World's second oldest airline, Avianca filed for bankruptcy due to COVID-19

ST Staff
Monday, 11 May 2020

The bankruptcy will be widely felt among Avianca's biggest unsecured creditors in the rest of the struggling airline industry, with aircraft, jet engine and maintenance services providers.

 

Avianca Holdings SA, Latin America's second-largest airline, filed for Chapter 11 bankruptcy in New York on Sunday after it failed to meet a bond payment deadline. 

According to court papers, Avianca, which counts United Airlines Holdings Inc. and Kingsland Holdings as stakeholders, filed in the Southern District of New York for protection from its creditors. It listed liabilities of as much as US$10 billion and assets of the same amount. The company said it would not make due Monday bond payments.

Late March, the carrier grounded planes after governments across Latin America sealed borders to curb the COVID-19 pandemic's spread. 

Avianca had just emerged from a fractious year of debt restructuring and embarking on a business turnaround plan to restore profitability by focusing on flights through its hub in Bogota. In a statement on Sunday, it cited the impact of the pandemic, adding that it intends to continue flying during the reorganisation.

"Avianca is facing the most challenging crisis in our 100-year history as we navigate the effects of the Covid-19 pandemic," said Anko Van Der Werff, Chief Executive Officer, in a news release. 

The company deferred lessor payments in late March, cancelled planned investments and offered unpaid leave to cut costs to most of its 21,000 employees. The company also postponed filing its annual report until June. It said it would include a warning that there is substantial doubt as to the ability of Avianca to remain in business.

The company has laid out a clearer path for its creditors by filing for protection in New York, said Roger Horn, a senior strategist for emerging markets at SMBC Nikko Securities America in New York.

In the early 2000s, Avianca was already going through bankruptcy, from which a Bolivian-born oil businessman, German Efromovich, rescued her.

In a boardroom coup led by United Airlines Holdings Inc (UAL.O), Efromovich grew aggressively but also saddled the carrier with significant debt until he was ousted from the airline last year. He still holds a majority stake in the carrier.

What lead-up to bankruptcy?

Before the crisis this year, the management that took over after ousting Efromovich was already focused on a cost-cutting reorganisation dubbed "Avianca 2021."

Warnings abounded over its fragile finances. Roberto Kriete, Avianca's board president, said last year in a meeting with employees that the airline was "broken." Avianca's accounting firm, KPMG, said last month that it had "substantial doubts" about the carrier's ability to exist a year from now.

Avianca faced a US$ 65 million bond payment due on Sunday that analysts didn't think the airline could meet. So, Chief Financial Officer Adrian Neuhauser said in an online briefing on Sunday evening that Avianca will not pay a $65.6 million bond maturity or make a coupon on bonds due in 2023. The payments are due on Monday and during the restructuring, he said, the company decided to keep as much liquidity as possible.

Avianca will also close its operations in Peru, which accounts for 5 per cent of the airline's revenue, and will lay off hundreds of employees within the next ten days.

In the statement, the company asked for authority to continue paying salaries and honouring employee benefit programs, as well as pay vendors and suppliers.

Avianca stated that it remains to provide financial support during the reorganisation in discussions with government officials in Colombia and other countries. Neuhauser said those talks involving debtor-in-possession financing, can often last for months.

Avianca has no date to resume operations, as its main hubs-Colombia, El Salvador and Peru-have shut down all air traffic to fight the coronavirus. After selling plane tickets late May, the carrier faced backlash only to have to cancel them when Colombia extended its lockdown on the coronavirus.

The bankruptcy will be widely felt among Avianca's biggest unsecured creditors in the rest of the struggling airline industry, with aircraft, jet engine and maintenance services providers. The documents show that IAE International Aero Engines AG and General Electric & CMF International are owed more than US$ 30million each. Rolls Royce Plc is listed on over $28 million in bonds.

Colombia's Avianca is the third of the Efromovich airlines in recent years to go through bankruptcy or out of business. Airlines Avianca Brasil and Avianca Argentina ceased to exist in their markets last year due to the economic problems.

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