Bankrupt Avianca Sees Governments as Key in Restructuring

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(Bloomberg) -- Avianca Holdings SA expects the Colombian government to play a key role in its restructuring efforts after widespread travel bans forced it to declare bankruptcy, according to court documents.

Latin America’s second-largest air carrier, which filed for Chapter 11 protection Sunday, said that due to its importance in the Colombian domestic air travel network, the government “may be one of the key stakeholders” as it reorganizes. The governments of El Salvador, Ecuador, and, potentially, Peru, may also play a role, Chief Financial Officer Adrian Neuhauser wrote in a declaration to the court, without elaborating on the type of aid it expects.

Colombia Finance Minister Alberto Carrasquilla said that the government is considering providing Avianca a loan. He had previously suggested an equity stake, but appeared to rule that out in an interview with Blu Radio Monday. The airline, which has said it plans to continue to fly throughout the court-supervised process, has about half of the market share for domestic flights in the country. It operates frequent flights on routes such as Bogota to Medellin, which is the busiest in Latin America, according to OAG Aviation Worldwide.

Avianca, which counts United Airlines Holdings Inc. and Kingsland Holdings as stakeholders, filed for protection from its creditors in the Southern District of New York, listing as much as $10 billion in liabilities and the same amount in assets. The company said it will not make bond payments due Monday.

Bankrupt Avianca Sees Governments as Key in Restructuring

The carrier grounded planes in late March after governments across Latin America sealed borders to curb the spread of the Covid-19 pandemic. Avianca had just emerged from a tumultuous year in which it restructured debt and embarked on a business turnaround plan aimed at restoring profitability by focusing on flights through its Bogota hub.

In his declaration, Neuhauser said the company was on the path to recovery in early 2020, but its operations were crippled by the pandemic. Avianca “has been compelled to file these Chapter 11 cases for one principal reason: The Covid-19 pandemic, which has affected the world’s population and economies in ways that have never been experienced.”

Fleet Reductions

Since March, governments have extended travel bans, reducing flights in the region to a trickle. Flight capacity in South America has fallen by almost 90% since January, according to data compiled by OAG.

The industry is unlikely to recover even after the bans are lifted. Avianca expects demand will be 20% to 30% lower than it was before the pandemic. As a result, the company expects to shed aircraft, it said in court documents.

Due to the costs of maintaining, insuring, leasing the aircraft, Avianca is “likely to seek to reject numerous aircraft leases at the outset of the case,” Neuhauser wrote. The company was operating 143 passenger jets and 13 cargo aircraft as of the end of last year, it said.

The bankruptcy will be felt widely in the rest of the struggling airline industry, with providers of aircraft, jet engines and maintenance services among Avianca’s biggest unsecured creditors. The documents show more than $30 million each is owed to IAE International Aero Engines AG and General Electric & CMF International. Over $28 million of obligations are listed for Rolls Royce Plc.

Lufthansa Group is owed $4.44 million, a unit of Boeing Co. is due $3.66 million and Airbus claims total $2.83 million.

Skipped Payments

Avianca will not pay a $65.6 million bond maturity or make a coupon on bonds due in 2023, Neuhauser said in an online briefing Sunday evening. The payments are due Monday and the company decided to keep as much liquidity as possible during the restructuring, he said.

The company said it requested authority to continue paying wages and honoring employee benefit programs, as well as pay vendors and suppliers. It intends to end operations in Peru, which represents about 5% of its revenue, and make lay offs in the next 10 days.

The company is getting financial advice from Seabury Securities LLC and FTI Consulting, with legal help from Milbank LLP, Smith, Gambrell & Russell, LLP, Gómez-Pinzón Abogados and Urdaneta, Vélez, Pearl & Abdallah Abogados.

The case is Avianca Inc., 20-11132, U.S. Bankruptcy Court for the Southern District of New York

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