Avianca, SKY Merge, Creating Large South American Low-Cost Airline

Avianca — the Colombian airline which in May 2020 requested to file for bankruptcy in the U.S. for the second time in 20 years — announced today a new business move that will allow it to consolidate its operation in the domestic and international market.

According to the Diario Financiero de Chile, SKY Airline CEO Holger Paulmann said yes to the merger with the Colombian carrier, with the aim of becoming the largest low-cost airline in Latin America. This comes just a few months after Avianca obtained the approval of the Bankruptcy Court of New York for the letters of commitment necessary to exit the bankruptcy process in July 2021.

The negotiations for this operation began last January, and the deal was closed 15 days ago. Paulmann will serve as a director of the new Avianca at the regional level.

It is expected that in late 2021 or early 2022, the merger procedures will begin to overcome legal, regulatory and free competition barriers. As of now, it is being reported that both airlines will retain their brands.

This plan began to develop years ago. Months before quarantines were put in place due to the Covid-19 pandemic, SKY Airline invested approximately $500 million in new Airbus A320NEO aircraft to fly longer distances, nonstop with less fuel use.

When air traffic was paralyzed in early 2020, the airline still had this debt, so Paulmann sought out opportunities to sell part of the company to seek financing, but without losing control of the firm. Paulmann offered 40% of the company, either through a bond or to a direct investor.

Several companies and investors approached SKY, among them Brazilian carrier GOL, the private equity fund Indigo Partners — which controls JetSmart — and the businessman Nicolás Ibáñez.

Those three negotiation attempts were unsuccessful until Elliot Management and Caoba, two global investment funds that specialize in investing in indebted companies, arrived. Elliot, which is an Avianca creditor, and Caoba control Avianca.

While Elliot and Caoba were negotiating with Avianca during the Chapter 11 process, they approached SKY Airline because they liked the offer to find a partner that would inject money to deal with the Covid-19 crisis and stay to invest in the long term and thus be able to expand their operations.

And it turned out. Elliot Management and Caoba have everything ready to take 40% of the Chilean firm in exchange for an injection of between $60 million and $70 million, which should also take place during October.

And once with the doors open at both airlines that require resources, the funds asked Paulmann why they should not work to merge Avianca with SKY, which precipitated the deal announced this week.

SKY will become a subsidiary of Avianca, and Paulmann will be a shareholder of the parent. In addition, the agreement dictates that he will have at least one ensured seat on the board of directors and that the SKY administration will maintain the day-to-day operations of the airline.

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Juan Pedro Sanchez Zamudio

The three things Juan Pedro loves most about aviation are aircraft, airports, and traveling thousands of miles in just a few hours. What he enjoys the most about aviation is that it is easier and cheaper to travel around the world and this gives you the opportunity to visit places you thought were too far away. He has traveled to different destinations in North, Central, South America and Asia. Born, raised and still living in Perú, Juan is a lawyer, soccer lover, foodie, passionate traveler, dog lover, millennial and curious by nature.

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