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Avianca Sees Another Loss During Restructuring

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Avianca Sees Another Loss During Restructuring

Avianca Holdings S.A. (NYSE: AVH) provided an update on its financial condition during its second quarter 2019 earnings report. The passenger and cargo airline reported a $115.5 million loss compared to break-even results in the same period last year.  

Restructuring

The Colombian airline is in the middle of a major restructuring dubbed "Avianca 2021." The debt-laden airline's transformation strategy is centered on gaining density in its most profitable routes and lowering its debt burden.

In regard to aircraft disposals in the second quarter of 2019, the press release stated, "In line with the Avianca 2021 plan, during the quarter Avianca's management took the decision to sell 24 aircraft from the Avianca Holdings Fleet – 10 Embraer E190, 10 Airbus A318 and four Airbus A320, resulting in a $220.9 million one-time write-off under depreciation and amortization."

Further, the company "suspended its aircraft operating lease and debt amortization payments on June 25, 2019 while deferrals from creditors are obtained." The company lists the total deferrals at $270 million and now lists more than $2.9 billion that is in default as short-term debt.

In the first quarter of 2019, Avianca reached an agreement with Airbus SE (OTCPK: EADSF) to cancel delivery of 17 Airbus A320s and postpone delivery of 35 more. The company said that this reduced its financial commitments by more than $2.6 billion.

Earlier in the year, Avianca cut some flights to North American destinations including Boston, Chicago and New York, opting to add capacity to more profitable domestic routes like Bogota to Medellin. Additionally, the airline has divested other non-core operations and joint ventures in attempts to raise capital.

In May 2019, Avianca's debt refinancing hit a snag when its majority shareholder, BRW, Inc. used AVH common stock as collateral in a $456 million loan from United Airlines (NASDAQ: UAL). BRW defaulted on that loan. This allowed United to set the stage to replace the chairman, voting in the Avianca's second-largest shareholder Kingsland Holdings and its head Roberto Kriete.

United's interests in Avianca stem from its desire to grow its Latin America footprint through an alliance with Avianca and Panamanian airline Copa Airlines. United has said that it stands willing to lend up to $150 million to help Avianca during its restructuring.

Second quarter results

Avianca reported a 6.9 percent decline in total revenues to $1.12 billion as passenger revenue declined 5.5 percent and cargo and other revenue was 13.8 percent lower. Lower passenger fares drove the decline on the passenger side and a year-over-year cargo comparison that included "events unrelated to the cargo operation" like sale leasebacks and payments from an original equipment manufacturer for equipment malfunctions resulted in the cargo revenue decline.

The company reported an adjusted net loss of $115.5 million in the period, significantly worse than the break-even results a year ago. Yields declined 9.2 percent year-over-year as air fares declined by 8.4 percent. Passenger traffic (revenue passenger kilometers) increased 4.1 percent, but available seat capacity increased 4.7 percent in the period. This resulted in a 50 basis point decline in load factor (percentage of available seats that are utilized) to 81.8 percent. Management called out macroeconomic weaknesses in multiple Latin American economies as the reason for the rate declines.

Avianca's leverage position (debt to EBITDA) increased to 6.3x from 5.6x in the first quarter. Long-term debt was $1.3 billion, which excludes the $2.9 billion of debt in default that is now listed as short-term debt.

From the press release, "Avianca expects continued leverage improvement going forward, with the benefit of its transformation process and the profitability strategy the company has implemented throughout the organization."

Avianca maintained its growth rate of flat to 2 percent for passengers and capacity as well as its load factor expectations of 81 percent to 83 percent. However, its earnings before interest and taxes (EBIT) margin outlook was lowered by 150 basis points on each end of the range to 4 percent to 6 percent. Second quarter 2019 adjusted EBIT was a $36 million loss which resulted in a -3.2 percent EBIT margin.

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