|The global aviation industry has been directly affected by the government-mandated travel restrictions and confinement measures due to Covid-19. / Photo by joyfull via Shutterstock|
Latin America’s second-largest airline Avianca Holdings has recently filed for chapter 11 bankruptcy in a New York court to reorganize its debt because of the “unpredictable impact” of the Covid-19 pandemic, reports radio network Voice of America.
Chapter 11 of the United States Bankruptcy Code is referred to as reorganization bankruptcy. It is often used to reorganize a business, which may be a sole proprietorship, partnership, or corporation. The chapter 11 bankruptcy process allows financially struggling firms to restructure their debt and postpone its obligation to its creditors.
Despite being one of the major carriers worldwide, Avianca is facing one of the most challenging crises in its 100-year history. Since late March, the carrier has not flown a regularly scheduled passenger flight and the majority of its 20,000 workforces have taken unpaid leave after Colombian President Ivan Duque declared a state of emergency to reduce the spread of the novel coronavirus. Colombia’s national airline also said that it is struggling with high fixed costs and had to cut over 80% of its income.
This led to the grounding of Avianca’s 142 aircraft and put pressure on its liquidity. The company’s chief commercial officer Silvia Mosquera told reporters, "In this time, we do not have the liquidity to sustain a loss-making operation.”
With the filing of chapter 11 bankruptcy, Avianca hopes to preserve and protect its operations so that it can continue to operate once the government restrictions are lifted. It will also help drive tourism and investment and ensure connectivity by continuing as the flagship airline of Colombia. The bankruptcy protection will likewise help restructure Avianca’s balance sheet and obligations so that it can navigate the effects of the pandemic and address its leases, aircraft orders, liabilities, and other commitments.
Impact of the pandemic on the global aviation industry
The global aviation industry has been directly affected by the government-mandated travel restrictions and confinement measures due to Covid-19. The International Air Transport Association, a trade association of the world’s airlines, said that airlines in Latin America are expected to lose $15 billion revenue this year and it will be the worst crisis in the history of the airline industry.
Before filing for Chapter 11 bankruptcy, Avianca already recorded a net loss of $894 million last year compared to its $1.1 million profit in 2018. The president of Avianca’s board Roberto Kriete said last year that the airline was “broke” so to keep it operating, it needed emergency $250 million loans funded in large part by the United Airlines Holdings.
|The air transport industry is an important engine for global socio-economic growth. / Photo by Dabarti CGI via Shutterstock|
A necessary step to address Avianca’s financial challenges
Avianca’s Chief Executive Anko van der Werff said that in the face of a complete grounding of their fleet and a gradual recovery this year, the filing for bankruptcy protection is a necessary step to address the financial challenges of the company. This is despite having positive results in their “Avianca 2021” plan.
The CEO added that they look forward to welcoming back their furloughed employees and playing a leading role in restarting Colombia’s economy and other markets when the air travel restrictions are already lifted.
As part of the air relief effort in the fight against the pandemic, though, Avianca Cargo remains operational. No certain date was given for when Avianca will resume its operations. The airline likewise plans to temporarily halt its operations in Peru, which represents 5% of its revenue, and will lay off employees in the next 10 days.
Passenger traffic of Avianca Holdings
Avianca Holdings transported approximately 26.23 million passengers in 2014, according to database company Statista. In 2015, its passenger traffic reached 28.29 million, 29.48 million in 2016, 29.46 million in 2017, and 30.5 million in 2018. Its passenger traffic in 2019 was the same in 2018. The carrier is currently composed of Ecuadorian airline Aerogal, cargo airline Tampa Cargo, and the Taca International Airline Group.
Before this year’s health crisis, the company already accelerated its Avianca 2021 strategy, which is focused on cost-cutting. One of the important pillars of such a strategy is operational efficiency. They started a systematic effort to improve the airline’s punctuality and made changes in itineraries, frequencies, schedules, and routes. They also worked with the Colombian aeronautical authority.
The whole process involved changes in the board last year, ousting CEO Hernan Rincón for van der Werff. They were also able to secure an emergency loan to cover their losses after a prolonged pilot strike in 2017. The largest shareholder of Avianca Holdings previously was Bolivian entrepreneur Germán Efromovich but was replaced by Robert Kreite.
Will the global airline industry bounce back?
Former air safety investigator Christine Negroni shared in an interview with Boston news station WBUR that it comes down to two things for the airline industry to bounce back. One is people having a reason to go somewhere and the second is, if it’s not a vaccine, a way of saying that the destination has some therapeutics that could limit the impact of the Covid-19. These two things make the idea of traveling more comfortable.
She opined that it would be difficult for the industry to go back to business as usual because of the fundamental shift of the way people view travel. Before the global health crisis, people were used to getting cheap flights any time and anywhere they want. That is how airlines were able to earn globally, but this will not be the same anymore.
The international tourism receipts data for Colombia was $6,617 million in 2018, a 12.50% change from $5,882 million in 2017, shares data technology company Knoema. The international tourism receipts are expenditures by international inbound visitors, including payments to national carriers for international transport and other payments made for goods and services received in the destination country.
In 2016, the tourism receipts for Colombia was $5,584 million, $5,235 million in 2015, $4,887 million in 2014, and $4,759 million in 2013.
The air transport industry is an important engine for global socio-economic growth. It helps create direct and indirect employment, support local businesses and tourism, and stimulates international trade and foreign investment. It means too much is at stake for Colombia to restart its economy with the grounded fleet of Avianca. If the government does extend a lifeline to the world’s second-oldest airline, it will hopefully come out stronger from this crisis.