Consolidation reaches Latin America

Avianca's crusade to create a leading Latin American airline group took one gigantic step forward in October after it agreed to establish a new parent company with Grupo TACA which will include more than 13 airlines from 10 countries.

Combined Avianca and TACA will serve 79 Latin American destinations, more than any other carrier in the region. With over $3 billion in annual revenue, Avianca-TACA will be the fourth largest airline group in Latin America behind LAN, TAM and Gol.

But TACA chief executive Roberto Kriete stresses the merger is about creating new revenue opportunities and reducing costs rather than stealing market share from other Latin American carriers. "Our idea is not to pick a fight with Copa, LAN or anyone," says Kriete, who will bechairman of the new holding company.

German Efromovich, whose first airline venture dates back to 2002 with Brazil's OceanAir and who acquired much larger Avianca at the end of 2004, has always talked about creating a powerful pan-Latin America airline group. He says the idea to merge with Grupo TACA was discussed seriously for the first time during a chat with Kriete at a Wings Club dinner in New York last year. "I saw Roberto and we started talking. It's like dating someone - you end up in bed," Efromovich says, adding the two carriers had "chemistry from the start".

Kriete says the merger made sense as the TACA and Avianca networks overlap on only two routes;Bogota to San Salvador and Lima. He says the merger will allow bothto grow by offering new city pairs and better connections on existing routes. "It's about upside. It's not about eliminating capacity and increasing fares," Kriete says.

Avianca, which is owned by Efromovich's Synergy Group, will end up with 67% of the new holding company and Grupo TACA Holdings (GTH) will own the remaining third. But Kriete says Avianca will not have a controlling stake and conceptually it is a "merger of equals". Efromovich adds:"In this marriage there is no controlling stake."

Avianca chief executive Fabio Villegas says while the airline will have two-thirds of the voting shares there is an agreement with GTH owner Kingsland Holding that gives equal rights to both owners on strategic issues. He says the deal also includes Avianca handing $10 million in cash and some notes to Kingsland's shareholders. But Villegas, who will be chief executive of the new Avianca-TACA parent company, adds the deal does not include any increases in working capital.

Profitable carriers

Both carriers are profitable despite the downturn and are not in need of a capital infusion. Avianca expects a $100-150 million profit this year on about $2 billion in revenues. TACA projects a profit of about $50 million on $1 billion in revenues.

While Avianca's revenues have continued to grow this year, Kriete says TACA has seen a 10% drop but adds its profit margin, excluding the impact of fuel hedges, has remained at about 5%. "Our revenues are down but our costs are down," he says. "We've become more efficient."

Kriete predicts the merger will generate a further 2-3% costreduction as they plan to "wring" common suppliers through the renegotiation of contracts.

The new company will include Tampa, a Colombian cargo carrier which Avianca purchased last year, plus the three mainline and five regional carriers that now make up the TACA consortium. Villegas says Avianca also plans to exercise an option to acquire OceanAir and Ecuador's AeroGal, resulting in both carriers becoming owned by the new company.Synergy already owns all of OceanAirand plans to complete the purchase of an 80% stake in AeroGal. VIP, a smaller Ecuadorean carrier which Synergy already owns, is being combined with AeroGal. Efromovich says he also just acquired a 50% stake in Variglog but the Brazilian cargo carrier will not be part of the merger.

Efromovich says he is "always pursuing opportunities" and is now looking at possibly launching a leisure airline to serveColombia's growing tourist points. But its main business centre, Bogota, will continue to be Avianca's hub while TACA will operate hubs in San Salvador, Lima and San Jose in Costa Rica.

Confident on approvals

The proposed merger awaits approval by several authorities in Latin America and the US. But Kriete and Villegas do not expect any problems securing approvals, including exemptions from the US DoT to ownership-related restrictions in bilateral agreements.

From a competition standpoint Kriete saysthe overlap is insignificant, while from an ownership view he notes the three largest markets involved, Colombia, El Salvador and Costa Rica, do not have any foreign ownership restrictions for airlines. Peru and Brazil haverestrictions but the latteris not an issue because Efromovich has dual Brazilian and Colombian citizenship. At TACA Peru, Peruvian citizen Daniel Ratti will continue to own a 51% stake with GTH's 49% stake being transferred to the new company.

Avianca and TACA for now will maintain separate brands although Kriete says over the long term they may "possibly look at gradually moving to a single brand". Kriete says TACA will continue pursuing Star Alliancemembership, a process begun last year. Villegas adds Star "is the right thing" for TACA but Avianca at least for now plans to remain independent.

Source: Airline Business