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6 December 20237 minute read

Colombia: Avianca and Viva Air – the attempted merger of the year

Introduction

In April 2022, Colombia's oldest and largest airline, Avianca, announced the acquisition of 100% of the economic rights in Viva Air, a low-cost competitor that had become the country's third largest airline in only ten years of existence. Four months later, it announced a plan to acquire the latter's political rights and thus formally merge with it, subject to government approval.1

 

Which government agency had the authority to review the merger?

Colombia has one of the most long-standing antitrust regimes in the LATAM region, with its origins in Law 155 of 1959. Initially, multiple entities regulated antitrust issues within their corresponding economic sectors, but in 2009, Law 1340 appointed the Superintendency of Industry and Commerce (SIC) as the national competition authority. However, the law stipulated two exceptions: (i) merger control in the financial sector remained under the control of the Superintendency of Finance, and (ii) merger control in the aviation sector remained under the control of the Civil Aviation Authority (Aerocivil). The proposed merger between Avianca and Viva Air fell under this second exception.

Avianca thus filed the merger with Aerocivil, claiming that its sole purpose was to rescue Viva Air from a financial crisis and facilitate its continuity as a low-cost airline. This was the first time Aerocivil had received a “failing firm defense” as part of a merger control procedure.

It should be noted that Avianca's market share had shrunk from 56% to 38% over the previous decade largely due to pressure from Viva Air, whose market share grew from 3% to 20% over the same period. The proposed operation between Avianca and Viva Air would have therefore created a consolidated entity with 58% of total market share and 100% control over some flight routes.

Aerocivil’s analysis of the failing firm defense

Ultimately, Aerocivil did not accept Avianca's failing firm defense and rejected the transaction in November 2022. In its resolution, it made clear that for such an argument to succeed, Avianca would need to prove that:

  1. The failing firm will be forced to abandon the market in the near future;
  2. There is no other less anticompetitive alternative to the proposed transaction; and
  3. The failing firm’s exit would be more damaging to the market than the proposed transaction.

Aerocivil determined that Avianca failed to prove each of these points.

Who created the financial crisis for Viva Air?

Even though there was evidence that Viva Air was in a financial crisis, Aerocivil found that the transaction between Avianca and Viva Air, through which Viva Air’s economic rights were transferred to Avianca, created the perfect scenario for it to be impossible for the low-cost airline to receive injected capital and limited other alternatives for Viva Air to exit the crisis.

Having said this, Aerocivil concluded that the failing firm defense cannot be accepted if the intervening parties were the ones that created the impossibility for the failing firm to exit its crisis.

 

Aerocivil rejects the transaction

Aerocivil found that the proposed transaction would have created a consolidated entity with between 60-100% market share of 45 routes throughout the country (of which 16 would be 100% under the entity’s control).

Regarding the international market, the consolidated entity would have ended up with 28 routes out of 35 between Colombia and Argentina, and there were also risks of limiting the participation of competitors in the local market because of interline agreements.

For these reasons, on 4 November, 2022, Aerocivil decided to reject the transaction between Avianca and Viva Air, explaining that the parties involved also did not offer any remedies to have the transaction authorized.

 

The transaction takes an unexpected turn

As mentioned above, Aerocivil only reviewed the transaction after Avianca tried to acquire Viva Air’s political rights. Nonetheless, the SIC was not sure of this analysis and took the position that Avianca acquired Viva Air from the moment it purchased the latter’s economic rights.

The SIC found that Avianca controlled Viva Air as early as April 2022 because economic rights imply coordinated market behavior and structural links that reduce or eliminate the incentives to compete. Additionally, during this time, political rights over Viva Air were transferred to a company whose directors were linked to Avianca.

On 9 December, 2022, the SIC opened an official investigation against Avianca and Viva Air for gun jumping since they did not file the merger until four months after this transfer of control. As already mentioned, Law 1340 of 2009 designated the SIC as the sole competition authority, and so even though Aerocivil can review mergers between aircraft operators, any other infringements of the competition regime must be reviewed and sanctioned by the SIC.

Only a month later, Aerocivil issued a decision stating that it had applied the wrong administrative procedure, reversing its rejection of the transaction and effectively starting all over again. This gave Avianca and Viva Air the opportunity to defend themselves and offer remedies before both agencies, but the delay in closing the merger had already taken a financial toll on Viva Air.

 

Viva Air stops flying

Viva Air stated in its initial filing with Aerocivil that because of its financial crisis, it could only keep operating for three months at most. Some started to doubt the veracity of this claim as the months went by, but on 27 February, 2023, Viva Air announced that it would immediately stop flying, leaving thousands of travelers with unusable tickets. The airline laid responsibility for the interruption on Aerocivil’s delay in reaching a final decision.

Less than a month later, Aerocivil abruptly authorized the transaction subject to the following remedies:

  1. The restitution of the slots Avianca had taken from Viva Air;
  2. The survival of Viva Air for at least five years;
  3. Decreasing the yield per passenger in the routes in which the airlines were going to have the 100% of the market share;
  4. New interline agreements with Satena, the state-owned airline;
  5. Maintaining existing interline agreements between Viva Air and other airlines;
  6. Releasing some routes that were assigned to the intervening parties for the route Bogotá-Buenos Aires;
  7. No exclusivity agreements;
  8. Protecting Viva Air’s passengers that were affected by the decision to stop operations and reimbursing 150% of each ticket’s value in airline vouchers.

These remedies differed from the ones offered by Avianca and Viva Air, and some of them (like reimbursing tickets and signing agreements with a state-owned airline) created the impression that Aerocivil was mixing antitrust with other areas of public policy (by this point, the airline drama had become major national news and grabbed the government’s attention). Avianca and Viva Air decided to appeal the decision.

Before Aerocivil could respond to this appeal, the SIC decided to close its investigation and issued a decision in which the companies agreed to the following remedies:

  1. A commitment by Avianca and Viva Air to stop coordinating their behavior in the market until a final decision is issued by Aerocivil;
  2. The airlines had to reimburse all the consumers that were affected by the suspension of operations of Viva Air and implement policies on competition compliance;
  3. An external auditor would report to the SIC on a weekly basis as to whether the parties were abiding by the remedies.

Again, since SIC is part of the government, many observers believed that other public policy goals played a role in its decision. In particular, the remedy of waiting for another agency’s decision was seen as unprecedented.

Finally, on 5 May, 2023, Aerocivil issued a closing decision that only slightly modified the remedies, without any substantial changes. Avianca subsequently decided not to acquire Viva Air and withdrew from the transaction. Viva Air is currently in the process of liquidation.


1 In this context, political rights include participating and voting in shareholders meetings, electing board members, obtaining information, and demanding extraordinary board meetings. Economic rights, in contrast, include ordinary dividends, preferential subscription, and collecting in the event of liquidation.

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