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Avianca: World-Class Quality

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Avianca confirms that Latin America has the talent and resources to provide world class quality and services.

BY WALTER T. MOLANO

Five years ago, Colombia’s national air carrier, Avianca, was on the brink. Labor woes, aging equipment and security concerns made it one of the worst airlines in Latin America. Soaring fuel prices and a depreciating currency only made matters worse. Avianca filed for bankruptcy protection in 2003, and it seemed destined for the boneyard—along with other storied carriers such as Aerolineas Argentinas and Varig. The Santo Domingo family, which were one of the controlling shareholders, lost interest in the company. They were more concerned with their beverage, telecommunications and financial operations which were throwing off plenty of cash.

U.S. INTEREST

Sensing blood in the water, U.S. airlines began circling the dying company. The second oldest airline in the world, after KLM, Avianca’s landing slots and routes were valuable assets. Continental Airlines, along with its Panamanian partner Copa Airlines, expressed an interest in acquiring assets. Given that no one else seemed interested in Avianca, the bidding was kept low and vague.

However, the situation took a sudden turn in November 2004, when a Brazilian entrepreneur suddenly placed a firm bid for the company, and swept it away. Today, Avianca is one of the best airlines in the region, and it could help transform Bogota into a major business hub for Latin America.

Germán Efromovich was born in Bolivia, the son of Polish immigrants, and was raised in Arica, Chile. Upon his arrival in Brazil, he sold encyclopedias and eventually began doing exploration and drilling work for Petrobras. In 1998, Efromovich established OceanAir, an air taxi operator in Rio de Janeiro that offered transfer services for the oil companies that were drilling in the Campos Oil Field. OceanAir began scheduled passenger services between Rio de Janiero and Sao Paulo in 2002, and it eventually expanded flights to other cities in the state of Rio de Janiero, such as Macae and Campos.

BIG LEAGUES

In 2004, Efromovich jumped into the aviation big leagues by grabbing Avianca away from Continental/Copa. In addition to offering $64 million for the company, he assumed all of its liabilities and promised to modernize the fleet. He quickly delivered on his promises by investing more than $2.5 billion in new airplanes and equipment. In addition to scores of brand new Airbus 330s and 320s, decked out with the latest technology and creature comforts, Efromovich ordered a fresh batch of the Boeing Dreamliners.

His efforts to turn around the national airline, as well as large investments into Colombia’s eastern oil fields, earned him Colombian citizenship, thus converting him into a truly transcontinental business leader. Last month, Avianca announced its decision to merge with Taca, the Salvadorian airline, transforming the group into the second largest carrier in the region. The new combined Avianca has more than 150 airplanes and its quality ranking is second after LAN Chile.

SURGE IN MORAL

Efromovich’s role in turning around Avianca, along with heavy investments into personnel and equipment, allowed moral and service to surge. Today, passengers are flocking back to the airline. Revenues are climbing, and the new combined group is expected to generate more than $3 billion next year. The restored confidence in Avianca is allowing it to tap into the domestic capital markets, raising 500 billion pesos only three months ago. More importantly, Avianca is transforming Bogota into a regional hub. Given its high quality service and competitive prices, many businesspeople are using Avianca as a way to escape the terror of U.S. airlines and the immigration/connection nightmares of Miami.

Passenger traffic in Bogota is reaching levels not expected until half way through the next decade, and the government is ditching its renovation plans and moving into a wholesale expansion of the airport. Many businesses are taking a new look at Bogota as a possible for hub for regional activities. Lima and Panama City benefitted enormously when their airports became major regional hubs. However, Bogota offers a more centralized location, cheaper skilled labor and better access to Brazil.

HOME-GROWN TRANSFORMATION

The amazing thing about the transformation of Avianca was that it was all home-grown. The revitalization of the company was not due to the injection of fresh capital and modern management from outside the region. On the contrary, the international airlines were only interested in stripping the carcass bare.

The case of Avianca confirms that Latin America has the talent and resources to provide world class quality and services. The case of Avianca also shows the role that private entrepreneurs can have on the real economy, without interference from the state. Avianca may not have any bonds in the international marketplace, but it is a story that will have a major impact across the region.

Walter Molano is head of research at BCP Securities.

 

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