How Adrian Neuhauser transformed Avianca into a low-cost competitor

Adrian Neuhauser, the soon-to-be head of holding company Abra Group but speaking to Airline Business during his final weeks as Avianca chief executive, is not generally forgetful when it comes to numbers. The Chilean national is a former investment banker who holds dual degrees in business administration and economics, with a focus on finance.

These days, though, he could be forgiven for losing track of an essential figure that most airline executives can rattle off in their sleep: exactly how many aircraft his firm operates.

“We’ve been adding planes really, really fast,” Neuhauser says of Avianca with a laugh. “Every time we ask the question, we get different numbers.”

That is because air travel in the airline’s home country of Colombia is going through a structural transformation, requiring it to move quickly to lap up the opportunity.

In the fourth quarter of this year, Avianca will operate an average of 150 more flights daily than it did in the third quarter, or about 4,800 additional flights monthly. It has hired more than 1,000 people, bringing its workforce to about 13,000 employees.

“It’s very, very strong growth and it’s required a tremendous effort by our operating team, by our finance team, to bring the planes in, to get the people in, to get them hired [and] explain to them what we’re doing and get them aligned. We’re a few weeks into it, but it’s been very, very, very seamless.”

The payoff? Filling capacity gaps left when two smaller Colombian carriers – Viva Air and Ultra Air – folded earlier this year.

”It’s not hard to sell seats in this industry – to walk out there and say ‘Hey, I’ve got 180 tickets for $1 each’ and fill 180 seats. The challenge is filling the seats at a fair price and [doing it] profitably”

With a population of more than 50 million in Colombia, there is a lot of money to be made.

Neuhauser was elevated to the top job at the world’s second-oldest airline in April 2021 when former chief executive Anko van der Werff left for Scandinavian flag-carrier SAS. Neuhauser had been recruited as the firm’s chief financial officer in 2019 from Credit Suisse.

His profile fit the company’s needs well. He had acquired industry knowledge while working on transportation deals at various financial institutions, is native-speaker-level bilingual and has a deep understanding of Latin America – attained while growing up as the son of a United Nations official and living in several countries across the hemisphere.

“Investment banking is a great learning experience, a great thing to do for a few years and then you can deploy what you learned on more interesting things,” he says.

VOLATILE TIME

With just two years of airline experience under his belt, Neuhauser, now 50 years old, was tasked to lead the struggling carrier through perhaps the most volatile time in the industry’s history.

“It was unexpected,” Neuhauser says of the promotion. “It wasn’t part of my life or career plan, but it’s been a lot of fun. It’s a big challenge. And it’s a big honour.”

In late November, he got another promotion. From early 2024, Neuhauser will become the next chief executive of Abra Group, the holding company that Avianca and Brazil’s Gol formed in 2022. Abra is an effort by both carriers to reduce costs, achieve greater economies of scale and expand routes, services, product offerings and loyalty programmes across the South American continent. Unlike a full merger, the airlines operate independently and maintain their own branding, management and strategies.

Rising into his new job is in essence a confirmation and acknowledgement of what he has achieved at Avianca in a short period.

He took over the company at a critical time. The world was in year two of the Covid-19 pandemic, vaccines had just been rolled out, governments were struggling with decisions on lifting travel restrictions, passenger demand was nowhere near where it had been in 2019 and Avianca was in the middle of a court-overseen Chapter 11 bankruptcy protection process.

In May 2020, Avianca and fellow Latin American airlines Aeromexico and LATAM Airlines Group – all of which had received little pandemic-related financial support from their respective governments – had filed for bankruptcy in the wake of the global health crisis.

In December 2021, just seven months after Neuhauser became chief executive, Avianca was the first of the three to complete the financial restructuring and emerge from bankruptcy protection. It was now free to begin the long slog to a new normal.

“The biggest challenge has been designing the reinvention of the company and then bringing 104 years of legacy along,” Neuhauser says. “Our employees have a lot of pride in the company’s long history and the role that it plays in Colombia and in Latin America.

“And the most rewarding part is getting the entire organisation rowing in the same direction.”

The pandemic forced airline managers worldwide to be exceptionally imaginative in order to keep the lights on. So too at Avianca. During the crisis and months-long shutdown, Avianca suspended some labour agreements. At the end of it all, the company lost some employees, mostly in administration roles, but on the operations side it retained “pretty much everybody”.

“Our agreement with the pilots gave us flexibility during Covid,” Neuhauser says of one of the creative moves that helped the airline bounce back. “Instead of letting pilots go, we would rotate them. So they would fly less hours, but every day they would fly some proportion of hours. And that let us recover very quickly.”

Avianca’s recovery continues at a blistering pace. In the third quarter of this year, the airline increased capacity as measured in available seat kilometres by almost one-third compared with last year, with another 23% rise slated for the rest of 2023.

But while the numbers look impressive for Avianca, the Colombian market’s overall growth is in the single-digit range. Why? Avianca and other airlines are filling a gap created when Viva and Ultra collapsed in the early part of the year.

SEEKING STABILITY

Avianca had made a play to take over Viva in early 2022, with the airlines’ owners saying the arrangement would improve both companies’ financial stability.

“We approached the authorities and said, ‘Look, we don’t think it’s in anybody’s best interest to have the chaos of a failed airline, no one wants that. We would like to be allowed to take it over,’” Neuhauser says.

Colombian aviation regulator AeroCivil took a long time to come to a decision.

“Their initial answer was no, which we didn’t expect,” he states. “The authorities looked at it [as] the status quo versus the merger, as opposed to looking at [Viva] failing versus the merger.”

After Viva ran out of money and ceased operations on 28 February, AeroCivil finally green-lighted a takeover.  But it attached some costly strings, including requirements that Avianca honour or refund unused Viva tickets, cancel some international frequencies, return some valuable slots at Bogota’s El Dorado International airport and maintain Viva’s low-cost options.

“We were okay with doing a transaction that we thought was sort of net neutral,” Neuhauser says. “But doing a transaction that would impact our ability to compete on an even basis when other [airlines] were not going to subject themselves to these long-term restrictions – no, that package of remedies didn’t work.” Avianca walked away from Viva in May.

Though the transaction ultimately fell apart, Neuhauser credits Viva with aiding Avianca’s transformation.

“Viva was a game-changer in Colombia,” he says. “It had been there for many years, it was the airline that ultimately forced us to change our business model. We had to learn from them. They were a low-cost innovator, they democratised the market and we saw a lot of value in that. It was something worth preserving.”

While Viva was a significant target, Avianca never had any interest in taking over Ultra, Neuhauser says. That airline, which only launched flights in 2022, closed shop in March.

“It’s not hard to sell seats in this industry – to walk out there and say ‘Hey, I’ve got 180 tickets for $1 each’ and fill 180 seats. That’s not the challenge.

“The challenge is filling the seats at a fair price and [doing it] profitably, being able to cover your cost of capital and grow and pay your employees adequately and service your debt and continue to invest.

“What happens with a lot of these upstart airlines is, they come in with big marketing [budgets], very cheap tickets –  but they’re not covering their operating expenses, let alone their cost of capital, and ultimately we see them fail.”

As demand rose following the pandemic, Avianca’s new management team saw opportunity to create something distinctive: a low-cost carrier with legacy carrier benefits.

”The biggest challenge has been designing the reinvention of the company and then bringing 104 years of legacy along”

“We’ve taken the best of the low-cost model and combined it with a lot of things that are unique to Avianca, whether it’s our frequent flyer programme or lounges or the fact that we fly widebodies with a full business class, or that we’re a member of Star Alliance, or that we sell over 50% of our tickets through traditional distribution methods as opposed to selling directly,” Neuhauser says.

“I don’t know what that’s called, but that’s where we are.”

Neuhauser thinks this mix is the right answer to the current uncertainty, while keeping in mind the economic realities of the region in which the airline operates.

“Purchasing an airplane ticket is a major decision” for people, Neuhauser says. “As a management team, we should not be designing an airline just for us, we should be designing an airline for the population that we serve.”

That population is getting a taste of the benefits of affordable air travel between far flung cities over unreliable, lengthy and often dangerous ground-based networks. As in many other Latin American countries, the alternative to an airplane has always been a bus. And for the growing middle class, air travel has become a more viable financial proposition.

“It’s about getting you from point A to point B safely, cleanly, respectfully, in a friendly way, on time, with your bags,” Neuhauser says. “We don’t try to enchant you with an incredible experience and feed you a meal on a two-hour flight.

“Frankly, you don’t need a meal on a two-hour flight.”

About 30% of the airline’s customers are flying for the first time, he adds. But the pivot is not just about them

“It’s about the small business owner in Medellin or Cali that wants to sell his product in Bogota, and he can now go once a month instead of every six months,” Neuhauser says. “The day trip from Medellin was just not an option, and now it is.”

That option now exists also because the new Avianca’s reliability has vaulted it to the top of Cirium’s global on-time performance leaderboard. During 2022 it ranked sixth in the world, and this year has taken the number one or number two spots every month since April. That would have been unimaginable in the past, according to Neuhauser. “We are massively focused on getting the basics right.”

The airline’s reinvention has also come with a new logo – a lower-case “a”, signifying that flying is no longer for just the wealthy few, but for the many. Its new tag-line: “The sky belongs to everyone”.

“That’s cemented in a very elegant way what we’re trying to be about. We are accessible from an economic standpoint, but also how we provide the service, the way we communicate with people,” Neuhauser says.

FRESH COMPETITION

Avianca’s main rival in Colombia is Chile’s LATAM Airlines Group, which has a sizeable domestic Colombian operation. But soon, an ultra-low-cost entrant will challenge Avianca in new ways.

Chilean discounter JetSmart plans to launch service on 27 Colombian routes early next year under its fourth air operator certificate. JetSmart had also made attempts to acquire Viva and later Ultra, but ultimately decided to go it alone.

“That will be interesting,” Neuhauser says. “Competition always makes you a better player and makes you kind of sharpen your teeth a little more.”

In May 2022, Avianca and Gol formed  Abra Group, in part to better compete with these kinds of advances. The venture aims to help the airlines better negotiate with vendors and suppliers, and to benefit customers through codeshare deals and reciprocal frequent flyer benefits.

“We need to provide solutions for our customers [to] cover the entire region, to be able to take a person from any country in the region and fly into any other country in the region,” Neuhauser says, adding that Abra is set up to preserve the legacies and histories of both brands.

“A lot of value gets lost when you paint all the planes the same colour,” he says.

And for investors, Abra presents an interesting opportunity. “You no longer have all your eggs in one basket in Brazil or in Colombia or in Central America. You’ve got a balance. Some countries do well when others do poorly. Some currencies do well when others do poorly. So having that balance from a portfolio perspective at the investor level has also been helpful,” Neuhauser says.

Abra will begin to bear fruit in 2024, when he steps up to take the top job, with the airlines “aggressively supporting each other”, Neuhauser said on the company’s recent third-quarter earnings call.

“The more needle-moving events will start next year,” he told investors.

In October 2023, Aerolineas Argentinas signed a memorandum of understanding with Abra, and negotiations to add Sky to the group are ongoing.

“We have an interest obviously in making that something deeper – that’s subject to discussions with [Sky’s] controlling shareholder and then eventually to regulatory approval,” he says.

But as new Latin American post-pandemic travel trends shake out and Avianca’s commitment to its Abra partners deepens, a long-touted joint venture with Star Alliance colleagues Copa Airlines in neighbouring Panama and United Airlines seems essentially dead.

“We don’t see that progressing,” Neuhauser says. “We love working with United – that relationship will continue to evolve – but our model change makes it more difficult to imagine that we could do something with Copa, [which] effectively is too close to us geographically.”

Regardless, Avianca’s post-pandemic strategic pivot looks like it is working so far. The company is making money again, recently posting a nine-month profit of $85.8 million while the wider industry across the region is expected to operate at a loss this year once again.

At the airline’s helm, Neuhauser sees himself as a facilitator, rather than the driver of the crucial changes.

“What’s interesting when you take on a role like this is that you realise it’s not about making decisions. Making decisions is hard, but it’s almost the easiest part. For those decisions to actually work and be effective you’ve got to get the entire organisation to rally behind you, and it’s very cool to see the results come to fruition.

“Very few things are my idea,” he adds. “We’ve got this amazing team and I get to play orchestra director.”

At Abra, he’ll have an even bigger stage upon which to play that role.