What changes and what is next with the new holding company that Avianca and GOL are betting on?

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What changes and what is next with the new holding company that Avianca and GOL are betting on?

The airline chessboard in Latin America is moving. It is no secret that the pandemic hit their profitability and forced them to reorganizations, alliances and mergers. under that stage Avianca’s new move to reduce costs and consolidate its operation in the international air market was revealed: a new regional holding together with the Brazilian company GOL. But, in practical terms, what can travelers and the competition expect?

The details of the agreement between Avianca and GOL

The shareholders of Avianca and GOL (GOL) agreed to create a holding structure called Abra Group Limited (Grupo Abra), which they hope will help position these companies as leaders in the Latin American air 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 is added to the announcement, less than a month ago, in which it reported its purchase of 100% of the shares of Viva Air, the low-cost airline that operates in Colombia. This implies that this company will also be under the umbrella of the group, which will have the economic rights of Viva’s operations in Colombia and Peru, although it will not control it.

The Abra Group also reported, through a press release, that it would have a minority investment in the airline Sky Airline in Chile, which could signal another possible expansion of Avianca through a union with Sky.

How Grupo Abra can benefit travelers

Avianca assures that this new holding company will benefit customers through a strong loyalty program and a more efficient cost structure that would allow low prices, a route network that would promote direct connectivity between destinations, practical connections, more destinations and more frequencies of flights.

For now, it was learned that the three airlines will maintain their brands, talent and equipment independently. “Our vision is to create a group of airlines capable of facing the challenges of the 21st century and that improves the flying experience for our customers, employees, allies and communities where we operate”said Roberto Kriete, the largest shareholder of Avianca and who will now be the president of the Board of Directors of Grupo Abra.

The figures of the air market will move. Will Abra be the leader?

Avianca, which has more than 102 years of continuous operations, is a leader in Colombia, Ecuador and Central America. The company reports that it operates 130 routes, 3,800 weekly flights and a fleet of 110 Airbus 320 and Boeing 787 Dreamliner aircraft, connecting to around 65 destinations in both America and Europe.

For its part, Gol Líneas Aéreas is the largest airline in Brazil and a leader in the corporate and leisure segments. Since it was founded in 2001, it has been a low-cost airline. Today, the company reports, it operates a standardized fleet of 142 Boeing 737 aircraft to serve 157 routes, 11 of them international.

While Viva has 23 A320 aircraft. This figure added to the 142 of GOL and the 110 of Avianca would be 275, which brings the group closer to the 335 aircraft operated by LATAM Airlines, which still leads the market in terms of number of aircraft.

In addition to having the largest fleet, LATAM Airlines would continue to be the leader in the region due to its participation in the Latin market, which is 15.3%, while the share of GOL and Avianca is 10.1%, according to euromonitor.

However, to understand the scope of the new group, it should be noted that Abra would become part of the top 20 of the most important airlines in the world, taking into account that American Airlines has 965 aircraft and number 20, which is Air France, has 206 .

“This agreement places Abra airlines in a leadership position in the region’s air transport market, being able to serve a population of more than 1,000 million people and a GDP close to US$3 billion, generating opportunities for capacity and revenue growth,” said Constantino de Oliveira Junior, who will serve as CEO of the Abra Group.

Will there be a merger between Avianca, Viva and Gol?

Now, it should be noted that this move is only a transaction between shareholders and does not imply a merger, yet. Although the lawyer in aeronautical law, Juan Felipe Reyes, explains that an operational union could be expected, as has happened in the past.

“In my opinion, it is a multinational airline that will benefit the Abra airlines through the flexibility of routes, frequencies and fleet exchange between the airlines of the same group. and this should translate into being able to offer more routes at a lower cost for the airline. It will be necessary to see how the convenience evolves to determine if they are merged operationally, ”he points out.

In addition, he points out that once it is known under what legal form the alliance will be carried out, it will be possible to know more accurately if it will be an integration that implies an operational merger in the future or not.

On the other hand, he points out that this movement consolidates the existence of large groups rather than isolated individual airlines. “The saying that there is strength in unity applies here because no airline can survive alone. That is why the trend is to integrate in order to cover more of the market, obtain flexibility in the operation and more aircraft, at a lower cost”, he indicates.

The benefits and the challenges

Avianca and GOL would function as complementary by allying in terms of route in Latin America. However, the two airlines have different business models. GOL is a low-cost regional airline, while Avianca is a hybrid company, 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-long term. “This is likely to favor GOL’s business position as it should provide an opportunity to improve scale and access to a network with little overlap. and a broader route system, as well as cargo operations and a stronger mileage program,” the rating agency said in a statement.

For Fitch, under the holding model, both airlines will have cost savings opportunities if they negotiate as a group, although it clarifies that so far “there is little information on the synergies, the expected cost reductions and the financial strategy under the new group”.

Now, René Armas Maes, vice president of Jet Link International LLC, assures that the greatest benefits of this holding company will be a larger client base and greater negotiating power, “which will probably improve the expansion capacity at the right time”.

Armas Maes also considers that the unified portfolio of aircraft orders “would create natural synergies in terms of greater negotiating power with vendors and suppliers, from catering, fuel, flight planning software and even new technologies”, He says. And he adds that the transaction offers the possibility of more quickly retiring the old fleet.

As for the biggest challenges, the analyst highlights that cultural integration will be “essential for the success of the operation.” In addition, the different family fleet (GOL with Boeing 737 and Avianca with A319 and 320), creates 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.”

It also highlights that the new holding company may have to give up slots at key airports to gain regulatory approval. Finally, for the expert, the group will have to apply strategies that allow cost efficiency to survive in the industry: manage and reduce the weight of on-board products, improve route planning, fuel consumption strategies and crew optimization solutions to operate with the fewest number of full-time employees per aircraft.

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