South American airline sees revenue drop 80% in 2 months

Avianca Holdings SA, the second-largest airline in Latin America, filed for bankruptcy protection in U.S. federal court on Sunday, saying it needs relief from creditors as it restructures in an effort to survive the worst crisis in aviation history.

The Colombian flagship carrier suspended all domestic and international passenger operations in late March because of the coronavirus pandemic but has maintained cargo operations with its fleet of dedicated freighters as well as passenger jets used in freighter mode. The grounding of the passenger fleet has reduced consolidated revenue by more than 80% and put pressure on the airline’s cash reserves.

Avianca, which serves more than 50% of the Colombian market and transported more than 30.5 million people last year, said the filing in the U.S. Bankruptcy Court for the Southern District of New York was necessary to preserve operations and jobs as it works to address about $5.3 billion in obligations, including leases, and aircraft orders. The airline, which operates to 76 destinations in 27 countries, is also closing its Peru division.

Bankruptcy inevitable despite austerity measures

Austerity measures taken by Avianca during the pandemic include employee furloughs, temporary wage reductions, freezes on nonessential capital expenditures and deferrals of payments on long-term leases.

The bankruptcy could be an ominous harbinger for the airline industry, especially for midtier airlines and those with heavy debt loads. Industry analysts expect some airlines to eventually go out of business.

Avianca was already in a weakened position when the COVID-19 travel restrictions and local lockdowns forced airlines to abandon most passenger flying. It lost $894 million in 2019, which included one-time transaction costs associated with a major restructuring designed to improve operational efficiency and ensure adequate liquidity. The company sold 24 aircraft, canceled 27 unprofitable routes, renegotiated debt and leases, and secured $375 million in convertible bonds in the fourth quarter. It also reclassified $2.6 billion in debt from short to long term.

“We are confident that through this process we can continue to execute our ‘Avianca 2021’ plan, optimize our capital structure and fleet of aircrafts and — with government support — emerge as a better, more efficient airline that operates for many more years,” said CEO Anko van der Werff in a statement.

Government support

Avianca is also seeking financial support from governments of countries where it provides essential services. The International Air Transport Association says airlines stand to lose $314 billion in revenues this year and be forced to eliminate 2.7 million jobs in the near future and is urging governments to provide airlines with direct assistance, loans and loan guarantees, and tax cuts to help them stay viable.

Avianca is using cash on hand and cargo revenues to support the business, including payments to employees and vendors during the court-supervised reorganization.

Avianca is one of the top all-cargo carriers for flowers out of South America to the U.S. and Europe. Its freighter fleet consists of six Airbus A330-200 aircraft, plus five aircraft from its affiliated company AeroUnion. The freighters serve Dallas, Los Angeles, Chicago, New York, Miami, Madrid, Brussels and major Latin American cities.

Special flights, joint ventures

With passenger operations halted and a shortage of available cargo transport, Avianca, like other airlines, has deployed some passenger aircraft for dedicated cargo operations. In March, it began using a 787-800 to transport essential supplies. It recently launched regularly scheduled cargo-only passenger flights between Bogotá and Shanghai, marking the first time the company has performed a cargo flight to China. The flights are bringing medical supplies and surgical garments from China for use in Latin America.

As of April 30, Avianca said it had completed 60 special cargo flights between Europe and Latin America.

United Airlines had been pursuing a joint venture with Avianca and Panamanian carrier Copa Airlines to get better access to the South American market, but those plans are now on hold.

Regional U.K. carrier Flybe and Virgin Australia Holdings entered into court-supervised bankruptcy proceedings in the past two months.