United Airlines Could Acquire Struggling Avianca

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This could spell the end of an interdependent Colombian flag carrier, but the beginning of United’s strong presence in South America. But this is not a simple and straightforward story (as the name of this website would suggest), as this situation is caused by the default of the majority shareholder of Avianca, not the airline itself.

Who is Avianca?

Avianca is Colombia’s biggest airline, controlling 54% of the domestic market and a massive 67% share of the South American international market, according to Seeking Alpha. Surprisingly they also maintain a significantly high load factor per flight, averaging 81% over 130 aircraft (ranging from small Airbus A318s to lumbering Boeing 787-9s).

They operate routes throughout South America, and to North America and Europe. They have been very successful, and seem to be going strength to strength.

What is the current situation?

So, if the airline is so popular, with new aircraft a massive growing passenger base… why is it defaulting on a loan?

It seems that whilst Colombia has now come out a civil war (lasting over 60 years) and has a rapidly booming economy, much of the international financial market has been slow to re-categorize the Colombian government and their assets, such as the airline, as a safe and secure investment. This causes problems and means that the true valuation of the airline cannot be recognized, and proper funding secured.

Thus, Colombian companies have found less orthodox ways to leverage their assets, like putting an airline up for a loan…

Now, this specific United loan situation gets a little more complicated. As it turns out, it’s not the airline that is in trouble, but rather the majority shareholder BRW (who owns 78.1% of the airline). They took out a loan from United Holdings (owner of United) for $456 million USD last year and put up the airline as collateral. Since then, BRW has defaulted on the loan and United could seize the collateral… Avianca.

What happens if Avianca is taken over by United?

It will be very interesting if Avianca is taken over by United.

For one, United will be in a position to rapidly expand the airline to take on other South American competitors such as LATAM (from rival Oneworld). They will be able to move their own excess capacity into the marketplace, and essentially operate fifth freedom routes with impunity, feeding extra passengers to their worldwide network

However, Avianca is not going without a fight. They are attempting to ‘buy out’ BRW and prevent a buy out by United. Another possibility is that United will be a shareholder of the airline, but not control it. Regardless, it is in United’s best interest to wait and see, as any rash movements at this time (such as seizing the airline) might cause additional problems to their future investment.

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                                                                                                                            Reported by Miss Vicky from Cargofee