United Bets On TACA As Avianca Flounders

There has been quite the mess unfolding down in Latin America. South America’s second largest airline has been falling apart, and United is stuck right in the middle. To fix this mess, United is going old school; it wants to put the airline in the hands of TACA’s management team. TACA? Didn’t that name disappear several years ago? Indeed it did.

LATAM is the undisputed king of Latin America, and if its joint venture with American eventually goes through (in some form or another), the two will be the leading force by far in the region. That combination has left other US airlines trying to cobble together relationships to bolster Latin American operations.

Delta’s response was to buy stakes in Aeromexico and Brazil’s Gol. It also sits and hopes that someday Aerolineas Argentinas will become capable of being a functioning partner. (Spoiler alert: it won’t.)

United bought a stake in Azul to give it a presence in Brazil, but it has focused on building relationships further north for its primary partnerships. The airline has put its efforts into a proposed joint venture with Panama’s Copa and Colombia’s Avianca. Copa continues to be a well-run airline with an Icelandair-like strategy. It skillfully uses its geography to send 737s throughout the Americas from its hub in Panama City. But Avianca, well, Avianca is a mess.

Avianca in name is one of the oldest airlines in the world. It’s approaching its 100 birthday later this year, and it continues to serve as Colombia’s most important airline. Though that may be the case, that doesn’t mean it’s always done well.

Around the turn of the millennium, Avianca cuddled up with its main rival in Colombia and created Alianza Summa to try to save the company. It did not go well. By 2004, Avianca was bankrupt and on the verge of disappearing. German Efromovich stepped in through his company Synergy Group and brought the airline out of bankruptcy, saving it and forming plans for massive growth.

The pinnacle of this strategy was reached in 2009 when Avianca and TACA agreed to merge. TACA was the brand name over a number of Central American and Peruvian airlines. The name went away in 2013 when the Avianca name prevailed.

Through owner Roberto Kriete and a savvy management team, TACA had become one of the darlings of Latin America. It was a very successful company that was only half the size of Avianca, so Avianca had the upper hand in the merger. Efromovich held 51.5 percent of the combined airline, so he had a controlling share. Kriete remained a large and vocal shareholder and board member, and there were numerous spats between the two sides — some spilling into the legal system — over the years.

In the meantime, Efromovich continued to build his empire under the Avianca name. He turned Ocean Air into Avianca Brasil and he started Avianca Argentina. The former is effectively gone, though there has been sparring over who will pick up the remains. The latter now only flies turboprops within Argentina. Neither are a part of the larger Avianca that was set to enter into this joint venture with United.

When the idea of a joint venture came long, Avianca smelled opportunity. The airline needed money, so United offered to loan Avianca’s parent (Synergy) $456 million as part of the deal. That seemed like a good idea at the time, but after a series of events, it appears to have been Efromovich’s undoing.

That loan was guaranteed by shares in Avianca, and Avianca wasn’t doing well. A mere six months after the loan was announced, Avianca defaulted and United could have taken control of the airline from Efromovich. The only problem? Well, United couldn’t just take control of another airline without upsetting labor agreements. Even without that, it’s unlikely United would even want to control the airline outright. It would rather exert influence and let a mostly independent management team create a strong partner.

So what did United do? It did the one thing Efromovich must have hated more than anything. United gave control to Roberto Kriete’s company Kingsland Holdings. Efromovich has been booted off the board, and Kriete has been installed as chairman. This is a rather strange situation since Efromovich is still an owner of the company. He’s just lost his controlling power.

Now, it’s up to Kriete and the Avianca team to right this ship. United has indicated that it will put more money into the airline as it works to dig itself out of a hole. This won’t be a simple task since the airline’s balance sheet is very heavy on debt. But the move to create the joint venture continues, and now Kriete will try to guide the ship to calmer waters.