The Avianca/Viva Saga is Even Stranger Than I Imagined, and Trouble is Brewing

I thought I was done writing about Avianca and Viva until I started learning more about just how tangled and strange this web truly is. We have intrigue, we have government investigations, and we have a whole lot of blown money. It all starts with something I didn’t realize… Avianca actually already owns Viva. Let’s go from there.

On April 9, 2022, Avianca announced it would acquire Viva, and one of Viva’s founders owners Declan Ryan would join the Avianca board. This transaction was designed in a two-step fashion to avoid any government scrutiny for the first step when the airlines themselves wouldn’t actually cooperate at all.

Instead of merging, Avianca would form a holding company that would own both airlines. It would then set up an independent third party that would control the voting interests in Viva. This way, Avianca would have no effective control over Viva’s decisions. In the original press release, this graphic was included to explain the plan, presumably because it was so complex that graphics were deemed necessary.

The idea, I assume, was that Viva was in trouble financially so this would add some much needed cash and stabilize the airline in the near-term while Avianca went through the whole government review process to complete an actual merger down the line. If Viva failed and Avianca hadn’t bought the airline, then Avianca wouldn’t have the ability to control all those assets it coveted (read: Bogotá slots).

In April, that acquistion was completed. Avianca formed Investment Vehicle 1 Limited (IV1L) to own the parents of both Avianca and Viva, and it added another layer by creating two trusts to own both Viva Colombia and Viva Peru which are separate entities under the same parent. Though this wasn’t done until April, the underlying structure was already in progress for months.

Back in September 2021, Southcastle Limited was formed in the United Kingdom. Whether it was originally created for this purpose or if it was later adapted to fit it, I don’t know (though I assume it was created for this reason). Either way, Southcastle became the so-called independent third party that would control the voting rights for Viva’s operation.

Southcastle had three directors. The first two started in December 2021: José Luis Caballero and Howard Millar. Caballero was an alternate director for Avianca itself until 1 month earlier when he left. Millar was an active director at Viva until the acquisition was complete, so he was doing double duty. The third director, Enrique Antonio Luna, was another alternate director of Avianca who also left that company in November 2021. If this doesn’t sound entirely independent to you, well, you are not alone.

In August, Avianca submitted its request to the government to allow the two airlines to merge. At the same time, Avianca formed another new company called West Castle Limited out of the Cayman Islands, which is of course where you form a company when you’re looking to do something completely above board. West Castle would control the voting rights for the Viva Latinoamerica parent company until the merger was approved. But West Castle has the same exact directors as Southcastle, so again, there’s that pesky potential conflict of interest.

Confused yet? Yeah, so let’s try this graphic I put together primarily from this La Republica article which I think is mostly right.

At this point, Avianca owned Viva, but both Southcastle and West Castle were supposedly running the show over there with total control of voting rights. Those were, of course, populated by that majority of directors who had come from Avianca which raises a red flag. To make things worse, it appears that there was some sort of agreement where Avianca would protect the directors from any sort of economic damage, creating more reason for them to do as Avianca said.

This greatly concerned Colombia’s competition authority, the Superintendencia de Industria y Comercio (SIC), to the point that it announced an investigation in December of last year. Both Luna and Caballero stepped down after the investigation was announced, but that didn’t assuage concerns that Avianca was really running the show without any sort of approval. In reality, that feels more like an admission of guilt to have them walk away as soon as the SIC got involved. Like, “oops, we got caught.”

We all know what happened after that. The merger attempt was slow-going and the government kept dragging its feet, requiring additional changes for it to be completed. By the end of February, Viva had burned through all its cash, and flights were suspended. Eventually, after much back-and-forth, the Colombian government approved the merger with onerous conditions. Avianca balked and decided to walk away from the merger, writing off its entire investment.

This is mind-boggling to me. Avianca owned Viva fully at this point. It had poured in about $200 million according to Avianca CEO Adrian Neuhauser, but the airline was expected to keep losing $50 to $100 million per year going forward. If the goal was to just buy Viva and kill it, Avianca could have easily done that through the April acquisition. Then it could have just starved the airline of capital and made it shut down without any of these merger shenanigans.

Instead, Avianca tried to fight for a merger, which suggests it actually saw value in that idea… but I can’t imagine what value that would be. If the airline was structurally going to lose $50 to $100 million a year, I can’t fathom any kind of reorganization that would allow it to become profitable. Certainly the conditions that the goverment put on the merger made it completely untenable to actually go through with it, but I’m not sure what Avianca expected would happen.

It was highly unlikely that this would sail through without some restrictive conditions to address competitive concerns. Some may point out that there was a regime change in Colombia last year that could have impacted what would and wouldn’t have been allowed, but that result was known in June before the merger was announced.

It’s fair to assume that what Avianca really cared about were Bogotá slots, but with Viva gone, those slots now go back to the pool to be distributed out. This article suggests that the slots will be divided up proportionally, and maybe that’s what Avianca’s goal was the entire time, but I’m not completely sure about this process. I tried to reach out to Avianca for comment on all of this, but I did not receive a response.

So what does Avianca have to show for this whole farce? Nothing, really. The best it can say is that it prevented another airline from buying the nearly-dead carcass of Viva, but with those slots in Bogotá being redistributed anyway, is that really a victory?