Avianca Holdings S.A. – Seeks Third Plan Exclusivity Extension; Details Cost-Cutting Measures, CBAs, Shift to Narrow-Body Fleet (Fleet Strategy Changes Yielding 35%/$2bn Reduction in Capital Costs), Advances in Negotiations as to Exit Capital Structure

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April 14, 2021 – The Debtors filed a motion to extend (for a third time) the periods during which they have an exclusive right to file a Plan and solicit acceptances thereof, through and including September 2, 2021 and November 2, 2021, respectively [Docket No. 1534]. Absent the requested relief, the exclusive periods are scheduled to expire on May 5, 2021 and July 5, 2021, respectively.

Notwithstanding the obvious continued impact of the COVID-19 pandemic, these Debtors have clearly been busy during their second extension of exclusivity periods and their summary of accomplishments during this timed is easily more interesting than the Debtors' predictable request for more exclusive time. This will be a must read for professionals guiding the LATAM Airlines Group S.A. and Grupo Aeromexico bankruptcies (these Debtors having been the first to file Chapter 11…and now the first to request a third extension) and the airline sector as a whole.

Amongst initiatives the Debtors now list as completed or advanced during their second extension:

  • First, the Debtors’ management and advisors, under the direction of an independent committee of Avianca’s board of directors, have reached closure on a five-year business plan. The unprecedented challenges and uncertainties currently facing the airline industry slowed progress on this front, but the Debtors were able, during the current Exclusive Filing Period, to finalize and obtain Board approval for a long-term post-pandemic business plan that will provide a platform for the Debtors to seek new capital and propose a feasible, value-maximizing plan of reorganization.
  • Second, the Debtors have undertaken successful efforts to better align their aircraft fleet with the Debtors’ anticipated post- chapter 11 business by moving from wide-body to narrow-body aircraft. The Debtors have begun to build a core fleet by entering into new and amended long-term leases for such narrow-body aircraft. To date, letters of intent for eight narrow-body aircraft leases have been approved, with letters of intent for up to eleven additional aircraft up for approval prior to the end of the current Exclusive Filing Period. These long-term leases build on the Debtors’ short-term success (reported in the Second Exclusivity Motion) of having entered into approximately 120 stipulations with aircraft counterparties regarding “power-by-the-hour” arrangements for the use of aircraft during these Chapter 11 Cases. Those agreements have allowed the Debtors to maintain optionality over their aircraft and equipment, which the Debtors are now using to their advantage in negotiating long-term leases for select aircraft. The Debtors have now launched a series of negotiations with airframe and engine manufactures (“OEMs”) with the objective of aligning their prepetition purchase contracts for airframe and engines to align with their new five-year plan. These fleet simplification and cost reduction programs are expected to reduce aircraft debt and lease obligations between March 2020 and December 2022 by more than $2 billion, and will reduce aircraft capital costs by more than 35%.
  • Third, the Debtors have successfully negotiated certain short-term collective bargaining agreements (the “Amended CBAs”) with several unions representing their pilots and flight attendants that will not only reduce labor costs but also improve productivity and protect jobs. The Debtors continue in negotiations with their other unions and labor associations and expect to enter into new or amended CBAs with these parties in the near future.
  • Fourth, the Debtors have taken steps to improve efficiencies across all of their operations. Key to this initiative has been an in-depth review of the Debtors’ many executory contracts and other business arrangements. The Debtors expect that using the tools afforded by the Bankruptcy Code to reject or renegotiate burdensome contracts will be an important step towards emergence as a profitable enterprise. So far, the Debtors have identified more than 300 individual initiatives, which will result in over $500 million of annual savings. Those savings will reduce passenger airline CASK (cost per available seat kilometers), excluding fuel, by over 38% as compared to pre-pandemic operations in 2019. Most of these initiatives have already been undertaken, and the rest should be completed by the end of 2022.
  • Fifth, the Debtors have made substantial progress towards reaching closure as to specific components of their post-bankruptcy capital structure, including the terms on which post- chapter 11 equity will be distributed to key stakeholders. In this regard, the Debtors re-opened negotiations with the Tranche B DIP lenders as to the terms of the Debtors’ potential exercise of their option to convert the entire principal amount of Tranche B loans under the Debtors’ $2 billion postpetition debt facility into equity of the reorganized Debtors. Once the terms of the equity conversion have been agreed with the Tranche B lenders, the Debtors expect to engage in a robust marketing process for superior sponsorship proposals and for an exit financing facility. Through this process, Avianca plans to raise $1.8 billion of exit financing (debt and equity) to refinance approximately $1.4 billion of Tranche A DIP obligations, as well as to provide approximately $400 million towards its target of $1.0 billion of liquidity at exit.
  • Sixth, the Debtors have succeeded in minimizing the overall cash burn during the Chapter 11 Cases, which has allowed them to fund their operations and debt service. The Debtors  have made network adjustments to reduce operating expenses to a bare minimum, and have paid interest in kind under the DIP Facility throughout the Chapter 11 Cases. 
  • Seventh, the Debtors have taken great strides toward the resolution of potential claims against, or in favor of, their estates and the removal of other potential impediments to a near-term exit from chapter 11. Among other milestones, the Debtors succeeded in bringing to a favorable conclusion litigation against USAVflow (the “USAVflow Litigation”)

The motion states, “Over the past year, the COVID-19 pandemic has given rise to unprecedented challenges for all businesses, especially in the airline sector. Formulating and soliciting support for a new, long-term business plan is never easy, but doing so in the wake of the pandemic has raised unprecedented obstacles. All of the foregoing notwithstanding, throughout this period— including during the four months since the Court granted the Debtors’ Second Exclusivity Motion—the Debtors have risen to the challenge and put in place many of the building blocks required to propose a feasible plan of reorganization. The Debtors had sought to accomplish seven key objectives during this period, all of which have been achieved: 

  • (i) development and approval by their Board of Directors of the long-term business plan essential to the formulation of a chapter 11 plan; 
  • (ii) alignment of their aircraft fleet and OEM purchase contracts with the Debtors’ anticipated post-chapter 11 business needs; 
  • (iii) negotiating flexible and cost-effective collective bargaining agreements with their employee groups; 
  • (iv) driving efficiencies across all of the Debtors’ operations by, among other things, conducting an in-depth review of their many executory contracts and other business arrangements; 
  • (v) reaching closure as to specific components of the Debtors’ post-bankruptcy capital structure; 
  • (vi) minimizing cash burn during the Chapter 11 Cases and, thus, retaining sufficient cash to fund ongoing operations and debt service; and 
  • (vii) the resolution of key potential claims against, or in favor of, their estates, including as to the Debtors’ litigation with USAVflow.”

As set forth in the First Exclusivity Motion and the Second Exclusivity Motion, the Debtors—like all other passenger airlines—are still facing significantly reduced revenues from ticket sales, government prohibitions on international flights, substantial ongoing contractual obligations to their lessors, lenders, and other creditors, and a slowdown of the global economy. 

The circumstances surrounding these Chapter 11 Cases are unprecedented; COVID-19 has had an outsized impact on the airline sector and has complicated the Debtors’ ability to formulate a long-term business plan and develop a path for exiting chapter 11. Thus, notwithstanding the Debtors’ substantial achievements so far in these Chapter 11 Cases, they are mindful of the need to proceed at a measured pace given the continued uncertainty in the airline industry. They are also optimistic, should the Court grant the relief requested herein, that they will be able to advance negotiations with their key constituents and file a viable plan of reorganization by the conclusion of the extended Exclusive Filing Period.

On LATAM Airlines Group and Grupo Aeromexico, the motion adds: "Furthermore, although neither LATAM Airlines Group S.A. (No. 20-11254, Bankr. S.D.N.Y. 2020) nor Grupo Aeromexico, S.A.B. de C.V. (No. 20-11561, Bankr. S.D.N.Y. 2020) have yet sought a third exclusivity extension, an extension in the Debtors’ cases is appropriate.  It stands to reason that the Debtors, as the first to file among the major pending airline cases, would be the first to seek a third extension.  In addition, neither LATAM nor Aeromexico has indicated that it will be prepared to file a chapter 11 plan before the expiration of its current Exclusive Period.   ”

A hearing on the motion is scheduled for April 28, 2021, with objections due by April 21, 2021.

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