In recent years, we have been seeing some consolidation and liquidation activity among airlines in Europe, and more recently we have been seeing the fierce battle between Frontier (ULCC) and JetBlue (JBLU) for Spirit Airlines (SAVE). That's not really a surprise. In Europe, a consolidation round was long overdue and the pandemic loaded airlines with debt and the industry as a whole is struggling with crew shortages and high jet fuel prices. Given the current pressures, consolidation makes a lot of sense. So, currently, there are opportunities for investors to benefit from momentum in mergers and acquisitions as well as upbeat expectations for this year and thereafter. One airline that recently rose significantly is LATAM (OTCPK:LTMAQ), which rose nearly 60% in the two days after I published a report on the company's results.
In this report, we stick with South American carriers as I will be looking at recent news that Gol Linhas Aéreas Inteligentes (NYSE:GOL) and Avianca (NYSE:AVH) aim to combine in a new airline group named Abra Group. The transaction is expected to be completed in the second half of 2022, creating an airline group with individual airlines that will maintain their identity, but with a significant number of passengers and an extensive network as I show in this report.
For all airlines, the pandemic dealt a blow to the business, but for Avianca, that blow hit even harder. The airline already was not in great shape prior to the pandemic and issued debt to cover short-term liabilities, which is never a good sign. When the pandemic started affecting the airline industry it did not take long for Avianca having to file Chapter 11 bankruptcy. The airline also liquidated its subsidiary in Peru. In December 2021, Avianca emerged from bankruptcy and in April 2022 Avianca and Viva Air decided to merge while maintaining separate brands. With Viva Air, Avianca was able to combine with a low-cost carrier instead of having to set up a low-cost brand and the company also had a presence in Peru again in the form of Viva Air Perú.
The newest addition to that airline group is Brasilian Gol Linhas Aéreas Inteligentes, which prior to the pandemic was the country's second-biggest airline.
Looking at the passenger numbers it can clearly be seen how the top 10 airlines saw passenger numbers decline by 60% during the pandemic. For Avianca, that decline was even higher as passenger numbers slumped 75%. So, it's not odd that Avianca has been looking to combine with other airlines. In Gol, Avianca finds an airline that's now the third biggest airline in Brasil while it used to be the second biggest airline in the country. So, Avianca and Gol both have reasons to operate in an airline group. Combined, the Abra Group will become the second-largest airline group in South America, positioning the group to compete with LATAM to become the No. 1 airline in South America and Gol will likely try to compete more effectively with Azul and LATAM on the domestic market in Brasil.
The top 10 airlines carried over 200 million passengers in 2019. In 2021, 55% of that passenger flow was recovered. So, there's a lot of potential. In the longer term, the South American market also offers opportunities, though income inequality, political instability and corruption can be considered risks associated to the region.
The airlines in the Abra Group will maintain separate brands and will retain their identity. I think that also means that while there will be synergy and scale advantages, synergies will not be fully unlocked. However, I don't think that is a bad thing. Certainly to reduce debt load, having cost savings is extremely nice but the nicer thing is that the route network of the airlines combined offers a lot of potential to strengthen the airlines.
Avianca has significant presence in Colombia with flight connections to Mexico and the US as well as Europe, while Viva Air strengthens the airline group's presence in the low-cost segment. The big addition is the network that Gol brings to the table. With a thorough network in Brasil as a low-cost carrier, the Abra Group will become a major low-cost player in South America while the low-cost networks can also be used to feed into Avianca's long-haul full-service offering.
We're currently seeing a new round of consolidation, mostly in North and South America. The consolidation in South America with Gol joining the Abra Group makes a lot of sense. Avianca already was not in great shape before the pandemic making it a prudent step for the airline to look for other airlines to partner with. With Viva Air and Gol, the Abra Group will significantly expand its low-cost network where Avianca does serve as a low-cost airline on short-haul routes and as a full-service airline on long haul routes. With the combination of the three airlines, Abra Group will become the second-largest airline in South America with a significant low-cost network that could also be leveraged to maintain and expand the long-haul operations.
The South American market is risky due to income inequality, but I believe that over the longer term Abra Group will be positioned well with its low-cost network as flying becomes affordable for more South Americans.
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