This transaction will allow Avianca to optimize the supply of seats, the fleet and the load factors that the airline needs both domestically and internationally, especially as jet fuel prices continued to skyrocket in April and are expected to remain high for at least in 2022.
Likewise, this union will allow airlines to gain market share, access a larger customer base, exploit savings and economies of scale on existing cost bases. In the case of Avianca, it will also inorganically expand its frequent flyer program and membership offers. Also, it would help it access new slots as it plans to expand its operations after a couple of difficult years restructuring costs and capacity among others.
Additionally, the new entity will allow the airline of Colombian origin to benefit from new passenger connections, the opportunity to be successful in markets/cities from which it had already left (for example, the national market in Peru), and also to strengthen its position in the market to compete against LATAM Airlines and other airlines in the region.
Likewise, it would help you improve your bargaining power and control of the supply chain, further reducing costs as well as diversify your portfolio of products and services while seeking to optimize the value of your shareholders, among others.
However, there are significant challenges when two very different business models and ways of doing business – like those of both companies – decide to work together. The main challenge could be cultural integration, which will be essential for a successful transaction. When companies have different cultures and management styles, decision-making can slow down and conflicts can arise, especially when considering working with both brands. So will Avianca and Viva Air be able to operate under separate brands? If the two cultures are not successfully integrated, communication gaps can negatively affect the performance of the new entity and its employees, leading to lost opportunities, profitability, productivity, and cost savings.
This transaction will allow Avianca to compete against other players with a more comparable cost structure and to maintain the highest performing core business or its international routes, where it can make a profit. premium income especially if they keep a tight control on the offer of seats. However, Avianca must consider whether two separate brands could achieve 100% economies of scale and whether they can operate a dual and coordinated management model efficiently. In the industry we see Copa Airlines, which operates Wingo, and WestJet, which operates Swoop, although these are low-cost airlines created by the parent company to compete more effectively with other airlines. low cost.
To take full advantage and achieve high performance economies of scale, the newly formed entity may need to move to the next level (an acquisition) in a phase 2. If that is the case, operational integration will be necessary. So, arrival and departure times, the fleet, the network, the coordination of resources and the integration of IT systems must be aligned. In addition, negotiations of employment contracts, unions and seniority of pilots, among others, must be carried out.
However, the time it may take to integrate operations, take advantage of routes and obtain regulatory authorization will be key to the success of this alliance. In my opinion, this could take 18 to 36 months.
In addition, improvements in flight crew productivity including flexible work patterns, more efficient management structures and shifting from fixed costs to a more flexible and variable basis should be sought. Similarly, the ancillary revenue strategy should be expanded to at least 33% (non-fare revenue) versus 67% (fare revenue) and new revenue verticals beyond travel should be pursued.
Similarly, Avianca needs to investigate whether a premium economy cabin product is profitable, and whether it is appropriate to increase seat capacity in its fleet of single-aisle aircraft, in order to further reduce its costs and optimize revenues.
As it stands today, a successful Avianca-Viva Air entity should aim for a CASK reduction of at least 25%. However, the initial realizable cost can fall below 20% if two separate brands work under the same holding company in a semi-coordinated manner. However, a successful integration/acquisition should achieve a CASK reduction of 35% to 40% based on a number of assumptions made.
As the air transport industry continues to navigate its way to recovery in seat demand and supply after a challenging couple of years, we should expect new business models and partnerships in our region.
In Latin America, we could see new partnerships and business opportunities in Mexico, Brazil and Argentina in the next 12 months. Similarly, and if the newly created Avianca-Viva Air entity moves to the next level, we can expect LATAM Airlines to seek new partnerships and partnerships.
Additionally, smaller markets like Ecuador (compared to their peers in the region) could be ripe for player redistribution.
While there is an abundance of international business models today, from company collaborations (Avianca-Viva Air) and brand integration and acquisition (proposed JetBlue-Spirit Airlines deal) to launching a low-cost subsidiary operated within the holding company (Copa -Wingo, WestJet-Swoop, etc.), could also be considered another model in Latin America and in the world.
This new model could include a lower-cost “partner” that could feed the domestic traffic of a full-service international carrier like Avianca at a lower cost that it would not be able to produce on its own. Through this new model, the full-service airline would focus on traffic premium and higher throughput (or international) while optimizing your load factors on these longer-haul flights. In addition, it could stop operating unprofitable or marginally profitable domestic markets.
Until now, this new model has been discussed in Europe, but full-service airlines operating in large, developed and highly competitive domestic markets, such as Colombia, have so far rejected the idea. The question is: could this model have been a better option for the recently created Avianca-Viva Air entity? For now, I think it’s a good question…