Aviation Week editors discuss the twists and turns of ultra-low cost carrier Viva Colombia, which suspended operations this week.

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Rush Transcript

Karen Walker:

Hello, everyone, and thank you for joining us for Window Seat, our Aviation Week Air Transport podcast. I'm Air Transport World and Aviation Week Network Air Transport Editor-in-Chief Karen Walker. Welcome on board. This week we're looking south to news events in Colombia, where ultra low-cost carrier Viva is experiencing some severe turbulence. Last week, Viva's CEO, Felix Antelo, announced his sudden resignation. And then this week, Viva suspended operations. The low-cost carrier sector has been a fast-growing and for the most part, very successful story in many parts of Latin America. So what's happening here with Viva?

To find out, I'm joined by two of my US-based colleagues, ATW and Routes Senior Editor Aaron Karp, and CAPA Senior Analyst America's Lori Ranson. Aaron, Lori, always great to be together with you, so thank you for joining us this week on this topic. Aaron, I'm going to start with you. This is quite a complicated story with quite a bit of history. Could you just start by telling us a little bit about Viva itself, that airline? How did it start? What does it operate? What's its market?

Aaron Karp:

Viva Air was founded in 2009 by William Shaw, who actually now is the CEO of Ultra Air, a Colombian competitor to Viva. At the time, Irelandia, which is the group led by Declan Ryan, who is one of the co-founders of Ryanair, owned 25% of Viva Air. The other carriers other than Ryanair that are in that group are Tiger Airways Australia and Viva Aerobus, which is a Mexican low-cost carrier. In 2016, 75% of the shares became owned by Irelandia, so they are the controlling stakeholder now. And you can see that Viva is part of a wider group of low-cost carriers.

As of when they closed operations, they were operating 25 routes, which was down from their peak 56 routes in their history. They fly eight international routes. They're mostly a domestic operator, but they do have eight international routes. They do fly as far as Argentina and Brazil, and they fly to Miami and Orlando in the US. They have been one of the low-cost carrier in Colombia. Now there's a lot of competition. Colombia is a really big aviation market, and I think as a level setter, Colombia is one of the fastest returning markets after the pandemic. They are well above already 2019 levels, so there's a lot of demand there. But that's sort of the basics of who they are and how they got to this point.

Karen Walker:

Interesting. So yes, this is not just a startup in Colombia. And it's also, as you say, a hot market there. Am I correct it's an all A320F/A320 family fleet?

Aaron Karp:

Yes, they operate 16 A320 aircraft.

Karen Walker:

Excellent. Okay. So Lori, I know you've been tracking the twists and turns of what's been happening here over the last few months. So give us that top line. Why did Antelo step down? Who's running Viva? And why did it suspend operations?

Lori Ranson:

Yeah, it's a long twisted tale, but I'll try and keep it short. So, during the pandemic, in the depth of the pandemic, Viva, like all airlines worldwide, they renegotiated a lot of contracts, from small vendors to large lessors. Got their unit costs down around 10% below pre-crisis levels is what they were saying. And during 2022, it got hit with currency fluctuations of the peso, high oil prices, and just other macroeconomic challenges. In April of last year, Avianca announced that it was going to acquire Viva. They were going to keep their separate brands and business models. The process started thereafter to get approval from Colombia's aviation regulator, Aerocivil. In August of last year, they asked for expedited approval because Viva's financial state was weakening. In November, Aerocivil rejected the deal, citing competition concerns. Viva and Avianca came back to the regulator offering concessions. The one to highlight is we'll give up 105 slots at Bogota International Airport, which is notoriously crowded and over-extended.

In January, Aerocivil said, "Well, we discovered irregularities in our initial review of this deal, so we're going to reopen the deal." Shortly thereafter, JetSmart, which is a South American ULCC group, expressed an interest in buying Viva, as did LATAM Airlines Colombia, which is Colombia's second-largest airline. No formal offers have been submitted, and after that, Viva entered into a voluntary 90-day restructuring that was available under Colombian law. And as it entered restructuring, it said, "We haven't been able to access capital for nine months because we have not been able to get approval for this merger." Fast-forward to a few days ago, maybe three days ago, I guess, now, Viva suspends operations, saying that this drawn out process has led to aircraft being grounded. Viva's lessors even met with the government and said, "We can't wait very much longer for Viva to get on its feet and for you all to approve this deal."

Prior to the shutdown, as you mentioned, Felix Antelo stepped down as CEO, citing health reasons, which could have been caused by stress for the last nine months, and its COO, Francisco Lalinde, took over. So as it stands now, Viva's grounded. They've stopped selling tickets, stopped operations, and there's a lot of uncertainty around Viva's future. I would have to say that it's not looking very promising at this point in time, because lessors can put those assets to use, and just look at the supply chain challenges that are happening worldwide. Lessors are going to want to put those aircraft to places where they know they can get a return, basically. So that's where we stand now.

The government has invited third party comments on this deal, which is sort of a strange kind of twist in and of itself. And it seems like they've said to these third parties, if you think you can offer a better arrangement that preserves competition, we will consider that. This is just kind of based on translations from government documents. So that's sort of where we stand now. It's a very interesting turn of events, and it's hard to say why the government has foot dragged as much as it has.

Karen Walker:

So yeah, as you say, it's lots of different things going on here. Let's just break some of that down a little bit. First of all, I just want to make clear, Avianca is a Colombian airline. The airline that's trying to merge with Viva is also in Colombia, correct? And certainly, though, those Bogota slots, as you say, that's a very constrained airport. So those must be valuable. Yes, they're valuable slots so that's a lot to give up. Did Aerocivil, the authority, when it mentioned irregularities, did it specify that? Do we know anything about that, or did it just say it needed to look more into the deal?

Lori Ranson:

Yes, unfortunately, that's all they said, significant irregularities in the review. So we're left to interpretation on that one.

Karen Walker:

Okay. But as you say, this has dragged on for a long while now. One assumes that if they'd seen something that was of great concern, they could have put a halt to this much earlier. So I'm sort of curious here as to, well, two things. Aaron, does this strike you as an unusually long time? I mean, we know that authorities can be very bureaucratic in Latin America. Can that be more so, or is this an unusual amount of time for someone to be sitting on this when they know the precarious state of particularly with Viva in this case?

Aaron Karp:

Well, Viva certainly thinks it has been a very long time. They've said they've done everything they can, the government's had all the documents, that they don't understand why it's taken so long. Particularly since they've pushed, saying that we're going to be grounded. I mean, Avianca has told the government, they've been telling the government for months that this is going to happen if you don't move. These processes often take a fair amount of time. I do think that there's just wariness to have this merger take place, that the authorities are very concerned about how it will affect the Colombian market.

And I think they see a lot of low-cost competition now, they see a lot of other low-cost carriers in the market. And they may think this is one carrier, it's been shrinking from its height, and that it would be too much of an antitrust problem for them to be involved with Avianca, combined with Avianca. So I think if it was an easy approval, it would've gone through faster, but it seems that Aerocivil thinks that this is much more complicated. But Viva is, I would think if you look at their statements, really beside themselves that it's taken this long. They don't understand it, and that is leading to a real confrontation between Aerocivil and Viva where they're trading accusations in public. And so I can't imagine that's going to expedite the process.

Karen Walker:

Right. Good point. And that makes the obvious question, Lori, at the end of the day, they have, as you say, it looks bad. But they're suspended operations, they've not gone out of operation yet. They've not ceased, if you like, they're just suspending. There is at least a technical difference between those two. Is this a ploy, essentially, to force Aerocivil into expediting their decision?

Lori Ranson:

I don't think so. There've been reports in the Colombian press that Viva's debt was over 800 million. So I don't think this is a ploy at all, I think this is the reality that Viva is facing. And so this is the last thing that they have to do. They have to suspend operations till they can get their reorganization done, whatever that means for them at this point after suspending operations. So yeah, I definitely don't think this is a ploy. I think this is the reality of their financial situation at the moment.

Karen Walker:

And are the other airlines, either in Colombia... As you said, there's a lot of low-cost carriers in the area. Are those other carriers in Colombia or the neighboring countries, have they fiercely opposed this merger? Or I think you did mention that there are some that have expressed interest in acquiring Viva, but nothing concrete yet, is that correct?

Lori Ranson:

Yeah, nothing yet. I know that Ultra Air, the new ELCC upstart in Colombia has expressed some concern about the merger in the past. Basically just saying, the government needs to ensure that competition will remain intact in the market. JetSmart and LATAM have said that they could be the better matches for Viva. But as we said, they haven't submitted any kind of formal offer for the airline. I think if you just take a step back, if they do submit plans to buy Viva, JetSmart could emerge as the front-runner because they don't have operations in Colombia yet. They've been trying to set up a Colombian subsidiary, they haven't gotten approval yet.

So you could have an outsider come in, because if LATAM is successful in acquiring Viva, you still have the second and third-largest airlines in the country combining. So that would obviously make regulators take pause as well, because that's going to be a heavy concentration. If we were to say who has the best shot, I think that JetSmart probably has a good shot. They're owned by Indigo Partners, so they have financial backing. They can come in and buy Viva. But it's also, on the other hand, it's anyone's guess how the government will ultimately react and what the decision will be.

Karen Walker:

Yes. And Indigo Partners that you mentioned there, of course, they own airlines, similar ultra low-cost carriers all around the world, including Wizz Air and Frontier here in the US, et cetera. A very sharply run operation. But you have to say, the longer this goes on and the more information that comes out, it's not looking like a very attractive deal for anybody right now. I mean, this much debt, and as you say, you could be purchasing an airline that sort of doesn't have anything if it's lost the aircraft, et cetera. Aaron, what's the general low-cost carrier market like in this region? I talked earlier about there's a lot happening there and a lot of it has happened fast, but there's successes, yes?

Aaron Karp:

Oh, yeah. I mean, low-cost carriers in the Caribbean and particularly Latin America are sort of the rage right now. You see a lot of them in Mexico. There's a growing number in Colombia which, as I said, is a monster market. And Ultra Air, which was founded by the same founder as Viva is in the market and they're providing competition. So I think one of the things the regulator may look at is that we have a thriving low-cost sector, so we could lose this carrier and we'd still have Avianca, which is a major flag carrier, and we still have all these other low-cost carriers, many of whom have said that this merger with Avianca would be damaging to them and damaging to the overall low-cost sector. So there is a very strong low-cost sector in Latin America, in Mexico and Colombia in particular. That's one of the issues that Viva Air has had, that their competition over their history has dramatically increased.

Karen Walker:

Right. And what's, I think, really helped to fast track that ultra low-cost carrier market in these regions is in many cases they're replacing bus route. There was no affordable air service, in some cases no service, other than some people were traveling long distances on buses. They sort of came into a market that almost didn't exist, made it very affordable and safe to travel, much quicker to travel. Maybe Lori, maybe it's just got a bit too hot. Aaron just sort of said, maybe the authorities were looking and saying, we actually can afford to lose this one rather than damage done to some of the low-cost carriers that are doing okay.

Lori Ranson:

Yeah, it's interesting. I was talking to someone about this situation yesterday, the Colombian situation. And it was suggested to me that yes, Colombia is a massively growing market, but Viva came in especially on trunk routes and lowered the fares. Everyone had to lower fares, and so no one was really making money on the trunk routes. And he also explained, yes, you can add passengers, stimulate the market. You can have incremental passengers, that doesn't mean those passengers are profitable. So I thought that was a very interesting point in terms of just how the market dynamics can unfold. Yes, these carriers are coming in and stimulating travel. People are traveling for the first time. But it does come at a cost, I think.

Karen Walker:

Yeah, if everybody's buying a ticket that's equivalent to a bus ticket, for example, you've really, really got to have your costs under control, first of all. And then if you are up against a lot of people doing the same thing, then you get into a silly price war. So yeah, it may just be that it's got a bit too hot for its own good and things need to settle down and get more stable. Aaron, I know you've been monitoring the Latin American market in general for a long, long while. It's a huge continent with very different markets from country to country, so of course, not all things are the same. But in general, are Latin American governments supportive of their aviation sectors or their airlines and airports?

Aaron Karp:

Well, not generally, especially from the airlines' perspective. For example, during the COVID pandemic, the South American governments, Latin American governments just did not provide the kind of financial support that was provided in Europe, in the United States and in many other places. Interestingly, in Colombia, what they did do is they suspended the value added tax on flight. That has now been reinstated, and airlines in Colombia are worried about that.

Some analysts following the markets say that if that's passed on to consumers, it could tip people back to taking the buses because the fare may get too high for them. So generally in South America, there's very high taxation on airlines, and the airlines are constantly pushing for that to change. And Colombia was praised for dropping their taxes during the pandemic, and there was some hope that the authorities would see that this had helped the market. But now the tax has been reinstated, and that's another concern for a carrier like Viva, and for the Colombian market in general.

Karen Walker:

So with the drama that's been happening at Viva the last few days, bottom line, Lori, what do you think are the next steps? I know it's hard to predict because it's all happening so fast, but what do you think we might see happen next, and potentially, is this the end for Viva?

Lori Ranson:

Unfortunately, I think this might be the end, simply because Aerocivil has opened up these third party comments to come in. So it's not like a decision is going to be made in the short term, from what I can tell. And Viva is still losing money, still has debt, has about, well, pretty much all of its fleet grounded now because it's suspended operations. So I don't think it looks good in terms of Viva being revived. I hope that I'm proven wrong in that regard, but I don't don't see this having a positive outcome for Viva, which is sad because Viva was the first true ultra low-cost carrier to put down roots in South America. So it's kind of, again, I hate to use the word twist of fate, but it's kind of a cruel twist of fate to see this happen.

Karen Walker:

So Aaron, what are your thoughts? And maybe even is this going to cause a bit of a shockwave through the market in general in that region?

Aaron Karp:

Yes. And one thing that we should note here is that Avianca, in addition to acquiring Viva, is involved in trying to create a pan-Latin American airline group with Brazil's GOL. And one of the things you hear Latin American airline CEOs saying is that there's simply too many airlines in Latin America, and that hurts the market a lot. And so I think the bigger carriers would say... I mean, Avianca said, we're acquiring Viva to make them our low-cost subsidiary. So they weren't planning to incorporate Viva into the Avianca brand in terms of fare levels and that sort of thing.

But I do think from Avianca's perspective, they don't like this happening, but their higher priority is the Abra merger, and they don't want to see that jeopardized. So I think they will tread a little carefully because their first priority is creating that pan-Latin American airline. And this was part of that, this was sort of a piece of that, but it is not the primary piece. As Lori said, Viva, in the recent history of Latin America is pretty significant. So I think people will take notice that they have failed and examine why they failed. In that way, they'll have an effect and it may have a side effect on the approval process for the Abra merger.

Karen Walker:

Right. Well, it certainly looks like there'll be plenty for us all to be monitoring and covering over the next few weeks whichever way it all turns. Aaron, I'll be seeing you very soon at Routes Americas, our event in Chicago in mid-March, and I'm sure that that's going to be a big topic of discussion there also.

Aaron Karp:

Yeah, absolutely.

Karen Walker:

Okay. Well, again, Aaron, Lori, thank you so much for joining me today. And also a big thanks to our producer, Michael Johnson. And of course, thank you to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. Until next week, this is Karen Walker disembarking from Window Seat.