The war for Brazilian skies

. Jul 02, 2019
air travel market avianca brazil

Avianca Brazil, the country’s fourth-largest airline, is grounded. The National Civil Aviation Agency (Anac), which regulates Brazil’s air travel market, suspended the company’s activities on May 24, fearing that its financial struggles would compromise passenger security. Meanwhile, customer service hotlines were shut down, and those with Avianca tickets don’t know how to get a refund, or transfer to other carriers.

The downfall of Avianca pushed plane tickets to rise by 20 percent in Brazil this year. And it is the result of a war staged between the three market leaders—Gol, Latam, Azul—and creditors who have BRL 2.8 billion to receive. July 10 is set to see the auction of Avianca assets. Now, interested players are hoping that no further twists will delay the process.

</span></p> <h2>Understanding how Avianca got here</h2> <p><span style="font-weight: 400;">In December 2018, Avianca filed for court-supervised reorganization after posting losses of BRL 1.3 billion that year. While the administration plan was being drafted, the company accepted a bid from Azul to sell 69 airport slots (licenses to fly to and from airports), as well as taking over 28 leased planes, Avianca&#8217;s frequent flyer program, and the rights to part of the company&#8217;s staff. The slots, Avianca&#8217;s crown jewel, were priced at USD 105 million.</span></p> <p><span style="font-weight: 400;">The deal appeared to make sense. Antitrust authorities would probably have blocked a deal of that size with Gol or Latam, which own already </span><a href=""><span style="font-weight: 400;">sizeable parts of the market</span></a><span style="font-weight: 400;">. With the noose around its neck, Avianca accepted the terms—but its creditors didn&#8217;t. Hedge fund Elliott Management, which owns 70 percent of the struggling company&#8217;s debts (about BRL 2 billion), thought the deal was too cheap. Depending on how long the transaction would take, most of the USD 105 million would be burned on operations—with little left for creditors and investors.</span></p> <div class="flourish-embed" data-src="visualisation/459248"></div> <p><script src=""></script></p> <p><a href=""><span style="font-weight: 400;">Elliott asked the value to be raised</span></a><span style="font-weight: 400;">, but Azul reportedly challenged the fund to find higher bidders.</span></p> <p><span style="font-weight: 400;">The fund then decided to dismember the company&#8217;s assets, in order to make Gol and Latam eligible for buying them. They split the carrier into seven divisions—six different slot groups and the frequent flyer program. It got Gol and Latam on board, getting offers of USD 140 million for the two best slot groups combined.</span></p> <p><span style="font-weight: 400;">The proposal was accepted by 80 of the creditors on April 5, and an auction was scheduled for May 7. However, Swissport, a service provider for airlines (and a creditor) filed a lawsuit claiming the slots are public concessions given by Anac, and couldn&#8217;t be sold as merchandise. </span></p> <p><span style="font-weight: 400;">The lawsuit complicated the auction, and Azul immediately filed a motion for an express purchase of Avianca assets for a total of USD 145 million—which was denied.</span></p> <div class="flourish-embed" data-src="visualisation/459269"></div> <p><script src=""></script></p> <h2>The auction</h2> <p><span style="font-weight: 400;">Since having its latest request rejected, Azul started to boycott the auction, as the Elliott fund has reportedly promised to compensate Gol and Latam if they lose the bidding. Instead, Azul has invested in ad campaigns trying to get public support for its cause, with a slogan saying &#8220;I was Azul to fly Rio-São Paulo.&#8221;</span></p> <p><span style="font-weight: 400;">If Avianca does indeed go bankrupt, or if it goes too long without operating, its airport slots would be split up and given to other operators. In the case of a new face in the market, this company would get 50 percent of the slots—and Azul wants to be that company. The caveat? It already owns 13 slots at Congonhas airport in São Paulo, but doesn&#8217;t use them as they are not sufficiently profitable.</span></p> <p><span style="font-weight: 400;">In that mess between the four market leaders, an underdog has appeared: Passaredo, a small carrier from the countryside city of Ribeirão Preto. And, as President Jair Bolsonaro authorized totally foreign-owned airlines to operate in Brazil, </span><a href=""><span style="font-weight: 400;">more competitors</span></a><span style="font-weight: 400;"> could appear until next week, when bidders must apply for the auction.</span></p> <p><span style="font-weight: 400;">Right now, Gol and Latam seem to be the heavy favorites. But Cade, Brazil&#8217;s antitrust authority, has already expressed worries about the market concentration either of them could achieve. This story is set to run and run.

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