INTERVIEW: Avianca chief executive Fabio Villegas

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From his office at the top of the brand-new Avianca headquarters building, Fabio Villegas has a towering view of the Bogotá skyline and the surrounding Andes mountains. It may not seem the best time for an airline to open a moderndowntown office building with room for significant expansion, but Avianca is not your average airline.This privately owned Colombian flag carrier has been profitable since emerging from bankruptcy in late 2004 and has remained in the black this year despite the global economic crisis.

Villegas, who joined the Avianca board in 2004 and took over as chief in March 2005, has led a turnaround that has dramatically improved service, operations and profitability levels. Having already near-tripled Avianca revenues since 2004 through rapid expansion in its home market, Villegas is now spearheading an ambitious diversification strategy aimed at establishing Avianca as a major player in other South American markets.

 © Luis Emiro Mejia

"In Colombia Avianca has been growing quite fast and we have been growing market share. But there is a limit in our ability to continue getting market share, particularly in the domestic market. We know that we have to diversify. We have done that with two different strategies. The first one is to diversify the product line," Villegas says, referring to the purchase last year of Tampa, the largest cargo carrier in Colombia. "The other strategy is to diversify the source of revenue in terms of market. It happens that our owners, the Synergy Group, are based in Brazil and they operate a small airline there, OceanAir. We have decided to advance the integration between Avianca and OceanAir [and] have taken control of the planning of the company."

Avianca last year installed one of its own vice-presidents, Santiago Diago, as OceanAir chief executive, reporting to Villegas. It has since restructured the OceanAir network and improved its operational performance and service. OceanAir operates 14 Fokker 100s and is now a break-even operation, with annual revenues of about $200 million. Villegas says for now OceanAir will focus on the domestic market. But he says OceanAir is preparing to enter the long-haul market in 2015, when the first of 10 new Airbus A350s ordered by Synergy are delivered.

Now is clearly not the right time to pursue expansion in Brazil, where domestic capacityhas grown at double-digit rates this year. But Villegas has high hopes for the market even though OceanAir is fifth in size behind TAM, Gol, Azul and Webjet. "Brazil is a huge market with 45 million passengers per year. We have only 2.5% of the market, but that 2.5% is $200 million in revenue. It is important to our strategy to diversify our revenue and we will grow in Brazil if we find a way to do it in a profitable way," he says. Instead of going for size, Villegas is aiming for quality. "We would like to bring OceanAir to the operational standards of Avianca and we would like to differentiate ourselves by the level of service."

THE ECONOMIST

Fabio Villegas was appointed to the Avianca board by former shareholder the National Coffee Federation in 2004 during arestructuring under US bankruptcy protection. New owner Synergy subsequently appointed Villegas as Avianca chief in March 2005.

Villegas, a former government minister and managing director of the Colombian division of Deutche Bank,headed Colombian financial institutions association ANIF before joining Avianca. He was an aviation industry newcomer but his background as an economist with a masters degree from the London School of Economics helped easethe transition: "I do not see any other industry which is as complex as this one - the labour, the service - it is all the complexities you have in different industries put together. It is amazing. It is exciting."

Golf and tennis enthusiast Villegas adds: "It is important to be happy in the work you do. If you are not happy with your work you are lost. I am very, very happy with the activity we have in place and what we are doing."

Through Synergy, Avianca also has a foothold in Ecuador in the form ofdomestic turboprop operator VIP. Villegas says VIP is "very small", butSynergy is planning to buy AeroGal, a carrier that operates about a dozen Boeing narrowbodies.Avianca and AeroGal have a commercial alliance and Villegas says Synergy is negotiating to acquire 80% of AeroGal. "We are working on that," he says. "It makes sense." Expansion in Ecuador could stoke up rivalry between Avianca and LAN, which has an Ecuadorean subsidiary serving international and domesticroutes.

Avianca is also competing with LAN in the Colombian cargo marketfollowing the launch of LACC, a new Colombian cargo carrier that is 90%owned by LAN. According to Colombian CAA statistics, LACC already has captured 8% of the Colombian international cargo market. Avianca now has a 32% share, including24% from four Boeing 767 freighters operated by its new Tampa subsidiary and 8% from the bellies of its passenger aircraft.

Last year may not have been the best time to purchase a cargo carrier as in the first half of 2009 the global cargo slump slashed international cargo traffic at Tampa by 28%. But Villegas remains confident in the strategic plan to increase cargo in the Avianca revenue pie. "Tampa is producing about $200 million per year in revenues - that is a lot of opportunity," he says. "It diversified the revenue that we have. The cargo high season is different than high season for passengers so you can have a nice balance of revenues for the whole year."

Synergy is also eyeing theacquisition of Brazilian cargo carrier VarigLog, which could increase both cargo revenues at Avianca and competition against LAN. Chile-based LAN, which already has a cargo subsidiary in Brazil, has become number two in Latin America after TAM by establishing passenger carriers in three countries outside its small home market and cargo carriers in another three.

Avianca is likely to eventually join LAN and Latin powerhouses TAM, Gol and Copa on the New York Stock exchange.A return to the Bogotá Stock Exchange, where Avianca was listed before its bankruptcy, and a potential listing in New York have been goals of Synergy since it acquired the carrier in late 2004. Villegas says Avianca has been ready for an initial public offering "for a couple of years"

, but it is waiting on the right market conditions. "We worked on putting together an IPO several years ago. We were almost there," he explains. But it was postponed after market conditions worsened."We still have to wait for the market to recover a bit. But to be prepared and ready when the markets are there, we are building our financial numbers in US GAAP, we [have implemented] corporate governance in our company and we have an independent board of directors."

Synergy and its charismatic chief, German Efromovich, have always intended to get a return on Avianca though an IPO. While Efromovich did not pay much for Avianca and was sole bidder at the end of the bankruptcy process, Synergy has since overhauled IT systems at the carrier and renewed its fleet. But Avianca is privately-owned and it is hard to pinpoint how much Synergy has injected.

The view is further obscured by complex investments, such as Synergy buying 25 Fokker 100s from American Airlines which it thenhanded to Avianca and OceanAir. Synergy is also behind most of Avianca's new aircraft orders. And while Synergy deserves credit for creating a stronger, more reliable and efficient airline, Villegas says the restructuring began during the bankruptcy process under the leadership of Latin American aviation veteran Emilio Posada, who headed Avianca from 2002 to 2005. But Villegas has led a drive to further reduce costs and improve efficiencies - an effort that is still ongoing.

Synergy has no short-term need to sell a stake in Avianca after recently placing $250 million in bondson the Bogotá exchange.But Villegas is keen to pursue an IPO because it would help strengthen governance at the carrier and give it access to new markets in terms of financial capabilities.

It remains undecided whether Avianca will list in isolation or as agroup with the Ecuadorean airline investments of OceanAir and Synergy. The Avianca financial figures now include Tampa, SAM and in-house maintenance unit Avianca Services, but exclude OceanAir and VIP, although all five carriers have already adopted a common livery and brand.In the likely event Avianca is listed as a group with the non-Colombian interests, Villegas will bring to the market a company with a revenue stream of at least $2.3 billion, making it the fourth largest Latin American airline group after TAM, LAN and Gol.

As Avianca prepares to host its peers at the ALTA forum of airline leaders in mid-October, Villegas believes most of the barriers that historically blocked growth in the region have been lifted. This relatively open environment has allowed all four of the publicly traded airlines in Latin America to record profits in the first half of 2009 despite the downturn.

Villegas says Avianca was also able to remain in the black during the first half, with an operating profit of $40-50 million. He expects a full-year profit and the Colombian economy has already begun showing signs of recovery, prompting economists to predict positive GDP growth for the second half of this year and 2010. He says: "Certainly we have had an impact of revenues by the crisis, but we have been managing to control costs and therefore we expect by the end of this year we will be on budget, which is around $100 million to $150 million operating profit."

OUT WITH THE OLD

Avianca, the second oldest airline in the world after KLM, turns 90 years old in December. It has a rich history, starting with the operation of monoplanes on mail routes, but the next 10 years could be its most fascinating decade.

The airline will spend the next few years completing a dramatic fleet renewal which began in 2007 with orders for 10 Airbus A330s and about 50 A320 family aircraft. By the end of this year Avianca will have taken five of these A330s and 16 A320s with another 10 A320s to be delivered in 2010.Avianca was originally only due to take four to five new aircraft a year, but Villegas says late last year it decided to "dramatically" accelerate deliveries by assuming slots freed up by other carrier deferrals. "The case for us was clear," he says. The aircraft will be used for renewal rather than growth, cutting operating costs and improving margins. "Accelerating the re-fleeting programme is part of the solution itself to the crisis. The change in fleet is the most important project we have today," he says. The A330s and A320s will replace Boeing MD-80s, 757s and 767s, while Avianca plans to use the 12 Boeing 787s, ordered in 2007, to launch routes to London and Frankfurt.

Over the next decade Avianca is planning to turn Bogotá into a hub. Villegas says only 20% of its passengers now connect, partly due to airport limitations, but hesays a new terminal that will house now separated domestic and international flights opens in 2013. Despite this transfer focus, alliance membership is not on the cards.Villegas says Avianca will instead focus on codeshares. "Our strategy is to have the right partner, to have the right alliance in the right place. That is difficult with the big alliance," Villegas says.

Avianca has been able to stay profitable despite increasing competition on domestic and international routes. Domestically a new low-cost player entered the market early this year, driving capacity up and depressing average air fares by 20%. Internationally, Avianca has had to contend with new US low-cost competition from Spirit Airlines, which has launched services to four Colombian cities over the last 16 months, and JetBlue Airways, which began serving Bogotá in January.

"We have seen a lot of low-cost companies come to the market, but I think they have been able to create their own market," says Villegas.He explains that these companies have managed their products and prices in a way which has created demand and increased passenger numbers. But despite this influx of new competition, Villegas says: "We have not been badly affected." Instead Avianca is focusing on improving service levels in the market it wants to contend. "That is what we are doing," says the Avianca chief."The market has been affected by the crisis buttoday we are quite comfortable with the level of demand that we have."

Avianca, which Villegas says back in 2004 "was in a very strong crisis and almost in a liquidation process", has clearly come a long way in only five years. Villegas credits a lower cost structure and a new service-oriented corporate culture for driving the financial turnaround and annual traffic growth of 12-13%.

"We knew from the beginning, and it was part of our strategy, that we had to have a structure of costs that is comparable with other airlines in the region. We know that it is easy to make money when the markets are doing well, when the passengers are there. Even with high price of fuel last year the demand was there so it was easy to transfer with the fares that increase in cost without affecting companyprofitability. It is more difficult to do it when demand is lost, which is what is happening this year," he says.

Villegas explains that countering industry cyclicality through a competitive cost structure is an essential for survival. "The strategy of the company must be not to make money in the ups but also to make money in the downs, in the lower part of the cycle. We did that. We reduced a lot of our costs."

Avianca has streamlined its distribution, sales and operating costs and has invested in its IT and infrastructure, but Villegas says: "The most important thing we have done is to change the attitude of our people. It is service that will provide the difference and a successful future for the company.We would like to differentiate Avianca from the other operators in the region because of the excellent level of service we are providing. That is our strategy - that is what we are working towards."