Last week, after months of ready, the Colombian Aviation Authority (Aerocivil) lastly accepted the combination of Viva Air and Avianca.
However, this determination didn’t have the anticipated outcome.
After the low-cost airline determined in February to stop operations, and since the approval is topic to a number of circumstances, the one-time important stakeholder needed to rethink the feasibility of this operation.
After Avianca discovered of the Colombian aviation authority’s determination, it stated the following steps are into consideration.
“Given the operational, financial, and technical implications of Aerocivil’s decision, Avianca will review the decision and the impact of the measures proposed by the authority as soon as possible to determine whether they can be complied with,” the airline stated.
Avianca argued that Viva Air now not has the identical capability – route community, plane, personnel – as earlier than the momentary suspension of operations.”
“A factor that must be analyzed in detail to determine the relevance of the conditions established by the Civil Aviation Authority.”
In addition, the regulator’s motion opens the best way for appeals and reconsideration by the affected airways and different events through the course of: Latam, Wingo, Ultra Air, and Aerolíneas Argentinas.
“Until this happens, Avianca does not have the authority to intervene in the operational or financial situation of Viva airline, nor can it resolve the situation of users affected by the low-cost airline, as requested in the resolution,” Avianca’s assertion reads.
TURBULENT SCENARIO
For Juan Fernando Puerta, head of aviation legislation on the Cuatrecasas legislation agency, breaking off the combination of Avianca and Viva Air can be one of many least fascinating eventualities for the market.
“Viva Air would be left without much financial room to resume operations and meet outstanding liabilities.”
“A withdrawal of integration would likely mean that Viva Air’s crisis would worsen,” stated the Colombian lawyer.
Although the circumstances imposed by Aerocivil have made the combination much less enticing, Puerta affirms that they’re attempting to know the actual scenario of Viva Air and permit the combination and, then again, to steadiness this example by avoiding the creation of monopolies on routes and using slots at Bogotá airport.
On the opposite hand, José Cárcamo, a professor at ESAN, assures that the uncertainty about this integration additionally impacts the outdated airline.
“Many say that Avianca will make a lot of money if it merges with Viva, but it also risks its survival. If there is no agreement, there are other interested bidders like Latam.”
“If a competitor buys the company, it will be very strong because Viva had very good operational slots.”
“Avianca is coming out of bankruptcy, and it is in their interest to have this market.”
“The regulation requires them to keep the low-cost model, which is valid and benefits the users and Avianca, or the company that buys Viva Air if the negotiations with Avianca fail.”
THE FACTORS BEHIND THE DOWNTURN OF THE LOW-COST AIRLINES.
Following Viva Air’s suspension of operations final month, one other Colombian low-cost service, Ultra Air, has taken the identical motion.
In a press release launched yesterday, the airline blamed the unfavorable macroeconomic setting.
“The increase in fuel costs and the exchange rate has led to a significant increase in costs for airlines, causing them to operate at a loss in recent months.”
“Airlines have to be efficient in a very competitive and complex environment, such as the current fuel issue and environmental regulations in the future.”
“All of this must be achieved through scale and economies of scale, and that will happen from now on,” stated Eliseo Llamazares, LATAM Aviation and Tourism Lead Partner at KPMG.
The strategy to get there, in accordance with Llamazares, is thru business consolidation.
“Integration is something that has been practiced for many years, but the lack of knowledge on the part of authorities or governments about what the aviation industry is all about has led to a magnifying glass being turned on the integration of purely economic or shareholder-driven companies.”
“Consolidations through integrations or alliances are something natural and necessary, precisely to provide service to passengers so they can fly unimpeded.”
According to the KPMG associate, the profitability of airways with just a few plane is, due to this fact, virtually nil:
“The industry needs economies of scale, it doesn’t make sense for there to be airlines with three, four, or five aircraft, but they start to be efficient when they have 25, 50, or 100 aircraft, and you can reduce costs.”
“When there are tickets like that, the price is very elastic in terms of demand, so airlines can create more demand and generate a lot more traffic,” he says.
In this sense, integration actions, alliances, or mergers would be the pattern within the coming months.
“The economic, political, and social situation in Latin America indicates that the economy will shrink, and small companies go bankrupt when there is a crisis.”
“An alternative to avoid this is for another company to buy them out and give them some money instead of getting nothing in case of bankruptcy.”
“This is the only way to survive, especially amid an inflation crisis, high interest rates, and the conflict between Russia and Ukraine. Mergers will be the way out to avoid bankruptcies and keep the business going,” stated José Cárcamo.