Latin America’s air traffic will see a possible reconfiguration following regional carrier Avianca’s bid to reduce costs and consolidate its position internationally by creating a holding company, Grupo Abra, in partnership with GOL, the largest airline in Brazil. But what does the alliance mean for the two companies’ passengers, and the airlines’ competitors?
The Details of the Deal
The shareholders of Avianca and GOL (GOL) agreed to create a holding structure called Abra Group, which they hope will help them position the companies as leaders in the Latin American airline market. The move is subject to regulatory approvals, but is expected to receive the green light in the second half of the year.
Avianca’s new strategy follows the announcement, less than a month ago, of its purchase of 100% of the shares of Colombian low-cost carrier Viva Air, bringing that company under the umbrella of the group, which will hold the economic rights of Viva’s operations in Colombia and Peru, although it will not control the airline.
The Abra Group also informed, through a press release, that it would make a minority investment in Sky Airline in Chile, which could signal another possible expansion of Avianca through a union with Sky.
How Will Grupo Abra Benefit Air Travelers?
Avianca says the new holding company will benefit customers through a strong loyalty program and a more efficient cost structure that would allow for lower airfares, a route network that would promote direct connectivity between destinations, convenient connections, more destinations, and more frequent flights.
For the time being, the three airlines will maintain their brands, staff and teams independently.
“Our vision is to create an airline group capable of meeting the challenges of the 21st century and improving the flying experience for our customers, employees, partners and communities where we operate,” according to Roberto Kriete, Avianca’s largest shareholder and now chairman of the board of directors of Grupo Abra.
Could Abra Rule the Skies in Latin America?
Avianca, which has been operating continually for more than 102 years, is the market leader in Colombia, Ecuador and Central America. The company operates 130 routes, 3,800 weekly flights and a fleet of 110 Airbus 320 and Boeing 787 Dreamliner aircraft, with connections to some 65 destinations in the Americas and Europe.
Gol Linhas Aéreas is Brazil’s largest airline and a leader in the business and economy segments. A low-cost airline founded in 2001, Gol operates a standardized fleet of 142 Boeing 737 aircraft serving 157 routes, 11 of them international.
For its part, Viva has 23 A320 aircraft, a fleet that would bring the three carriers’ total to 275 aircraft, still short of the 335 aircraft operated by LATAM Airlines, which still leads the Latin American market in terms of seating capacity and with a 15.3% share of the Latin America aviation market, while GOL and Avianca’s joint share is 10.1%, according to Euromonitor.
However, to understand the scope of the new group, it should be noted that Abra would enter the top 20 of the world’s most important airlines, considering that American Airlines has 965 aircraft and Air France, at number 20, has 206.
“This agreement places Abra in a leadership position in the region’s air transport market, being able to serve a population of more than 1 billion people and a GDP of close to $3 trillion, generating capacity and revenue growth opportunities,” said Constantino de Oliveira Junior, who will serve as CEO of Abra Group.
Will Avianca, Viva and Gol Merge?
The deal is so far a transaction among shareholders and does not imply a merger yet. However, Juan Felipe Reyes, an aviation lawyer, told Bloomberg Línea that an operational merger could be expected, as has happened in the past.
“In my opinion this is a multinational airline that will benefit Abra airlines by making routes, frequencies and fleet exchange between airlines of the same group more flexible, and this should translate into being able to offer more routes at a lower cost for the airline. We will have to see how the agreement evolves to determine whether to merge operationally,” he says.
He also points out that once it is known what legal form the alliance will take, it will be possible to know more precisely whether it will be an integration that implies an operational merger in the future or not.
On the other hand, he points out that this move consolidates the existence of large groups, rather than isolated, individual airlines.
“Here the saying that union is strength applies because no airline can survive alone. That is why the trend is to integrate in order to cover more markets, obtain flexibility in operations and more aircraft at a lower cost,” he says.
Benefits and Challenges
Avianca and GOL would function as complementary companies by teaming up in terms of routes in Latin America. However, the two airlines have different business models. GOL is a low-cost regional airline, while Avianca is a hybrid carrier, which is betting on low-cost on short-haul routes, but full-service on long-haul routes.
According to Fitch Ratings, the creation of the group is favorable for GOL in the medium to long term.
“This is likely to favor GOL’s commercial position, as it should provide the opportunity for improved scale and access to a network with little overlap and a broader route system, as well as stronger cargo operations and mileage program,” the rating agency said in a statement.
For Fitch, under the holding model, both airlines will have opportunities for cost savings if they negotiate as a group, although it adds that so far “there is little information on synergies, expected cost reductions and financial strategy under the new group”.
However, René Armas Maes, vice president of Jet Link International LLC, says that the biggest benefits of this holding company will be a larger customer base and greater negotiating power, “which will likely enhance the ability to expand at the right time”.
Armas Maes also believes that the unified aircraft order book “would create natural synergies in terms of greater bargaining power with vendors and suppliers, from catering, fuel, flight planning software and even new technologies”, he says.
And, he adds, the transaction offers the potential to retire an aging fleet more quickly.
As for the biggest challenges, Armas Maes highlights that cultural integration will be “fundamental for the success of the operation”. Also, that the different family fleet (GOL with Boeing 737s and Avianca with A319s and A320s), generates challenges.
“Fleet simplification is unlikely, and therefore total annual net synergies may not be optimized and may not be able to drive substantial cost savings.”
He also highlights that the new holding company may have to give up slots at key airports to obtain regulatory approval. Finally, the group will have to implement cost-efficient strategies to survive in the industry: managing and reducing the weight of products on board, improving route planning, and with fuel consumption strategies and other optimization solutions that include the operational and managerial side so that they can operate with the lowest number of full-time employees per aircraft
