Consultants working on Avianca's Chapter 11 restructuring

15 June 2020 Consultancy.lat

Latin America's second-largest airline, Avianca, is currently undergoing a large restructuring effort, as part of its Chapter 11 bankruptcy and plans to emerge as a smaller and leaner airline. The company is being advised by restructuring experts from a number of leading consulting and law firms.

Law firms engaged on the project are New York-based Milbank, US-based Smith, Gambrell & Russell, and Bogota-based law firms Gómez-Pinzón Abogados and Urdaneta, Vélez, Pearl & Abdallah Abogados. FTI Consulting is the lead restructuring advisor, while Seabury Securities is tasked with investment banking services.

The cohort of legal and restructuring consultants are helping the world’s second oldest airline with a comprehensive overhaul of its operations. The plan is to “right-size” Avianca’s operations, which involves shrinking its fleet size, downsizing its network, and closing its Peru operation. The process will be complicated, and will require complex negotiations with the airline’s numerous partners, but is a necessity for its survival.

The airline filed for protection in New York last month, after a sustained dearth of revenues brought about by the Covid-19 travel restrictions. The International Air Travel Association (IATA) reports that airline passenger traffic fell by almost 40% in March this year, while expert predict that it will take more than half a decade for the sector to recover across the globe.

Avianca undergoing a large restructuring

“The starting point is worse for Latin American airlines,” explained Mauricio França of L.E.K. Consulting, pointing to the facto that Brazil’s major airlines have lost nearly $2 billion in the last half a decade. The rest of Latin America’s aviation market has faced similar fortunes, and Avianca is among several airlines that have struggled financially in recent years.

The most recent revenue shock topped up a turbulent 2019 for the Avianca, when it had already restructured debt and recently developed a turnaround strategy. Measures to cut costs began in March itself, when the airline put more than 20,000 employees on unpaid leave and put off its annual report till June. 

However, the airline owes over $30 million to International Aero Engines, General Electric & CMF International, and an additional $28 million to Rolls Royce. Millions more are owed elsewhere, including to other aviation sector players such as Lufthansa, Boeing and Airbus. Leaving filing for protection as a logical and unavoidable next step.

In discussion with Bloomberg, Avianca’s CEO Anko Van Der Werff said: “We are facing the most challenging crisis in our 100-year history as we navigate the effects of the Covid-19 pandemic. We believe that a reorganization under Chapter 11 is the best path forward to protect the essential air travel and air transport services that we provide across Colombia and other markets throughout Latin America.”

Nevertheless, Avianca remains optimistic that it will stay afloat. Attention is turning to recovery strategies from the Covid-19 crisis, while the gradual easing of restrictions bodes well for the travel sector. In addition, a recent measure passed in Colombia has allowed the government to acquire a stake in airline companies, paving the way for a government bailout at Avianca – a type of support that has previously been unavailable to Latin American airlines.