The future of Avianca Airlines in Brazil

Author

Gustavo Ribeiro
April 05, 2019 • Reading Time: 6 minutes

Good morning. Brazil has gotten —and will continue to get— poorer. Bolsonaro’s political woes. The future of Avianca Airlines in Brazil.

Brazil has gotten —and will continue to get— poorer

Between 2014 and 2017, 7.3m Brazilians began living with under USD 5.50 per day. Now, 21% of the Brazilian population is below the poverty line, according to the most recent data from the World Bank. in 2014, that rate was at 17.9%. In its report, the bank offered little silver lining, stating that Latin America should grow by only 0.9% this year, thanks to the lackluster economic performance of Mexico, Brazil, and Argentina—and the Venezuelan collapse.

The bank addressed the massive poverty reduction during the 2003-2013 era—which it called “Brazil’s Golden Decade”—when the poverty rate was cut from 41 to 19%. This movement, however, was mainly based on the commodity boom and the favorable business cycle of the beginning of the century, with only 13% of poverty reduction being the result of structural (and therefore lasting) changes.

Another figure, produced by the National Confederation of Commerce, also comes as alarm. Almost two-thirds 

of Brazilian families (62%) are in debt—and 23% are defaulting on these debts. Moreover, almost 10% of families state they have no means to pay back these obligations in the mid- to long-term, meaning that they will continue in default. An alarming figure for a country where the bulk of the GDP depends on consumption.

It’s old politics, after all

Despite his aggressive demeanor, President Jair Bolsonaro is described by allies as someone who knows when to listen and stand down. That was what he did when he decided to host the chairpersons of political 6 parties yesterday. The president tried to bury the hatchet—reportedly admitting to his mistakes in dealing with Congress, and even apologizing for having called one of the leaders a “piece of s—.” He even promised to no longer use the expression “old politics.”

It could be a sign that the president has finally realized that failing to pass the pension reform would be lethal to him. But there remains a long way to go before his administration can enjoy a healthy relationship with Congress. Mr. Bolsonaro said on Twitter that no party discussed getting cabinet positions in exchange for support—but that’s more due to party leaders’ fear of being exposed by the ever-tweeting president.

Big business has grown a bit wary of the administration—after only 3 months. The perception is that the moral crusade being engaged in by a handful of ministries (Education, Human Rights, Foreign Affairs) undermines the efforts of “well-functioning” ones—Economy, Infrastructure, Agriculture. Even among the rural caucus (one of Mr. Bolsonaro’s key support groups), the perception is that congressmen should support the reforms, but not necessarily the government. For big business, the deadline for passing the pension reform is October. Or else they will jump ship.

The future of Avianca Airlines in Brazil

Avianca, Brazil’s 4th-largest carrier, meets with creditors today for a new round of negotiations around its court-supervised reorganization. With debts amounting to BRL 2.8bn and depending on loans from competitors, Avianca could be declared bankrupt by courts unless it is able to make a deal. A vote on the recovery plan was already postponed once last week, and could be again, as some creditors want more time to analyze the proposal.

The deal on the table includes the creation of 7 new companies, each housing different assets of the company, such as planes, airport slots (173 of them), employment contracts with crew, and its frequent flyer program (which has over 6m users). Avianca would keep 15 airport slots and would depend on maintenance services from other carriers for most of its revenue.

The plan to divide Avianca into 7 units for auction came from the Elliott Management Corp., an investment fund which owns 70% of Avianca’s debt—and was proposed without the knowledge of the company’s owners. Latam and Gol, Brazil’s top 2 carriers, are willing to spend BRL 70m each for the assets—but the Brazilian antitrust authority (Cade) is expected to block the deal, as the two companies already own 87% of slots in São Paulo-Congonhas airport and 63% in Rio’s Santos Dumont.

  • Museum. Police investigators have pointed out corner-cutting measures in the air-conditioning system as the probable cause of the massive fire that destroyed Rio’s National Museum, in September 2018. The building, a historical colonial palace, also wasn’t equipped with sprinklers, smoke detectors, or fire doors—which could have minimized the damage. Outside of the building, the nearby fire hydrants weren’t working. The museum burned for 6 hours and was completely destroyed. 

  • Temer.A federal court accepted money laundering charges against former President Michel Temer—the 4th criminal case against him. He is accused of using BRL 1.6m in bribery money to pay for home improvement projects in a house owned by his daughter (who was also indicted). Mr. Temer is at the center of 10 different inquiries—all involving corruption.

  • Twitter.Justice Minister Sérgio Moro has decided to join Twitter as a tool to discuss his anti-crime bill “in a more modern way.” Mr. Moro wants to use the micro-blogging platform, which allows posts of up to 280 characters, to discuss the complex project, which involves increasing police repression and social programs for “vulnerable” areas.

  • Ports.The Brazilian government will auction the rights to administer 6 port terminals in the northern state of Pará, and is expected to raise BRL 430m in the process. All terminals are used for moving and storing fuels. In March, the government raised BRL 220m by auctioning 3 terminals in Paraíba (Northeast) and Espírito Santo (Southeast).

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