NEW YORK/SAO PAULO--The airlines circling Panama-based Avianca Holdings SA and its Brazilian cousin show that Latin America retains an attraction for foreign carriers, even in the midst of a regional economic slump, as local currencies nosedive.
For foreign buyers flush with U.S. dollars, Avianca offers a solid foothold on a continent with just a handful of major players and plenty of untapped potential for leisure and business travelers in a region where many still travel long distances by car and bus.
United Continental Holdings Inc and Delta Air Lines Inc are vying with China's HNA Group for a chance to buy into Bolivian-born entrepreneur German Efromovich's operations spanning from Havana to Rio de Janeiro, sources told Reuters on Friday.
A string of quarterly losses from the region's carriers, including three in the past year from Avianca, have not deterred U.S. airlines, which are cashing in on low fuel costs, strong demand and rising revenue from checked bags and other services, but are running out of room to grow domestically. The strong dollar squeezing the profitability of South American airlines makes them relatively cheap targets for foreign rivals playing catch-up on the continent, and looking to position themselves for an upturn.
"The market will come back up," said Joel Chusid, U.S. executive director for China's Hainan Airlines Co Ltd , speaking as an aviation industry veteran without any knowledge of parent company HNA's plans. "The people are still there."
United and Delta have shown they are eager to close the gap with American Airlines Group Inc, whose Latin American market share is bigger than both of theirs combined, according to figures from Euromonitor. American also enjoys a codesharing agreement with LATAM Airlines Group SA, the region's biggest carrier.
"By providing the greatest network ubiquity and connectivity between any points, you put yourself up to be the best choice" for large corporate buyers, said aviation industry consultant Robert Mann.
That could reap dividends as Latin American economies return to growth, and as more people in the region choose to fly rather than drive or take a bus, said travel industry analyst Henry Harteveldt. U.S. airlines' dollars are going further, as Latin American currencies have lost as much as 40 percent against the greenback in the past two years with the end of the global commodity boom. The sharp depreciations have left local airlines struggling to cover foreign debts and dollar-denominated aircraft leases with domestic revenues, especially as demand retreats in the region.
"It's been a complicated time, not just for Avianca but for the sector generally because of the increase in the value of the dollar," said Omar Suarez, analyst at Bogota brokerage Alianza, highlighting the struggle to pay foreign debts with local revenue.
A painful debt restructuring at Brazilian airline Gol Linhas Aereas Inteligentes SA highlights the challenge. After losing 7.6 billion reais ($2.16 billion) in four years, Gol approached bondholders this year to propose a debt swap implying losses of up to 70 percent on their investments.
Gol extended the deadline on the deal this week to June 8 after creditors tendered just 17 percent of the $780 million in outstanding debt covered by the offer. Delta bought 9.5 percent of Gol and has denied press reports that it would increase its stake if the Brazilian government does away with domestic ownership requirements, as expected.
Brazilian rival Azul Linhas Aereas Brasileiras SA tried for nearly three years to float its shares before finally accepting $450 million from HNA Group in November for a 23.7 percent equity stake. Azul also took a $100 million investment from United and signed a codesharing agreement with the carrier.
Avianca Brasil, which Efromovich runs separately from his Panama-listed group to get around Brazil's foreign ownership restrictions, has been even more aggressive than its cash-hungry competition. The Brazilian carrier expanded capacity 15 percent through April this year while rivals cut routes and sent aircraft overseas.
Source: Daily Herald
Airlines get ready to pounce on Avianca
