Avianca is slowing growth in 2019 as it focuses on improving profitability following a challenging year that saw slimmer profits.

The Star Alliance carrier plans to keep capacity flat or grow up to 2% in the year, following capacity growth of 8.7% in 2018. It is forecasting an operating margin of 7-9% in 2019. Avianca reported a 4.7% operating margin for 2018, or 7% when excluding a one-time impairment charge in the fourth quarter.

Higher fuel prices and continued weakness in markets like Argentina and Brazil contributed to a difficult year for Latin American airlines including Avianca, which saw full-year operating profit fall 21% to $232 million. Revenue in the year was up 10% to $4.89 billion, and net profit declined to $1.1 million from $82 million in 2017.

Fourth quarter results were more encouraging, with operating profit up 19.2% to $67.1 million and net profit rising 31% to $19.3 million. Revenue grew 15.3% to $1.29 billion in the period.

In 2019, the airline plans to move away from growth and focus on improving profitability. It will do this through six areas, including fleet cuts and the divestiture of non-core operating units.

Avianca chief executive Hernan Rincon said on an earnings call today that the airline has retained Seabury Consulting to assist with the work. It has also appointed Gerardo Grajales, a longtime Avianca executive who was set to depart the airline in the first quarter, as chief transformation officer.

Asked if a planned joint venture deal with United Airlines and Copa Airlines influenced the change in strategy, Rincon says: "We have been thinking about a change in business model for a while."

He adds that while previous years of growth had benefited Avianca, the continued expansion was "getting to its limits". "When we discussed the joint business agreement with United, it was clear to us that the most important priority was to make that very successful. And that would require a lot of our time," says Rincon.

NETWORK AND FLEET TRIMMING

Paring back unprofitable flying is part of Avianca's goal of improving its operating profit in 2019. The airline announced on 19 February that it will exit three cities in Peru, slashing its domestic network in the South American country to a lone city pair between Lima and Cusco. Avianca will continue to serve the two Peruvian cities from various international destinations.

Rincon says Peru has been a challenging market for Avianca "for many years", and that the airline had not received flight slots that were timed ideally to appeal to premium passengers. "Those Peruvian routes came in at the very bottom," he says of a route profitability analysis taken at the airline.

The carrier will end service to Trujillo, Juliaca and Puerto Maldonado effective 31 March. In 2018, the airline exited Arequipa, Iquitos and Piura.

Avianca's domestic capacity in Peru declined 9% in 2018, and will be down 21% this year even without taking into account the recently announced cuts, Cirium flight schedules data show. Prior to the pullback in Peru, Avianca exited the domestic market in Honduras in 2018.

Aside from the airline's network, Avianca plans to reduce its in-service fleet. It announced earlier today plans to remove 10 Embraer 190s this year, consisting of eight aircraft operated by Avianca and two leased to Aeromexico Connect.

Including the eight E190s, Avianca operated 190 aircraft as of end-2018. Talks are ongoing to further reduce the fleet to a range of between 150 to 165 aircraft, says Rincon. "We don't know if we will do that all in 2019, but that's what we are targeting," he tells analysts.

Later this year, Avianca's ATR turboprops will shift over to a new regional carrier, Regional Express America. The airline is expected to begin operations in March. Rincon told FlightGlobal last year the regional airline will allow Avianca to respond in a more agile manner to the service needs of smaller communities.

Separately, Avianca plans to continue divesting non-core companies later this year as it focuses its business around the segments of passenger air transport, cargo and loyalty. The airline has divested its share in a company that provides call centre services for Avianca, and sold its share in a pilot training joint venture with CAE to the Canadian training provider.

Grajales says Avianca will look to sell other investments later this year, such as its stake in a travel agency in Colombia.

Source: Cirium Dashboard