Are Colombia’s skies becoming politicized?

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Ultra Air's CEO William Shaw denied allegations the airline is in financial trouble. Photo: Santiago Arias/Airliners.Net

For decades, Colombia’s aviation sector witnessed steady growth, expansion of routes and connectivity, and the arrival of international carriers and start-ups in the low, and ultra-low, cost markets. The coronavirus pandemic hit the brakes on travel and as global airlines received hefty financial bailouts from their respective governments, others, especially in Latin America filed for bankruptcy protection under Chapter 11.

The sudden return of domestic tourism in Colombia with the lifting of COVID-19 restrictions presented a roadmap for airlines to restructure their business models, attract capital finance and international investors, as well as embark on aggressive ticket pricing, and promotions, to maintain fleets commercially operational, and above all, competitive.

The recent grounding of one of Colombia’s low-cost airlines, Viva Air, has highlighted many vulnerabilities of the country’s aviation sector, despite perceptions among the traveling public that flying, like driving a car, is a routine, if not inalienable right. But nothing could be further from the truth…until, you are one of the tens of thousands stranded when the airline you purchased a ticket from runs out of cash. Because airlines don’t own anything. Instead, they owe everything.

Planes are leased, airport slots have to be paid for, maintenance crews are either outsourced or depend on specific aircraft manufacturers, so too spare parts and almost every detail of aviation safety. Pilots, flight attendants, ground staff, and cargo handlers figure into the revenue outflow as salaries. All this, without the unpredictable cost of fuel.

Essentially, the difference between one airline and the next is brand recognition, starting with the livery (paint scheme), uniforms, and inflight extras. Increasingly few and far between these days.

The demise of premium service on domestic flights given cost-cutting measures by most airlines fueled the rise of low-cost travel. Avianca, Colombia’s largest carrier joined the race to capitalize on this important segment by introducing tailored S,M,L, XL pricing for clients. But the 102-year-old airline (second in terms of longevity to KLM) with its extensive domestic and international route network remains a premium brand. Premium, but heavily down-sized.

The marriage between Avianca and Viva Air was meant to be a fait accompli. With mounting debt and unprofitable routes, Viva Air began canceling flights and returning aircraft to their leasing company. But the company continued to sell tickets convinced that Avianca’s US$240 million offer in shares would inject much-needed capital into the struggling low-cost. Avianca, on the other hand, believed, that the legal and regulatory framework for mergers and acquisitions in Colombia would rubber-stamp the deal.

So, what happened next?

As the owners of Viva Air shares, Avianca awaited approval from the country’s Civil Aeronautics Administration (ACC). As weeks and months passed, the ACC didn’t react and despite warnings from Viva that the company was in a deep financial crisis, the authority’s Sergio París did not respond to calls, or as the company’s CEO Francisco Lalinde claims, his WhatsApp messages.

The mere fact that the head of the country’s aviation entity did not respond to the directors of Viva presents a worrisome scenario, not just because the future of an airline was at stake, but also the safety of the traveling public. After seven months of waiting, Viva was forced to suspend operations. The airline continues to be grounded, leaving thousands of employees out of work.

The neglect of Viva by the ACC sends a negative message to the airline industry at large. When a government entity cannot provide the legal framework to determine what constitutes a monopoly, nor take decisions to protect the carriers that are essential to the tourism sector, any future investment in the aviation sector is thrown in doubt. The entry of the national government, with the Ministry of Transport and Superintendency of Transport, to require all airlines in the country hand over their financial statements has politicized Colombia’s skies. Minister of Transport Guillermo Reyes did, however, give Aeronautica Civil a deadline to approve – or not – the contentious merger. The deadline ends Friday, March 17.

If Viva is not allowed to “paint the skies yellow” (as its catchy slogan claims) again, other ULLCs (ultra-low-cost carriers) will have a difficult time ahead convincing global hedge funds to roll out millions in operational cash. On Tuesday, journalist Paola Herrera at La W Radio triggered the alarm bells with a report that another budget airline, Ultra Air, was in financial trouble and could suspend operations after Easter week. In her report, La W claims that “Ultra Air has not been complying with payment commitments for slots to park planes (…) nor does the airline have money to pay for fuel.”

These allegations against an airline that started in 2020 in Medellín, and has moved 1.8 million passengers on more than 12,000 flights, prompted an immediate reaction from the company with an official statement. The statement denies reports of a financial crisis within the start-up, yet confirms that it is “not exempt to the current situation, where different macroeconomic factors have affected the industry. However, Ultra Air is backed by solid investors who believe in the company’s project and who are aware of the current challenges in the sector,” the airline said.

William Shaw, CEO of Ultra Air confirmed that the airline is in “a capitalization process with national and international investors who see a great opportunity in the Colombian market.” The aviation expert, who was also a founding partner of Viva – and its first CEO – assured passengers that Ultra Air would “continue with operations, security, and fair prices to contribute to the development of the Colombian tourism sector.” Shaw, however, did state on RCN radio that “there is a very powerful actor within the Colombian market, who would love to see us stop operating.”

Word is still out on who that “very powerful actor could be”, but one thing is sure: Colombia’s skies have become a battlefield between the public and private sectors, and no truce looms on the horizon.