Avianca Says It May Not Survive

April 27, 2020
In an SEC filing made last week, Colombian air carrier Avianca (NYSE: AVH, BVC: PFAVH) revealed that their auditors, KPMG, will inform the airline’s audit committee that “substantial doubt exists as to our ability to continue as a going concern.”
The full statement on page 3 of the SEC form 6-K reads as follows:
“Our independent auditors, KPMG S.A.S. (“KPMG”), have informed our Audit Committee that, in the absence of further information in support of our ability to meet our obligations as they become due and to comply with our debt covenants, KPMG’s auditors’ report on our consolidated financial statements as of and for the period ended December 31, 2019, will include an explanatory paragraph indicating that substantial doubt exists as to our ability to continue as a going concern.”
Avianca has faced worsening financial and operational difficulties over the past 3 years, and the Coronavirus COVID-19 Pandemic may have pushed the airline over an existential cliff. Even before governments ordered closures of airspace, Avianca had scarce cash on hand to cover current liabilities, and had just completed a debt restructuring and closed on additional financing. Now the airline has more debt, less revenues, and has fallen behind on payments of leases and financing.
At an 81% load capacity in previous conditions, the airline announced that it was retooling its aircraft to add even more seats, but passenger demand is unlikely to recover in the coming months once travel is permitted again.
Avianca’s North American patron, United Airlines (NASDAQ: UAL) is not optimistic either. In their own SEC form 8-K filing, they stated “Our significant investments in AVH and its affiliates, and the commercial relationships that we have with Avianca may not produce the returns or results we expect.”
United Airlines admitted in the filing that their stake in Avianca may turn out to be worthless, stating:
“As a consequence, we may not realize a satisfactory (or any) return on our invested or loaned funds with respect to AVH and its affiliates.”
United went on to discuss the operational impact an Avianca collapse could have, since it relies on connections with Avianca and Copa Airlines to complete its route network in Central & South America.
“Further, these investments may not generate the revenue or operational synergies we expect, and they may distract management focus from our operations or other strategic options. Finally, our reliance on Avianca in the region in which it operates may negatively impact our global operations and results if AVH does not successfully recover from its debt restructuring or the COVID-19 pandemic, or is otherwise impacted by general business risks or performs below our expectations or needs. Any one or more of these events could have a material adverse effect on our operating results or financial condition.”