Bidding for Avianca Heats Up

Sure, the LatAm economy is a disaster right now, but that makes for a great buying opportunity for US airlines with record profits and an opportunity to show up in a country that doesn’t limit foreign investment and that has a struggling flag carrier. We know that Delta Air Lines is working to protect its investment in GOL, taking some 737s off lease from the struggling Brazilian carrier. But Brazil still restricts direct foreign investment in airlines so Delta won’t be buying a controlling stake any time soon. Avianca, on the other hand, is up for grabs, and it has reportedly attracted interest from several parties.

Rumors of activity around Avianca first came to light in June with United Airlines and Delta named as potential suitors. The story idled for a while after that but returned this week, with Panama-based Copa Airlines added to the conversation. Copa already has a significant presence in the Colombian market with its Copa Airlines Colombia operation, formerly known as Aero Republica. United and Delta would use the partnership to shore up access into Central and northern South America, markets where both have grown significantly in recent years but also where RASM has struggled because of such rapid capacity growth and also the faltering economy. American Airlines has a significant lead over its two rivals in LatAm capacity, making such a partnership less useful.

United knows the value a strong partner in the region can bring. In 1998 Continental took a 49% equity stake in Copa, combining marketing efforts across the two carriers and extending route networks both north and south. That stake was sold off over the years, mostly to allow Continental to keep its pension funded as the Copa share price rose but the US economy and airlines fared less well. The investment formally ended in 2008 and Copa finally split from United’s MileagePlus loyalty program in 2015, launching its own ConnectMiles program and completing the breakup, though both are still members of Star Alliance and code-share on certain routes.

The US & Colombia countries established an Open Skies agreement in 2012, allowing unrestricted traffic between the two from flagged airlines. Presumably this would allow either Delta or United to pursue a joint venture operation with Avianca as part of the equity transaction. Delta recently established just such a deal with Aeromexico while American has a JV arrangement with South American behemoth LATAM, giving it a dominating position across Brazil and Chile. And securing the JV will allow coordination of operations, including prices and scheduling. That limits competition but the airlines will argue it is still better for travelers with more efficient connections and more reliable operations. And the airlines will almost certainly win that argument; they rarely lose.

Should Copa seal the deal the market dynamics would also shift essentially consolidating the Colombian market back down to a single carrier, though LCCs like vivaColombia are trying to break through. For either of the US carriers securing a significant stake in Avianca, and the attendant position in the regional market, would open up significant potential growth areas. It would also be a risky move given the uncertainty around the economic future and competition from both Copa Colombia and LCCs. But all three reported bidders are flush with cash today (Copa somewhat less so than the others) and buying in on the cheap is generally smarter, assuming the integration can be managed.

Header image: Avianca A319 – Joao Carlos Medau –  CC BY 2.0