The Avianca-Sky Merger: How Close Is It?

The merger between Avianca and the Chilean low-cost carrier Sky Airline may be closer than anyone thought. Earlier this week, it was reported that Sky Airline placed a US$100 million bond into the market and was acquired by none other than some of Avianca’s investors. So, what does this mean?

A Sky Airline Airbus 320 NEO landing at Santiago airport
Could Sky and Avianca merge? Photo: Getty Images.

Elliott Management and Caoba Capital

Last year it was reported that Sky Airline was looking at new investment options to help the airline through the COVID-19 crisis. Holger Paulmann, Sky Airline’s CEO, spoke with several possible investors, including the Brazilian carrier GOL Linhas Aereas and Indigo Partners. Nonetheless, these negotiations didn’t come to fruition.

Then it came to Elliott Management and Caoba Capital, a couple of global fund management companies. This company is better known because it holds an undisclosed share of Avianca’s debtor-in-possession financing and will convert it to equity. According to the Chilean newspaper Diario Financiero, Elliott and another investment firm called Caoba Capital will invest approximately US$1 billion in Avianca and will acquire about 70% of the company.

At the same time, Elliott Management has become interested in investing in the Chilean low-cost Sky Airline.

The Avianca-Sky Merger: How Close Is It?
Avianca exited Chapter 11 last year. Photo: Getty Images

Sky’s bond acquired by Elliott Management

Sky Airline placed a US$100 million bond in November last year, reported by Diario Financiero. This bond was acquired by Elliott Management and Caoba Capital and will allow both firms to control 40% of the Chilean low-cost carrier.

The possibility of a merger is still a long way to be done deal; nonetheless, Elliott Management and Caoba Capital’s investment in both carriers give hope to the possibility.

Simple Flying reached out to Avianca for comment. The airline has not given a statement regarding the latest development. In October 2021, Avianca informed that it was unaware of the plan that the Tranche B financiers (Elliot and Caoba) may seek as possible controllers of the company.

Avianca
Acquiring a low-cost carrier could benefit Avianca’s plans in South America. Photo: Getty Images

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How did we come to this?

The COVID-19 crisis heavily impacted the Chilean airline industry. LATAM Airlines Group is currently under a Chapter 11 bankruptcy process (although there’s light at the end of the tunnel); Sky Airline is looking for new investments; meanwhile, JetSMART signed an impressive partnership with American Airlines last year.

By November 2021, the Chilean carriers were serving 41.9% fewer passengers than in 2019; the international segment was 83.9% below its pre-pandemic levels. Nonetheless, Chile’s cargo market has rebounded, growing by 13.4% and 9.0% in the international and domestic markets, respectively.

In May 2020, Sky Airline’s CEO Holger Paulmann started looking for new partners after seeing the impact caused by the pandemic. He appointed a company called BTG Pactual to look for new investors.

According to local reports, Sky met with GOL, Indigo Partners, and Chilean businessmen, but with no breakthroughs. Apparently, Sky was only willing to give a third of the company for US$70 million.

Paulmann has said that the company needs a strategic partner allowing the company to have more equity to grow in the future.

Meanwhile, Avianca has exited the Chapter 11 proceedings. The airline is looking to inaugurate 50 new routes in the next three years. Avianca aims to offer more competitive fares, with a tailored product, without losing its legacy appeal. To effectively combine a legacy product and the practicality of the modern low-cost carrier, maybe the merger with Sky is exactly what Avianca needs. Only time will tell.

What do you think about a possible merger between Avianca and Sky? Let us know in the comments below. 



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