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An Avianca A321 prepares for its next flight at LAX. (Photo: AirlineGeeks | William Derrickson)

Avianca Holdings Files for Chapter 11 Protection, Closes Peru Subsidiary

Avianca Holdings and some of its subsidiaries “voluntarily file[d]” for chapter 11 bankruptcy in the Bankruptcy Court of the Southern District of New York in the U.S., the airline announced on May 10. Avianca Holdings currently oversees a number of subsidiaries, the list of which includes Columbian airlines Avianca and Tampa Cargo, Ecuador-based Aerogal and Taca International Airline Group.

The company stated that “invoking this process was necessary due to the unpredictable impact of the COVID-19 pandemic” and that “Avianca’s regular passenger operations have been grounded since mid-March, which has reduced its consolidated revenues by more 80% and has put significant pressure on its liquidity. ”

“Despite the positive results of our ‘Avianca 2021’ plan, we believe that, given the total suspension of our passenger operations and a gradual recovery, entering this process is a necessary step to face our financial challenges,” pointed out Anko van der Weff, CEO and President of Avianca. He also announced the definitive termination of Avianca Peru and the start of the dissolution and liquidation process of the subsidiary.

The company also announced that the LifeMiles mileage program did not ask to enter chapter 11. This same dichotomy has happened with several companies that have had financial difficulties where, on one hand, an airline’s operation is in serious financial trouble, but on the other, the frequent flyer program associated with it earns increasing profits year after year.

Avianca’s situation has been a matter of national debate during the last week as the company had requested financial assistance from the Colombian government. That debate generated voices in favor of a bailout due to the status of Avianca as a  “flag carrier” and voices against it on the grounds of not rescuing a company based, established and formed by foreign capital. And for many of the voices in favor of a bailout, their attachment to the company was based more on the traditional association of the brand with Colombia and on the extended network of domestic destinations that it serves than on it being a true national strategic asset.

Importantly for Avianca, voluntary filing with the court does not necessarily imply bankruptcy of the company. In this instance, making use of the protection of Article 11 obliges the company to present a detailed reorganization plan with achievable goals, and to negotiate that plan with the creditors.

This plan divides creditors into classes and establishes what the payment conditions will be for each creditor. The duration of this first stage is normally 120 days, and if the term ends without an agreement, the creditors may present their own plan or request that the court proceeds to the liquidation of the company’s assets under Article 7 of the law.

It is true that several companies, including many airlines, have used the chapter 11 process to reorganize their financial obligations. Even Avianca went through a Chapter 11 process in 2003. However, the airline was about to get out of the process in December 2004 with an intelligent legal strategy and a strong investment from Synergy Group, German Efromovich’s holding. The group was displaced last year after seriously compromising the future of the company with an expansion that reached Argentina but receded as quickly as it arrived.

The company’s board of directors hired numerous advisers to help lead it through the process and is also being advised by an independent compensation consultant in establishing retention of best practices for certain employees that are essential to the airline’s reorganization

“We are sure that through this process we can continue executing our  Avianca 2021 plan, optimize our capital structure and our aircraft fleet and — with government support — emerge as a better and more efficient airline that will operate for many years to come,” Van der Weff concluded.

Pablo Diaz
Pablo Diaz
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