Finances Colombia – The Colombian government rejects the Avianca – Viva merger; Airlines can appeal

Yesterday, the Colombian civil aviation regulatory authority, Aeronautica Civil, known as Aerocivil in short, issued a decision denying the merger of Colombian Airlines Long live and Avianca in a holding company called Abra, which would also include Brazilian Airlines Gol.

Denying the move, Aerocivil said the merger would increase consumer risk and over-consolidate the Colombian aviation market. The ruling said that if the merger goes through, it would:

  1. Generate or strengthen market power in favor of the integrated entity (Avianca, Viva Air and Viva Peru). The three entities participate in 59 national routes, which mobilize 93.7% of the country’s internal traffic. Among these routes, 29 domestic round-trip routes coincidentally participate.
  2. This economic group would reach 100% of the stake in 16 national lines. (route monopolies)
  3. The economic indicators used to assess this integration show a considerable potential deterioration. In terms of free competition, this would mean a step back and a return to levels not seen in the country more than 7 years ago.
  4. Viva, which has been an important player in the Colombian market, has stimulated competition in the sector and has become a valuable alternative for Colombian and regional consumers, would disappear as an independent competitor.
  5. Other competitors would face further difficulties in expanding or entering markets affected by higher barriers to entry and increased market power.
  6. Consumers could be harmed to the extent that the integrated entity (Avianca, Viva Air and Viva Peru) would have more facilities, incentives and less risk by increasing its prices, reducing frequencies, eliminating routes or by reducing additional services, among others.
  7. Free competition is a right of everything that entails responsibilities. The authorities responsible for authorizing business integrations have a legal and constitutional duty to protect the market, free economic competition and, above all, consumers.

Aerocivil: “What crisis?”

Additionally, Aerocivil criticized the rationale for the merger. Viva and Avianca positioned the merger in the public as “saving” Viva, although Viva grew, and Avianca emerged from bankruptcy less than a year ago. Aerocivil bluntly stated that Viva does not behave like a company in crisis:

“We recommend that Viva adopt the relevant internal and alternative measures in order to overcome the financial situation it currently faces.” – Aerocivil

Avianca and Viva did not offer any recourse; in fact, they requested that the transaction be approved on an expedited and comprehensive basis, applying the exception of a business in crisis.

The company in crisis exception consists of the situation in which the competition authority authorizes the carrying out of a concentration of companies which, under normal conditions, would be contested on account of the possible adverse effects on competition, fact of the critical situation of the company being acquired. This exception only has a legal basis if the parties prove compliance with the following criteria:

Due to the crisis, the company will go out of the market and it is necessary to sell it or integrate it to a third party.

  1. There is no other viable competitor that generates fewer restrictions on economic competition.
  2. The harm to competition caused by the approval of the proposed transaction may not be greater than that which would cause the company in crisis to exit the market, and
  3. The alleged crisis or the absence of viable alternatives cannot have been generated or linked to the planned integration operation.

In this case, although it has been proven that Viva is currently facing a relevant financial situation, Avianca and Viva have not proven that Viva’s economic crisis is of such magnitude as to affect its viability on the market and, consequently, it is condemned to leave the market. imminent and inevitable.

Regarding the search for alternatives, through options other than sale or by reaching out to other less anti-competitive buyers, Viva has not demonstrated that it has explored and exhausted other alternatives. and that they were impossible. For example, there is nothing in the file to prove that Viva requested loans from financial organizations and/or sent offers to potential buyers such as investment funds or groups of investors.

On the other hand, Avianca and Viva have not proven that the harm to competition generated by the operation was less than that which would lead to Viva’s exit from the market. On the contrary, Avianca and Viva confined themselves to recounting the effects of Viva’s supposed exit from the market, but did not compare them to the effects that the approval of the transaction would generate.

For this reason, taking into account that Avianca and Viva had the burden of proving compliance with all the requirements of the exception of a company in crisis, and in this case, the application of this exception was the support for approval of the proposed transaction, the same was objected.

Aerocivil says it acted quickly on this decision due to the urgency expressed by both Avianca and Viva. He said companies can appeal the decision within 10 days or resubmit an application for approval, although it will only be considered if competition concerns in the market are resolved, although Aerocivil has warned that she “would take the time that is appropriate, guaranteeing in any case the right to due process.

Any revised proposal, according to Aerocivil, will always be rejected unless the companies demonstrate that:

  1. The companies propose, and Aerocivil approves, remedies and commitments, called conditions in Colombia, that identify and isolate or eliminate the anti-competitive effects of the integration, such that once these remedies are implemented, the transaction does not affect the competitive structure of the market; That is
  2. That the parties succeed in proving that the business in crisis exception is configured.

Viva is surprised

Viva released a statement saying that:

Regarding the decision made by Civil Aeronautics (Aerocivil) regarding the application for an alliance between Avianca and Viva, we wish to inform the following:

We have respectfully but with surprise received the decision taken by Civil Aeronautics in which it rejects the request for the alliance process between the two companies, which in itself would have constituted an endorsement of the continuity of the Low Cost model in the region. Under the suggestions provided by the authority during the presentation of its concept, we will review the alternatives presented to us, given that this alliance is necessary for the continuity of Viva, to continue improving the air connectivity of the country to low cost and the source of work for the more than 5,000 direct and indirect collaborators of Viva.

For our part, and while studying the possibilities we have as a company for the review of this decision, we will continue to operate as we have done throughout our ten years of operation, and in recent months despite the difficult macroeconomic environment we face, committed to promoting aviation inclusion in Colombia and the region, together with our “Super Low Cost” model which has generated higher levels of connectivity and development for the country and the region.

Avianca advances with Gol

Avianca says it has been informed by Viva aircraft lessors of delays in the payment of their financial commitments.

Avianca, again positioning itself as lifeguard for Viva, released a statement saying:

Avianca is concerned about the recent negative decision taken by Civil Aeronautics regarding the joint application of Avianca and Viva to be part of the same group of companies.

This request, which aims to protect passengers and jobs and to boost connectivity in the country, would have enabled Avianca to support Viva in redressing the financial situation of the low-cost company.

Adrian Neuhauser, President and CEO of Avianca, said: “We are concerned about the direction of the decision, as it runs counter to the needs of the country and ignores the potential effect Viva’s disappearance would have. on users and the market. At Avianca, we reiterate our desire to actively participate in the rescue of Viva, seeking to maintain connectivity for travellers, strengthen tourism and preserve formal employment.

Given this scenario, Avianca will carry out a detailed analysis of Aerocivil’s decision and will evaluate all available legal alternatives to obtain the necessary approvals.

It is essential to specify that this process is independent of the Abra group, a project in which the shareholders of Avianca and GOL continue to advance.

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