Months after the merger between Avianca and Taca closed in 2010, Taca chief executive Roberto Kriete was a firm believer that the two airlines were a good fit despite the different backgrounds of their management teams.
Kriete, whose family owned Taca, had spent more than three decades at the Central American carrier. By contrast, Avianca's owner German Efromovich had no major airline experience before he acquired Avianca out of bankruptcy in 2004.
"They are not airline people, so they are very happy to have me here," Kriete told FlightGlobal in an interview published in February 2011. Referring to Efromovich and his brother Jose, both of whom sit on Avianca's board with him, Kriete added: "They are entrepreneurs; they are not airline managers."
More than six years later, Kriete and Efromovich will be all too aware how painful their differences can be.
In late February, Kriete's Kingsland Holdings filed a lawsuit against Avianca and the Efromovichs, whose Synergy Aerospace is the controlling shareholder of the merged airline, now branded Avianca. Kingsland, the airline's second largest shareholder, holds a 14.5% share.
Kingsland is seeking court action to stop Avianca from entering into a partnership with United Airlines - a move that Kingsland says would benefit only Synergy. Kingsland alleges that Efromovich, using his dominant position as chairman on Avianca's board, strong-armed the airline to go with United despite better offers from two other airlines.
Avianca has since countersued, accusing Kriete of being a disloyal director who released confidential information about the airline in Kingsland's lawsuit. A New York judge is set to hear on 7 April a motion by Kingsland for expedited discovery to gain access to documents related to the case. Avianca, Synergy and United - all defendants in Kingsland's lawsuit - have all opposed the motion.
'THE HONEYMOON STOPPED'
The merger of Avianca and Taca created a carrier that would be the second biggest in Latin America, with airlines in Colombia, El Salvador, Peru, Ecuador, Costa Rica, Guatemala, Honduras and Nicaragua.
While no one questions the hundreds of millions of dollars in synergies from the merger, the legal in-fighting reflects differences between Kriete and Efromovich that were there right from the start, say individuals familiar with the matter who spoke with FlightGlobal on the condition of anonymity.
Spokespeople for Efromovich and Kriete decline to make them available for interviews with FlightGlobal.
In the early days of the merger, both carriers worked well together to capture the synergies from integration - a process that Kriete himself highlighted in his interview with FlightGlobal a year after the merger closed.
"We are moving forward... it's going really, really well," he said then.
But once the integration was over and done with, problems began to surface, those with knowledge of the situation tell FlightGlobal. "Once you got into the day-to-day business, the honeymoon stopped," says an aviation executive.
Individuals familiar with the working styles of both Kriete and Efromovich portray stark differences between the two men.
Kriete, whose family had owned Taca for decades, is described as an industry veteran who is prudent with growth. Efromovich, a Bolivia-born entrepreneur whose Synergy conglomerate has investments ranging from oil to shipyards to agriculture, is seen as a risk-taker with big ambitions for Avianca.
The two men's divergent views on Avianca's future came to the fore when Latin America's airlines found themselves in a regional slowdown, driven by the economic recession in Brazil. The Colombian peso and other Latin American currencies depreciated, hurting the bottom line of many of the region's carriers.
"It was the perfect storm," says an aviation executive.
Kriete, like most airline managers, wanted to cut capacity - a plan that Efromovich wasn't on board with. "German still wanted to expand," says an executive. "They had two very different perceptions of strategy and risk."
At Efromovich's Synergy, the impact from the economic downturn hit harder as the group's oil and shipbuilding businesses endured tough times. Kingsland alleges in its lawsuit that Efromovich then pledged 97% of his stake in Avianca to third parties, including hedge fund Elliott Management, as collateral for loans.
Kingsland alleges that Synergy chose United as a partner for Avianca because United's offer had included a loan to Synergy - a charge that Synergy denies in legal filings. It says it has "discussed only the indicative outlines of a potential loan that United is considering to provide and even these outlines are subject to change as the parties continue their preliminary discussions".
United declined to comment when contacted by FlightGlobal.
Kingsland says Avianca's Synergy-dominated board rejected offers from two other airlines that would have provided more capital for Avianca. There was just one catch - the two other carriers' offers require Synergy to give up control of Avianca. And Efromovich is not willing to sell.
"I have the right to decide," said Efromovich during a March press conference. "No one can take away what is mine. We are not willing to give away control."
The two carriers that had placed offers before Avianca - Delta Air Lines and Copa Airlines - have been subpoenaed for the lawsuit. They declined to comment for this article.
CONFLICT OF INTEREST?
Kingsland alleges that the United negotiations were only the latest in a series of "self-dealing" transactions into which Synergy had forced Avianca in recent years. These range from transportation contracts for the airline's staff provided by a Synergy affiliate, to a 100-aircraft Airbus order that Kingsland calls "excessive".
In response, Avianca says Kingsland did not formally disapprove some of these transactions and in some cases even agreed to settlement deals to not pursue them further.
But the pending partnership between United and Avianca, first announced on 31 January, was the straw that broke the camel's back after years of building tensions between Efromovich and Kriete.
"He [Kriete] was sick and tired," says an aviation executive. "He felt he had to present a lawsuit."
Hitting back at Kriete, Avianca says in its counter lawsuit that Kriete breached a joint agreement that governs the rights of Synergy and Kingsland as the airline's two biggest shareholders. The agreement calls for disputes to be settled amicably, before being referred to shareholders.
In response to FlightGlobal's questions about why Kingsland did not attempt to resolve the dispute with Synergy internally, a Kingsland spokesperson says in a statement that Synergy's actions relating to the United deal "pose significant risks to Avianca and compelled us to take immediate steps to protect the airline and its minority shareholders from further and irreparable harm".
Those familiar with Avianca say it was only a matter of time before the airline's relationship with Synergy and its affiliated businesses threw up questions of conflict of interest.
"German [Efromovich] always looks for synergies, which is a good thing for his businesses," says an aviation executive. "But with the merger [with Taca], he stopped being the sole owner of the company. He still sees it as totally his but it's not."
In its countersuit, Avianca points to Kriete's involvement in Mexico's Volaris, which recently launched a Costa Rican subsidiary. Kriete is a co-founder of Volaris and his family owns a 11% share in the airline. Volaris Costa Rica, which launched flights in December 2016, competes against Avianca on its two initial routes.
Avianca says Kriete's position on both airlines' boards present a conflict of interest.
In response, Kingsland says in a legal filing that the Kriete family is not the controlling shareholder of Volaris, and that the Krietes' share in the Mexican carrier was a permitted investment allowed by the Avianca joint shareholders agreement with Synergy.
However, observers point out that Kriete's involvement in Volaris could be a weak area for Synergy and Avianca to target. "Roberto's involvement [in Volaris] gives German room to make noise," says an aviation executive.
NO HAPPY ENDING
Even before Kingsland filed its lawsuit, it was at a disadvantage when it comes to a buyout clause in the Avianca joint shareholders agreement binding Kingsland and Synergy.
While the deal gives both parties equal rights to approve certain transactions of the airline, only Synergy is afforded a right to buy out Kingsland's shares in cases where Kingsland issues a disapproval.
Avianca alleges in its countersuit that Kingsland, despite citing its concerns over several transactions in the past, had withdrawn disapproval notices that would have paved the way for Synergy to buy out its shares.
"Kriete's goal is to force Avianca into an alternative sale transaction so that Kriete can extract a profit on the sale of his shares," alleges Avianca in its lawsuit against Kingsland and Kriete.
An aviation executive familiar with the shareholders agreement says that the accord "ended up not being smart about the way to resolve problems".
"If Roberto tries to disapprove, that opens the opportunity for German to buy from Roberto for the current price plus 10%," he says. "But Roberto won't be able to exercise the same decision for Synergy's shares, so he's pretty much shooting at his own foot."
Avianca's stock price has yet to recover from the 9% dive it took after the United partnership talks were announced. It closed at $7.65 on the New York stock exchange on 4 April, down 25% from the one-year high of $10.19 it had reached in January.
Despite the legal turmoil surrounding its planned partnership with United, Avianca has reiterated it will press ahead with negotiations with its Star Alliance partner.
Regardless of who ultimately prevails in the courts, the legal action marks a sour turn for the merger of two major Latin American airlines that began operating under a single brand as recently as 2013.
As an aviation executive puts it: "It's never a happy ending when you get lawyers involved."
Source: Cirium Dashboard
