As interesting as the US airline market is these days, it’s hard to beat what’s going on in South America. There seems to be nonstop action, and Avianca is leading the way by doing all sorts of deals. Last week it was an acquisition of domestic rival Viva and now it’s a tie-up with Brazilian airline Gol. There may be more on the horizon.
Avianca has been quite the confused airline over the years… and it has had a lot of years to get confused since it’s one of the oldest airlines in the world at over 100 years old. It has always been a Colombian-based company, acting as the country’s flag carrier since 1919, albeit then named SCADTA. Colombia is a strong market, but the high altitude and constrained airport in Bogotá means the capital has never lived up to its hub potential.
After a stint in bankruptcy, the airline was bought out by Germán Efromovich’s Synergy Group in 2004, a company that already owned OceanAir in Brazil and had big plans, but it would take about 5 years before things really shifted.
In 2009, Synergy had purchased Aerogal out of Ecuador, but that was nothing compared to the blockbuster 2010 merger with Grupo TACA out of El Salvador, the airline that blanketed Central America and was one of the more successful airlines flying in Latin America.
Synergy then went through an effort to standardize under the Avianca brand, including with Aerogal and OceanAir as Avianca Ecuador and Avianca Brasil respectively, though the later remained a separate company and simply used the name. In 2013, the TACA name was retired, and then just a couple years later, Synergy bought a small Argentinian airline called Macair Jet. This company, like Avianca Brasil, remained independent, but it used the Avianca Argentina name.
This whole house of cards came tumbling down over the last few years. Both Avianca Brasil and Avianca Argentina failed. Synergy lost control of Avianca with former Grupo TACA boss Roberto Kriete taking over. The airline shut down its Peruvian subsidiary and decided to focus on Colombia, Central America, and Ecuador only.
The airline went bankrupt again and came out ready to remake itself with a lower-cost, lower-fare version of itself, especially on the hotly-contested short-haul markets. It cleaned up its fleet, densified the product, and shifted to a new CEO for the second time in a couple years.
From this new baseline, Avianca started to lay down its plans. First up was a financial transaction with Sky Airline in Chile, but I’ll get to that later. The first big move was just a couple weeks ago when it effectively acquired its large and growing domestic rival, Viva. This wasn’t a typical acquisition in that the airline said it would keep the two brands and companies separate to “comply with regulations of Colombia and other countries.”
Considering Avianca’s downmarket move in short-haul markets, this seemed like a natural effort to bring these two together in order to strengthen the position against LATAM in both Colombia and Peru where Viva had expanded in recent years. I still imagine that a full merger will some day happen if the authorities allow it. But for now, they’ll remain separate.
Last week, the second shoe dropped with Avianca and Gol coming together under common ownership in a new company called Abra Group. Again, the airlines will remain separate, but ownership will be consolidated. Unlike the other merger which gives Avianca depth, this is about breadth. Let’s look at the numbers.
Departing Seat Share by Airline by Country – July 2022
Above are the seven largest country markets in South America by number of seats. In Colombia, Avianca will now have an even more commanding position while in Peru it will still remain a minor player but one that is at least marginally stronger. In Brazil, Avianca adds little value on its own, but with Gol in the market it becomes an instant player.
These tie-ups now give Avianca/Viva/Gol an important position in 3 of the top 7 markets. Visually it looks like this vs LATAM from a South America-only network perspective:
As you can see, the coverage vs LATAM in Brazil and in the northwest of the continent is solid. It’s further down along the western coast that shows weakness, but just wait… there’s likely more coming.
Last year, there was a press release announcing that Sky Airline out of Chile would become a subsidiary of Avianca. This proved to be premature, to say the least, but the Abra press release notes more than once that the deal includes “convertible debt representing a minority interest investment in Chile’s Sky Airline.”
What happens if Sky is brought into the fold?
Well look at that. Combined with Sky, Avianca would be a clear number two in Chile with nearly 20 percent of the market, and the same in Peru with about 15 percent. This gives Avianca a meaningful presence in the top 5 South American markets where there’s actually an ability to have a meaningful presence. (I exclude Argentina and Bolivia because protectionist policies in each country effectively keep any external airlines from becoming competitive.)
A look at the July 2022 schedule shows that bringing all these airlines together would create something slightly larger than LATAM with 7.9 million seats on just over 45,000 departures compared to 7.7 million seats on just shy of 42,500 departures at LATAM. This, of course, might not stay that way. There would be rationalization of capacity and all that, but it competes a meaningful, viable second airline in South America.
What this means for partners is a whole different question since Avianca is tied to United while Gol is with American. But that is something that can be addressed in the future. For now, this is about consolidating in a market where there’s long been just one major player.
10 comments on “Avianca Adds Breadth to Its Recent Move for Depth with Gol Deal”
An entire continent with over 400 million people to be dominated by just 2 airline holding companies…. that doesn’t sound like a good idea from a competition perspective – I see high fares in the near future, followed by some entrepreneurs deciding to set up new airlines
Azul hasn’t made any moves outside of Brazil and if they do, that would make 3 Pan-Latin American forces. One for each global alliance but major re-shuffling would need to occur. Gonna get interesting.
Great use of graphics to illustrate your thesis, Mr. Snyder. Someway, somehow, Delta will use these latest developments to squander a few billion more. I have never understood why they do that instead of investing in their own people.
Somewhat predictably, JetBlue is now taking their case directly to Spirit’s shareholders in a hostile takeover attempt. Mr. Franke might be working the phones today with Spirit’s institutional investors and larger shareholders. Many industry eyes watching.
B6 is definitely offering a significant premium for Spirit compared to what Frontier is offering… Should be interesting to see what rumors come out about how the major Spirit shareholders (which include Fidelity, Vanguard, and other mutual fund companies) feel about Frontier vs JetBlue.
At the very least, I’d argue that Spirit’s management has an obligation to its shareholders to engage JetBlue enough (even half-heartedly) to try to get Frontier to sweeten its offer, but who knows what kind of backroom deals have already been reached.
I’m sure the lawyers, execs, and news media will earn a good chunk of change in the short term from this whole saga, even if few of the companies’ employees or shareholders do.
Cranky,
Does any South American government have equity stakes in any of these airline groups?
Angry Bob – I don’t believe so, though it’s possible that one of them has a minority stake somewhere.
It is very possible that Avianca could maintain separate alliance relationships by brand since they don’t appear to be going for a single brand strategy – at least right now which would be good for American and United. Delta clearly has its position in the region cemented with Latam and Aeromexico and no amount of money from either AA or UA will secure a partner if most of the continent does, in fact, coalesce around 2 airline groups. There is no other equivalent to AM in the Mexican market. Mexico and Brazil form the bookends of Latin America as the two largest economies.
The real implication of these moves is that Latin America will increasingly be seen as one market even though there are still significant cultural differences between Mexico and Spanish speaking South America as well as between Brazil and just about every other country.
It is also worth noting that, in order to form two airline groups, the Avianca/Gol group is having to incorporate very different airline strategies while AM and LA are both global carriers with an LCC bent in their domestic markets. There is value in forming some of these partnerships but I’m not sure how customer friendly they will be with airlines that have such vastly different strategies.
AM is how DL covers a network hole that AA/DFW and UA/IAH don’t have. Having both MIA and DFW hubs, AA may not care too much about local partners down there. I suspect it will result in Star Alliance growth as long as Copa and Avianca can co-exist, which seems reasonable as Copa focuses on connecting North to South America while Avianca/Grupo Abra is mostly within South America.
With this development, I cannot see CM and AV co-existing in Star. UA cannot offer much to AV while AA is wide open with LA out of the way. It does not take much to realize that AA/MIA and IB/MAD is the big price for any Latin American carrier. If AV/G3 decide to partner with AA, then DL/LA can go pound sand.
Copa has always been very competitive with Avianca. It will be interesting to see how they react to this.