey, there's a good opportunity to grow market share, but what you're going to end up is more of a sort of duopoly as opposed to having more airlines. What do you think, Lori?
Lori Ranson: Let's remember as well, there is a new entrant that's trying to come into Colombia, JetSmart. So JetSmart has operations in Argentina and Chile, small operation in Peru. It's an ultra low cost carrier backed by Indigo Partners. American Airlines has a small stake in JetSmart. They've applied, and I believe gotten approval, to start the process. So they're trying to bring some ultra low cost competition back into the market. I guess the question is, how long will it take? Given what we've just witnessed over the last year or so, how long will it take for JetSmart to actually enter the market? One advantage that JetSmart has, it has very strong backing. So perhaps it has some staying power once it enters the market, if it's allowed to enter the market. And so there are some low cost competitors that are looking to fill the shoes of Viva and Ultra.
And JetSmart seems to have a bit more stability. They've been operating in the region for about four or five years, I believe. So there's a familiarity there. I think that their management and owners understand that working with the governments in South America can sometimes be challenging. So I think there's probably a level of patience there to wait it out and get approval because it's just such an important market, and they may be able to convince the regulators now while you don't have any low cost competition, it would be beneficial for you all to let us come in and stimulate the market. Whether that happens or not, I think that's very tough to predict.
Karen Walker: Okay, so that's an interesting aspect to all of this. Again, just looking at the Colombian government moves of late, they've reintroduced the 19% VAT tax on all tickets and aviation fuel. They actually took that down to 5% during the pandemic to assist their airlines, and that had the right effect. Now they've taken it back up to 19%, and IATA, the International Air Transport Association, is saying that you can already see the effect of that additional cost on tickets slowing demand. They've done a comparison, a month versus last year, and I think they've said that ticket sales are down about more than 20% when you compare one month to last year when there was a 5% tax. I'd be interested to see from both of you, is it the case of the lessons of the pandemic are already being forgotten, or is it a case of Colombia sort of going the way of some other Latin American countries and just seeing aviation as a cash cow rather than a economic stimulus? Aaron, do you have thoughts?
Aaron Karp: Yes, and I think one thing to point out was that Colombia was a friendly market to airlines relative to the rest of Latin America. And I think that, like other markets in Latin America, they see an opportunity to get revenue from the airlines and they have a hard time seeing beyond that. And if the revenue is coming in from the taxes, they don't quite see why they should stop generating that revenue. And so this has been the old story in Latin America where the airlines have complained, there haven't been proper infrastructure investments, where the taxes are always problematic. You talked about the Argentinian market, and I've noted that Aeromexico has said that they basically not fine Argentina, or very rarely fine Argentina, and that's not based on demand, that's based on the political situation and the tax situation. So I think that Colombia is a lot of other Latin American markets, and I think in the broader picture, they were progressive in the context of Latin America.
And so I think that this is the issue all around Latin America for airlines. And one thing I was thinking about preparing for this discussion is that you have airlines like LATAM and Avianca is now creating a pan-Latin American airline group with GOL. So you have these pan-Latin American airlines, but no pan-Latin American regulator. So LATAM is essentially a bunch of different airlines based in different countries all under one umbrella, but regulated differently in every market. I mean, I think that's a constant challenge for airlines in Latin America is that you're dealing with 10, 11 different regulators if you're flying all over Latin America, almost as if, say, American Airlines was regulated differently in Texas and New York and California, or airlines in the EU had to deal with every single regulator. And so I think there's just such a strange regulatory environment and it's so fragmented and there's not a mindset at all of seeing airlines beyond as another industry to tax. And there doesn't seem to be an enthusiasm for building that infrastructure and trying to make it easier for airlines to grow and expand into new markets.
Karen Walker: That's a really good point that you made about the very, very complicated regulatory environment. It's a huge continent. It's growing. But the airlines, as you say, that of course also want to be serving across those national boundaries, having to work with each country's tax and other rules. And then the other thing I'd just say is that when it comes to things like putting VAT tax on tickets and fuel, the governments don't worry about plowing that money back into the infrastructure that's really needed. They could put that money anywhere they like, and usually aviation is the last place that they want that money to go to. So it's very difficult. Do you have thoughts, Lori, on the situation overall?
Lori Ranson: Yeah, it's interesting because Colombia had presidential elections last year. So there is a change of government, and this is what the industry faces in Latin America. Usually when there are elections, presidential elections, it's like a pendulum shift to a different mindset with the government. And so the industry has to go in and educate these new governments about the benefits of aviation. And I think what you're kind of seeing in Colombia is, yeah, it is sort of reverting back to, well, let's just tax the industry because we view it as a cash cow. And so this is where industry associations have to come in and just continuously communicate with governments.
It's also interesting to note, and I think this is sort of a general kind of principle, buses, the bus industry, which is still very much a vital part of travel for Latin America, I don't believe it's taxed nearly as much as the aviation industry. And so that's just a challenge that has been around for quite some time. So yeah, I agree with Aaron. It's so fragmented. And then it becomes even more fragmented when you have changes of administration. Argentina a few years ago had a change of administration that resulted in the creation of the low cost industry and the domestic market. There does appear to be progress here and there, but it's kind of two-step forwards, one step back and the market in general.
Karen Walker: Yeah. So you mentioned about the buses, the regulation overall is nowhere near there, whether it's the safety or anything. But as you say, it's sort of a mindset, really. So let's just quickly look at a little bit more generally what's going on in some of the other major countries and airlines. Azul, incredibly successful airline in Brazil. They've been doing some things lately as well, haven't they, Lori? What's going on there?
Lori Ranson: So back in March, they kind of announced that they were working with sort of OEMs and lessors to restructure their obligations to those companies. And so they recently announced that they're going to have, I believe it's US 1.1 billion reduction from mid-year this year through 2027 and beyond and aircraft lease payments. And that's a big deal. And the whole premise of trying to do this restructuring with the OEMs and the lessors is, well, our balance sheet got a little battered during Covid, and we didn't have any government assistance. So we're going out on our own and trying to do this restructuring.
And so they have about 95% of their lessors on board in terms of getting relief. And it's a very complex transaction because they're issuing sort of a note. And the lessors will be able to buy some shares at some point. I mean, we could have a whole podcast about this package, but it kind of shows that airlines in the marketplace, whether it's Avianca, LATAM or Aeromexico who had to go through formal chapter 11 to weather the crisis, or Azul kind of doing this outside on its own, and GOL is doing some refinancing as well, and this is what they're doing to try and make sure that they're competitive going forward.
And this is going to help Azul with some balance sheet repair. I'm sure that GOL's trying to do the same thing, and it kind of reverts back to the governments didn't help us very much, I mean, and that's why the three majors had to go into bankruptcy as well. This is what they're doing just to make sure that they can seize on the demand in the region, and grow in a reasonable way without bringing any more risk onto their financial situation.
Karen Walker: So Aaron, you said earlier about, or I, in fact, I mentioned it and then you picked up on that about it seems that from the government perspective around here, there's a lot of not learning, or for easily forgetting the lessons of the pandemic. Governments have already forgotten just how critical airlines were and what it took to keep them and some of them looked like they might not make it. So there was that thinking then, but some of that seems to be forgotten. They're already sort of treating these airlines like they're suddenly massively rich, which they are certainly not. But the airlines themselves, from what Lori has just said, the airlines, they've actually seen to be absorbing the lessons from the pandemic and making themselves... Working out how to make sure that they're more resilient in some of the work that they're doing. Do you think that's correct, Aaron?
Aaron Karp: Yes, I think so. And we talked about how Colombia lowered the tax. That was done instead of providing aid to airlines. And so throughout Latin America, airlines did not get the kind of assistance during Covid that they got in, say, Europe and the United States. And so there were some adjustments on taxes, but that was in lieu of the support that the airlines got. So I think that Latin American airlines really feel one lesson of the pandemic is that they just have to figure it out on their own because even in the worst crisis ever, the governments were sort of hands off in dealing with it, much more so, much more hands off than the United States or Canada or particularly the United States. Canada sort of dragged its feet as well. But anyway, I think that they've learned that they can't continue. I mean, I've been covering the market for a long time.
I know you have, Lori, too, and complaining and trying to educate the government and talking about the taxes and the infrastructure, it sort of hasn't gone anywhere. And so I think that they realized that this may be the environment, we'll continue to try and educate, we'll continue to try and lobby, but we have to figure out how to operate in a way that accepting that the regulatory environment may be somewhat hostile to airline growth. And so you've always have had this contradiction where there may be no other airline market in the world with as much growth potential as Latin America, and yet you have governments who do not seem to embrace spurring that growth as much as it could possibly go.
Karen Walker: So a tough way to do it, but it is probably ultimately what we're seeing is that you've got to be really smart to run an airline in Latin America, and be prepared to work through this yourself and make your company resilient through this, regardless of the political arena. Lori, Aaron, thank you so much for another good conversation. This is a region that I know you both cover a lot and I always find fascinating. There's always a lot going on. So, good to catch up on that. Thank you also to our producer Michael Johnson, and of course, thank you to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcast or wherever you listen. And until next week, this is Karen Walker, disembarking from Window Seat.
