Colombia Does Not Like the Avianca/Viva Merger, But Avianca is Not Giving Up Yet

Avianca has been busy remaking itself over the last few years. That has meant pivoting toward an ultra low cost (ULCC) model while also trying to grow through acquisition. The biggest piece of that plan involved taking over local low-cost operator Viva, but the government is not happy about that. Despite the opposition, Avianca is not giving up.

The deal for Avianca to take over Viva came to light last April when a single ownership was planned to sit over both airlines. Viva is a Colombian-based ULCC that had grand growth plans, but it has had financial issues. Avianca, fresh out of its own trip to the bankruptcy spa, stepped in with its plan.

By August, Avianca said the situation had become dire, and it wanted to move ahead with a full integration, not just a financial umbrella over both airlines. It described Viva’s financial situation as being both “complex” and “delicate.” That’s just a fancy way of saying that Viva was on the brink of doom, so it asked the government to approve an integration quickly under rules regarding an “empresa en crisis,” or for the Spanish-impaired, company in crisis. The government was not onboard.

Earlier this month, the Colombian regulator shot it down. It first said that the “company in crisis” situation did not apply, because Avianca did not prove that Viva’s death was imminent. It agreed that Viva was in real trouble, but not enough trouble. It also said Viva didn’t adequately explore alternatives that wouldn’t hurt the competitive situation, either through a different acquirer or bank loans.

With the Colombians unwilling to consider this a crisis, they fell back on evaluating this on its competitive merits. And they did not like what they saw.

• The two airlines compete today on 59 domestic routes which make up 93.7% of the country’s domestic traffic
• The airlines would have a monopoly on 16 routes (though Avianca doesn’t agree with that methodology)
• Competitive levels would fall back to where they were more than 7 years ago
• This would increase barriers to entry for new competitors

It appears to be largely a domestic issue for Colombia’s Aerocivil, but let’s start with total seat capacity for all markets, because, well, because we can.

Seats Departing Colombia by Airline Group by Month

^{Data via Cirium}

Do you see Avianca? Of course you do. It’s the big red anchor that is the biggest in the market. But do you see Viva? Yep, that’s the one that’s third in total seats, just above the deep blue of LATAM. Combining Viva and Avianca does indeed create significant consolidation of market share. (On a separate note, holy cow that’s huge growth in total seats over time.)

But let’s get back to the domestic market and look at market share since that seems to be the biggest issue.

Total Seat Share By Airline By Month, Domestic Colombia

^{Data via Cirium}

This is a more interesting chart. You do see Avianca continuing to be the leader, but look how its share has been eroded. Viva has grown, LATAM has grown, and you see the introduction of other low cost operators Easyfly and Ultra Air. Meanwhile, Copa and its subsidiaries along with SATENA have lost share.

I put Viva in that striped blue/reddish color to make it easy to see how the two airlines would look combined. And sure enough, you can see how this would give Avianca share around what it had 7 years ago. But Avianca isn’t giving up. It apparently has a five-point plan.

• Divest slots (reportedly 40-60 percent of what Viva holds) at congested Bogotá airport
• Maintain the Viva brand and model
• Limit fares on the three routes it says there will be a monopoly (remember, the government says there are 16 routes but apparently Avianca disagrees)
• Codeshare with SATENA on routes where SATENA is the monopoly operator, giving connectivity to people in those towns
• Retain Viva’s interline agreements that exist today

This is not a small concession. Bogotá slots are hotly-contested, and looking at full year 2022, Avianca had just over half the flights departing the airport. LATAM is next at nearly 19 percent and then there’s Viva at nearly 10 percent. This move would still allow Avianca to grow in Bogotá, but it also opens a not-insignificant number of slots for others.

Maintaining the Viva brand and model seems fairly silly. I guess it’s a jobs program, or at least that’s how it’s worded. But Avianca has moved swiftly toward the Viva-style model, so I don’t really know what value keeping the brand has.

Regarding fare caps, I think what Avianca is doing here is looking at routes that are currently served only by both Avianca and Viva and no other airline. That means fare caps would come to Medellín and Cali to Riohacha along with Cali to Cúcuta. That seems like a pretty minor give. I’m guessing the government is looking at routes that are served either by one or the other today, something that wouldn’t change during a merger but could be an opportunity to extract a pound of flesh.

The SATENA codeshare has a broader impact, though these are all pretty small places. Here’s what I pulled from Cirium as having a SATENA monopoly:

• Bogotá – Aguachica, Inírida, Ipiales, Mitú, Pitalito, Puerto Carreño, San Vicente del Caguán, Saravena, Tame, Tumaco, Villa Garzón
• Cali – Ipiales
• Nuquí – Medellín/Herrera, Quibdó
• Puerto Asís – Florencia, Ipiales, Puerto Leguízamo
• San Andrés – Providencia Island
• Villavicencio – Inírida, Mitú, Puerto Carreño

Presumably the codeshare will only really do anything for flights from Bogotá and Cali. Of course, this would be a huge news for people who live in those towns, though only 3 have more than 100,000 people and just one, Tumaco, tops 200,000. These aren’t big places — which would explain why nobody else flies to them — but maybe the undying love and devotion from people in these towns make this something that would help change Colombia’s mind.

I have no real idea how Colombia’s competitive review process proceeds, so I can’t comment on whether these concessions might do the trick. They do seem meaningful, but we’ll just have to wait and see if it’s enough to sway Aerocivil.