Annual and Transition Report (foreign Private Issuer) (20-f)

Date : 04/29/2019 @ 10:15AM
Source : Edgar (US Regulatory)
Stock : Avianca Holdings SA (AVH)
Quote : 4.41  -0.11 (-2.43%) @ 10:59PM
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Annual and Transition Report (foreign Private Issuer) (20-f)

Table of Contents

As filed with the Securities and Exchange Commission on April 26, 2019

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-36142

 

 

AVIANCA HOLDINGS S.A.

(Exact name of registrant as specified in its charter)

 

 

Avianca Holdings S.A.

(Translation of registrant’s name into English)

Republic of Panama

(Jurisdiction of incorporation or organization)

Aquilino de la Guardia Calle No. 8, IGRA Building P.O., Panama City,

Republic of Panama

(+507) 205-6000

(Address of principal executive offices)

Luca Pfeifer

Tel: (57+1) - 587 77 00 ext. 7575 • Fax: (57+1) - 423 55 00 ext. 2544/2474

Address: Avenida Calle 26 # 59 – 15 P5, Bogotá, Colombia

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares (as evidenced by American Depositary Receipts), each representing 8 Preferred Shares, with a par value of $0.125 per share   New York Stock Exchange

 

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2018:

Common Shares — 660,800,003

Preferred Shares — 340,507,917 (includes 4,320,632 preferred shares held on behalf of the Company)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-Accelerated filer

 

  

Emerging growth company

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ☐    International Financial Reporting Standards as issued
by the International Accounting Standards Board ☒
  Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes  ☐    No  ☐

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
Presentation of Financial and Other Information      ii  
Market Data      iii  
Certain Terms      iv  
Forward Looking Statements      vii  
PART I      1  

Item 1.

  Identity of Directors, Senior Management and Advisers      1  

Item 2.

  Offer Statistics and Expected Timetable      1  

Item 3.

  Key Information      1  

Item 4.

  Information on the Company      48  

Item 4A.

  Unresolved Staff Comments      107  

Item 5.

  Operating and Financial Review and Prospects      107  

Item 6.

  Directors, Senior Management and Employees      143  

Item 7.

  Major Shareholders and Related Party Transactions      154  

Item 8.

  Financial Information      164  

Item 9.

  The Offer and Listing      167  

Item 10.

  Additional Information      171  

Item 11.

  Quantitative and Qualitative Disclosures About Market Risk      192  

Item 12.

  Description of Securities Other than Equity Securities      194  
PART II      195  

Item 13.

  Defaults, Dividends Arrearages and Delinquencies      195  

Item 14.

  Material Modifications to the Rights of Security Holders and Use of Proceeds      195  

Item 15.

  Controls and Procedures      195  

Item 16.

  Reserved      197  

Item 16A.

  Audit Committee Financial Expert      197  

Item 16B.

  Code of Ethics      197  

Item 16C.

  Principal Accountant Fees and Services      197  

Item 16D.

  Exemptions from the Listing Standards for Audit Committees      198  

Item 16E.

  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      198  

Item 16F.

  Change in Registrant’s Certifying Accountant      198  

Item 16G.

  Corporate Governance      198  

Item 16H.

  Mine Safety Disclosure      200  
PART III      200  

Item 17.

  Financial Statements      200  

Item 18.

  Financial Statements      200  

Item 19.

  Exhibits      200  

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

In this annual report, we use the terms “we,” “us,” “our,” “the Company” and “Avianca Holdings” to refer to Avianca Holdings S.A., together with its subsidiaries, except where the context requires otherwise.

IFRS Financial Statements

This annual report includes our audited consolidated financial statements as of December 31, 2018 and 2017 and for the years ended December 31, 2018, 2017 and 2016, together with the notes thereto, prepared in accordance with IFRS. Unless otherwise indicated, all financial information provided in this annual report has been prepared in accordance with IFRS. Our consolidated financial statements prepared in accordance with IFRS are stated in U.S. dollars.

Change in Accountants

On February 21, 2018, our board of directors approved the appointment of KPMG S.A.S as our external auditor for the period of May 1, 2018 to April 30, 2020. Our consolidated financial statements as of and for the year ended December 31, 2018 have been audited by KPMG S.A.S, independent auditors, as stated in their report included herein. Our consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016, included in this annual report, have been audited by Ernst & Young Audit S.A.S., independent auditors, as stated in their report incorporated by reference therein.

Certain Non-IFRS Financial Measures

This annual report includes certain references to non-IFRS measures such as our Adjusted EBITDAR and Adjusted EBITDAR margin. See “Item 3. Key Information—Part A. Selected Financial Data” for a discussion of our use of Adjusted EBITDAR in this annual report, including the reasons why we believe this information is useful to management and to investors, and a reconciliation of Adjusted EBITDAR to net profit. These supplemental financial measures are not prepared in accordance with IFRS. Accordingly, you are cautioned not to place undue reliance on this information and should note that Adjusted EBITDAR and Adjusted EBITDAR margin, as calculated by us, may differ materially from similarly titled measures reported by other companies, including our competitors.

Adjusted EBITDAR is commonly used in the airline industry to view operating results before, among other items, depreciation, amortization and aircraft operating lease charges, as these costs can vary significantly among airlines due to differences in the way airlines finance their aircraft and other assets. However, Adjusted EBITDAR should not be considered as an alternative measure to operating profit, as an indicator of operating performance, as an alternative to operating cash flows or as a measure of our liquidity. Adjusted EBITDAR, as calculated by us and as presented in this annual report, may differ materially from similarly titled measures reported by other companies due to differences in the way these measures are calculated. Adjusted EBITDAR has important limitations as an analytical tool and should not be considered in isolation from, or as a substitute for an analysis of our operating results, as reported under IFRS. Some of the limitations are:

 

   

Adjusted EBITDAR does not reflect cash expenditures or future requirements for capital expenditures or contractual commitments;

 

   

Adjusted EBITDAR does not reflect changes in, or cash requirements for, working capital needs;

 

   

Adjusted EBITDAR does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on debt;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDAR does not reflect any cash requirements for such replacements;

 

   

Adjusted EBITDAR does not reflect expenses related to leases of flight equipment and other related expenses; and

 

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other companies may calculate Adjusted EBITDAR or similarly titled measures differently, limiting its usefulness as a comparative measure.

Currency Presentation

In this annual report, references to “dollars,” “U.S. dollars,” and “$” are to the currency of the United States and references to “Colombian pesos,” “Pesos” and “COP” are to the currency of Colombia. The meaning of the word “billion” in the Spanish language is different from that in American English. In the Spanish language, as used in Colombia, a “billion” is a million millions, which means the number of 1,000,000,000,000, while in American English a “billion” is a thousand millions, which means 1,000,000,000. In this annual report, the meaning of billion is as used in American English.

We have converted certain U.S. dollar amounts presented in this annual report from Colombian peso amounts solely for the convenience of the reader. We make no representation that the peso or dollar amounts shown in this annual report could have been or could be converted into U.S. dollars or Colombian pesos at the rates shown in this annual report or at any other rate. The Federal Reserve Bank of New York does not report a noon buying rate for Colombian pesos. The conversion of amounts expressed in Colombian pesos as of a specified date at the then prevailing exchange rate may result in presentation of U.S. dollar amounts that differ from U.S. dollar amounts that would have been obtained by converting Colombian pesos as of another specified date.

The rates set forth in this annual report for conversion of COP into U.S. dollars are the rates published by the Colombian Central Bank ( Banco de la República , or the Central Bank) as reported by the Colombian Financial Superintendency ( Superintendencia Financiera de Colombia , or the SFC).

On March 31, 2019, the exchange rate between the Colombian peso and the U.S. dollar certified by the SFC was COP 3,174.79 per $1.00. See “Item 10. Additional Information—Part D. Exchange Controls—Exchange Rates.” On April 15, 2019, the exchange rate between the Colombian peso and the U.S. dollar certified by the SFC was COP 3,109.32 per $1.00.

IFRS does not currently require us to adjust our financial statements for inflation and therefore our financial statements are not adjusted for inflation. Colombia experienced inflation rates of 3.2%, 4.1% and 5.8% for the years ended December 31, 2018, 2017 and 2016, respectively, according to the Colombian National Administrative Department of Statistics ( Departamento Administrativo Nacional de Estadística , or DANE).

Rounding

Certain figures included in this annual report have been rounded for ease of presentation. Percentage figures included in this annual report have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this annual report may vary from those obtained by performing the same calculations using the figures in our consolidated financial statements. Certain other amounts that appear in this annual report may not sum due to rounding.

MARKET DATA

This annual report contains certain statistical data regarding our airline routes and our competitive position and market share in, and the market size of, the Latin American air transportation market. This information has been derived from a variety of sources, including the Civil Aviation Authority of Colombia ( Unidad Administrativa Especial de Aeronáutica Civil ), the Civil Aviation Authority of El Salvador ( Autoridad de Aviación Civil ), the Civil Aviation Authority of Costa Rica ( Dirección General de Aviación Civil ), the Civil Aviation Authority of Peru ( Dirección General de Aviación Civil ), the Civil Aviation Authority of Ecuador ( Dirección General de Aviación Civil ), the International Air Transport Association, or IATA, the Latin American and Caribbean Air Transport Association, or ALTA, and other third-party sources, governmental agencies or industry or general publications.

Information for which no source is cited has been prepared by us on the basis of our knowledge of Latin American airline markets and other information available to us. The methodologies and terminologies used by different sources are not always consistent, and data from different sources are not readily comparable. In addition, sources other than us use methodologies that are not identical to ours and may produce results that differ from our own estimates. Although we have not independently verified the information contained herein concerning competitive positions, market shares, market sizes, market growth or other similar data that is based upon third-party sources or industry or general publications, we consider these sources and publications to be generally reliable.

 

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CERTAIN TERMS

This annual report contains terms relating to our business and operating performance that are commonly used in the airline industry and are defined as follows:

“Aircraft utilization” represents the average number of block hours operated per day per aircraft for an aircraft fleet.

“Amended and Restated Joint Action Agreement” means the agreement dated as of November 29, 2018 by and among Avianca Holdings S.A., Kingsland, BRW, United and Synergy.

“Available seat kilometers,” or ASKs, represents aircraft seating capacity multiplied by the number of kilometers the seats are flown.

“Available ton kilometers,” or ATKs, represents cargo ton capacity multiplied by the number of kilometers the cargo is flown.

“Avianca” means Aerovías del Continente Americano – Avianca S.A.

“Avianca Costa Rica” means Avianca Costa Rica S.A., formerly known as Líneas Aéreas Costarricenses, S.A.

“Avianca Ecuador” means Avianca Ecuador S.A., formerly known as Aerogal.

“Avianca Holdings” means Avianca Holdings S.A.

“Avianca Leasing” means Avianca Leasing, LLC.

“Avianca Peru” means Avianca Peru S.A., formerly known as Trans American Airlines S.A.

“Block hours” means the elapsed time between an aircraft leaving an airport gate and arriving at an airport gate.

“BRW” means BRW Aviation LLC, a Delaware limited liability company and wholly owned subsidiary of Synergy, that currently holds 515,999,999, or 78.1 % of our voting common shares which represents 51.5% of our total outstanding shares. BRW is owned by BRW Aviation Holding LLC (“BRW Holding”), which is owned by Synergy, a company, indirectly controlled by Mr. José Efromovich and his brother Germán Efromovich.

“CASK excluding fuel” represents operating expenses other than fuel divided by available seat kilometers (ASKs).

“Code share alliance” means our code share agreements with other airlines with whom we have business arrangements to share the same flight. A seat can be purchased on one airline but is actually operated by a cooperating airline under a different flight number or code. The term “code” means the identifier used in flight schedules, generally the two-character IATA airline designator code and flight number. Code share alliances allow greater access to cities through a given airline’s network without having to offer extra flights and makes connections simpler by allowing single bookings across multiple planes.

“Copa” means Copañia Panameña de Aviacíon, S.A., including, as applicable, certain of its subsidiaries and affiliates relevant in the context of the United Copa Transaction.

“Cost per available seat kilometer,” or CASK, represents operating expenses divided by available seat kilometers (ASKs).

“ECA” means export credit agency.

“ECA financing” means a financing provided or guaranteed by any ECA.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

 

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“IFRS” means the International Financial Reporting Standards and applicable accounting requirements set by the International Accounting Standards Board or any successor thereto (or the Financial Accounting Standards Board, the Accounting Principles Board of the American Institute of Certified Public Accountants, or any successor to either such Board, or the SEC, as the case may be), as in effect from time to time.

“Independent Third Party” means the person that United and BRW identify and select, after consultation with Kingsland and as soon as reasonably practicable after the date of execution of the Amended and Restated Joint Action Agreement, to exercise certain rights that have been delegated by Kingsland in relation to the Amended and Restated Joint Action Agreement and the Company’s charter ( Pacto Social ), including the right to vote Kingsland’s shares, the right to approve certain strategic and operational transactions and any other rights afforded to shareholders generally under the Amended and Restated Joint Action Agreement and the Company charter, except for, among others, Kingsland’s rights in connection with the composition of Avianca Holdings’ board of directors, Kingsland’s tag-along rights as specified in the Amended and Restated Joint Action Agreement and all statutory rights afforded to Kingsland as a shareholder of Avianca Holdings under certain rules of Panamanian law. Until election of such Independent Third Party by United and BRW, the Independent Third Party shall be Kingsland. As of the date of this annual report, the Independent Third Party has not been appointed by United and BRW. For more information, see “Exhibit 2.3.1—Amended and Restated Joint Action Agreement” and “Exhibit 2.4—Share Rights Agreement.”

“Joint Action Agreement” means the agreement between Avianca Holdings, Kingsland and Synergy dated September 11, 2013, as amended March 24, 2015.

“Joint Business Agreement” means agreement dated November 29, 2018 by and among certain members of our group, United, Compañía Panameña de Aviación, S.A., and Aerorepublica, S.A.

“Kingsland” means Kingsland Holdings Limited, a company incorporated under the laws of the Commonwealth of the Bahamas, which is indirectly wholly owned by the Atlantis Trust. Mr. Roberto Kriete and his family have dispositive voting power of Kingsland’s shares.

“Load factor” represents the percentage of aircraft seating capacity that is actually utilized and is calculated by dividing revenue passenger kilometers by available seat kilometers (ASKs) unless stated otherwise.

“Local Bonds” means Avianca’s COP 266,370 million aggregate principal amount of Series C bonds governed by Colombian laws and maturing on August 25, 2019.

“NICA” means Nicaraguense de Avíacíón S.A.

“Operating revenue per available seat kilometer,” or RASK, represents operating revenue divided by available seat kilometers (ASKs).

“Pilots’ Strike” means the 51-day long strike of approximately 700 members of the Colombian Association of Civil Aviators pilots’ union that resulted in the cancellation of 50% of our flights between its start on September 20, 2017 and its conclusion at the end of 2017 and compelled us to enter into wet lease agreements to continue our operations.

“Revenue passenger kilometers,” or RPKs, represent the number of kilometers flown by revenue passengers.

“Revenue passengers” represents the total number of paying passengers (which do not include passengers redeeming LifeMiles (previously known as AviancaPlus or Distancia ) frequent flyer miles or other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).

“Revenue ton kilometers,” or RTKs, represents the total cargo tonnage uplifted multiplied by the number of kilometers the cargo is flown.

“Share Rights Agreement” means the agreement dated as of November 29, 2018 by and among Avianca Holdings S.A., Kingsland, BRW and United.

“Synergy” means Synergy Aerospace Corp, indirectly controlled by Mr. José Efromovich and his brother Germán Efromovich, and itself the indirectly controlling shareholder of BRW.

 

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“Taca” means Grupo Taca Holdings Limited.

“Taca International” means Taca International Airlines S.A.

“Tampa Cargo” means Tampa Cargo S.A.S.

“Technical dispatch reliability” represents the percentage of scheduled flights that are not delayed at departure more than 15 minutes or cancelled, in each case due to technical problems.

“United” means United Airlines, Inc., including, as applicable, certain of its subsidiaries and affiliates relevant in the context of the United Copa Transaction.

“United Approval Notice” means a notice given by United pursuant to the Share Rights Agreement, pursuant to which United notifies the other parties to the Share Rights Agreement that (a) United has determined that its exercise of any or all of the rights that have been delegated to the Independent Third Party by Kingsland can be exercised by United or its designee without such exercise constituting “control” within the meaning of such term within any of United’s collective bargaining agreements or other material agreements, or (b) United is otherwise prepared to exercise any or all of such rights.

“United Copa Transaction” means the three-way joint business arrangement among Avianca, United and Copa signed on November 29, 2018 to effect a strategic and commercial partnership among the airlines covering routes between the United States and Central and South America (excluding Brazil), which currently remains subject to antitrust approval.

“United Loan” means the loan agreement dated as of November 29, 2018 among BRW Aviation LLC, as borrower, BRW Holding, as guarantor, United, as lender, and Wilmington Trust, National Association, as administrative and collateral agent.

“Yield” represents the average amount one passenger pays to fly one kilometer, or passenger revenue divided by revenue passenger kilometers (RPKs) unless stated otherwise.

 

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FORWARD LOOKING STATEMENTS

This annual report includes forward-looking statements, principally under the captions “Item 4. Information on the Company—Business Overview,” “Item 3. Key Information—Part D. Risk Factors,” and “Item 5. Operating and Financial Review and Prospects.” Our estimates and forward-looking statements are mainly based on our expectations as of the date of this annual report and estimates on future events and trends that affect or may affect our business, financial condition, results of operations, liquidity and prospects. They are made considering information currently available to us and are not guarantees of future performance. Although we believe that these estimates and forward-looking statements are based upon assumptions that we believe to be reasonable in all material respects, they are subject to several risks, uncertainties and assumptions and are made in light of information currently available to us.

Our estimates and forward-looking statements may be affected by the following factors, among others:

 

   

general economic, political and business conditions in our core markets of Colombia, Peru, Ecuador and Central America and the other geographic markets we serve;

 

   

our level of debt and other fixed obligations and compliance with the covenants contained in our debt financings;

 

   

our ability to obtain financing and the terms of such financing, including our ability to refinance existing indebtedness;

 

   

any change in our controlling shareholders, BRW and Kingsland, and any consequences of such change in control, including under our financing and other material agreements;

 

   

our ability to successfully implement our current strategy, including our ability to increase operating efficiency, reduce costs and increase our operating margin;

 

   

demand for passenger and cargo air services in the markets in which we operate;

 

   

competitive pressures on pricing;

 

   

our capital expenditures;

 

   

changes in the regulatory environment in which we operate;

 

   

fluctuations of crude oil prices and its effect on fuel costs;

 

   

changes in labor costs, maintenance costs and insurance premiums;

 

   

changes in market prices, customer demand and preferences and competitive conditions;

 

   

terrorist attacks and the possibility or fear of such attacks affecting the airline industry;

 

   

future threats or outbreaks of diseases affecting traveling behavior and/or imports and/or exports;

 

   

natural disasters affecting traveling behavior and/or imports and/or exports;

 

   

cyclical and seasonal fluctuations in our operating results;

 

   

defects or mechanical problems with our aircraft;

 

   

our ability to successfully implement our fleet modernization program; and

 

   

the risk factors discussed under “Item 3. Key Information—Part D. Risk Factors”.

 

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The words “believe,” “may,” “should,” “would,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “will,” “expect,” “plan” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, strategies for reducing costs and increasing operational efficiency, potential selected growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the future events and circumstances discussed in this annual report might not occur or come into existence and forward-looking statements are thus not guarantees of future performance. Considering these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.

 

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PART I

 

Item 1.

Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2.

Offer Statistics and Expected Timetable

Not applicable.

 

Item 3.

Key Information

 

A.

Selected Financial Data

The following tables present selected summary consolidated financial and operating data as of the dates and for the periods indicated. We prepare consolidated financial statements in accordance with IFRS as issued by the IASB in U.S. dollars. You should read this information in conjunction with our consolidated financial statements together with the notes thereto included in this annual report, “Presentation of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects.”

The selected consolidated financial information as of December 31, 2018, 2017, 2016, 2015, and 2014 and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from our audited consolidated financial statements prepared in accordance with IFRS.

 

     As of December 31,  
     2018      2017      2016      2015      2014  
     (in $ millions)  

Consolidated Balance Sheet Data

              

Assets

              

Current assets:

              

Cash and cash equivalents

     273.1        509.0        375.8        479.4        640.9  

Restricted cash

     4.8        5.5        5.4        5.4        2.0  

Available-for-sale securities

     —          —          —          —          1.2  

Trade and other receivables net of expected credit losses (1)

     288.2        226.0        313.9        279.6        355.2  

Accounts receivable from related parties

     6.3        17.2        19.3        23.1        27.4  

Current tax assets (1)

     231.9        114.4        —          —          —    

Expendable spare parts and supplies, net of provision for obsolescence

     90.4        97.2        82.4        68.8        65.6  

Prepaid expenses

     99.9        99.7        59.7        45.7        56.1  

Deposits and other assets

     89.8        202.0        160.1        130.7        174.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     1,084.4        1,271.0        1,016.5        1,032.7        1,322.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Assets held for sale

     31.6        —          —          3.3        1.4  

Non-current assets:

              

Available-for-sale securities

     —          —          0.1        0.8        0.2  

Deposits and other assets

     115.5        116.4        174.0        246.5        218.0  

Trade and other receivables net of expected credit losses (1)

     35.5        4.1        92.0        59.7        42.4  

Accounts receivable from related parties

     —          —          —          —          11.2  

Non current tax assets (1)

     0        136.3        —          —          —    

Intangible assets and goodwill, net

     513.8        426.6        412.9        413.8        416.1  

Deferred tax assets (1)

     24.6        26.0        5.8        5.8        35.7  

Property and equipment, net

     5,313.3        4,881.0        4,649.9        4,599.3        4,128.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     6,002.7        5,590.4        5,334.8        5,326.0        4,851.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     7,118.6        6,861.5        6,351.3        6,364.9        6,176.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1


Table of Contents
     As of December 31,  
     2018     2017     2016      2015     2014  
     (in $ millions)  

Liabilities and equity

           

Current liabilities:

           

Short-term borrowings and current portion of long-term debt

     626.7       572.1       406.7        412.9       458.7  

Accounts payable (1)

     732.6       495.0       493.1        480.6       547.5  

Accounts payable to related parties

     2.8       7.2       9.1        9.4       13.8  

Accrued expenses

     120.9       186.7       138.8        118.2       138.3  

Current tax liabilities

     26.7       31.9       —          —         —    

Provisions for legal claims

     7.8       11.7       18.5        13.4       14.2  

Provisions for return conditions

     2.5       19.1       53.1        52.6       61.4  

Employee benefits

     44.7       38.7       39.6        32.9       49.2  

Air traffic liability (2)

     424.6       454.0       521.2        433.6       461.1  

Frequent flyer deferred revenue (2)

     186.4       85.2       —          —         —    

Other liabilities

     3.9       9.4       11.1        12.7       127.5  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,179.6       1,911.0       1,691.2        1,566.3       1,871.6  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Non-current liabilities:

           

Long-term debt

     3,380.8       3,180.0       2,867.5        3,060.1       2,711.9  

Accounts payable (1)

     7.1       5.1       2.7        3.6       21.2  

Provisions for return conditions

     127.7       144.1       120.8        109.2       70.5  

Employee benefits

     110.1       135.6       115.6        127.7       173.5  

Deferred tax liabilities

     18.4       25.8       20.4        13.5       15.8  

Frequent flyer deferred revenue (2)

     234.3       104.8       98.1        93.5       85.9  

Other liabilities non-current

     68.2       15.2       14.8        15.4       8.5  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total non-current liabilities

     3,946.6       3,610.6       3,239.9        3,423.0       3,087.1  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     6,126.2       5,521.6       4,931.1        4,989.3       4,958.8  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Equity:

           

Common stock

     82.6       82.6       82.6        82.6       82.6  

Preferred stock

     42.0       42.0       42.0        42.0       42.0  

Additional paid-in capital on common stock

     234.6       234.6       234.6        234.6       234.6  

Additional paid-in capital on preferred stock

     469.3       469.3       469.3        469.3       469.3  

Retained earnings

     386.1       588.0       565.1        553.7       355.7  

Revaluation and other reserves

     —         —              24.6  

Other comprehensive income

     (44.1     (0.8     6.9        (28.1     —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total equity attributable to the Company

     1,170.5       1,415.7       1,400.5        1,354.0       1,208.7  

Non-controlling interest

     (177.9     (76.0     19.8        18.6       8.1  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

     992.5       1,339.7       1,420.3        1,372.6       1,216.7  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

     7,118.6       6,861.4       6,351.3        6,361.9       6,175.5  

 

(1)

With effect from January 1, 2018, certain amounts previously recorded under accounts receivables and accounts payable, as applicable, are instead recorded within the balances of the associated rights and obligations underlying such amounts, including reclassifications impacting non-current taxes and current tax liabilities. These items have been reclassified in our balance sheet as of December 31, 2017 to conform to the presentation as of December 31, 2018. However, we were not required to, and we have not, reclassified the items included in our balance sheet for dates prior to December 31, 2017. Therefore, the line items referred to above as of December 31, 2016, 2015 and 2014 have not been reclassified. See Note 2 to our audited consolidated financial statements as of and for the year ended December 31, 2018 included elsewhere in this annual report.

(2)

We previously recognized deferred miles related to our LifeMiles rewards program as current and non-current air traffic liability. As of January 1, 2018, we recognize such deferred miles as current and non-current frequent flyer deferred revenue. Certain amounts previously recorded under “air traffic liability” have been bifurcated into “air traffic liability” and “frequent flyer deferred revenue”. These items have been reclassified in our balance sheet as of December 31, 2017 to conform to the presentation as of December 31, 2018. However, we were not required to, and we have not, reclassified the items included in our balance sheet for dates prior to December 31, 2017. Therefore, the frequent flyer deferred revenue presented in this table as of December 31, 2016, 2015 and 2014 is not broken down into current and non-current portions and the current portion thereof was stated within air traffic liability. See Note 2 to our audited consolidated financial statements as of and for the year ended December 31, 2018 included elsewhere in this annual report.

 

2


Table of Contents
     For the Year Ended December 31,  
     2018     2017     2016     2015     2014  
     (in $ millions, except Earnings and Dividends per Share / ADS data)  
Consolidated Income Statement Data           

Operating revenue:

          

Passenger

     4,074.4       3,550.2       3,285.2       3,458.0       3,862.7  

Cargo and other (1)

     816.4       891.5       853.1       903.3       840.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     4,890.8       4,441.7       4,138.3       4,361.3       4,703.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Flight operations

     153.6       92.5       58.4       58.1       56.7  

Aircraft fuel

     1,213.4       923.5       785.3       1,006.8       1,345.8  

Ground operations

     474.8       450.2       426.2       412.4       397.6  

Aircraft rentals

     267.7       278.8       314.5       317.5       299.2  

Passenger services

     188.7       166.9       151.7       149.3       154.5  

Maintenance and repairs

     206.5       280.5       260.7       309.7       268.9  

Air traffic

     269.6       242.6       219.0       203.0       206.2  

Selling expenses

     530.9       515.1       545.3       612.8       605.7  

Fees and other expenses

     203.3       177.9       187.6       176.2       165.2  

Salaries, wages and benefits

     760.8       706.8       661.7       666.1       725.8  

Depreciation, amortization, and impairment

     389.4       313.4       269.5       230.7       198.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     4,658.7       4,148.0       3,879.9       4,142.5       4,424.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     232.1       293.6       258.5       218.8       279.5  

Interest expense

     (212.3     (183.3     (172.6     (169.4     (134.0

Interest income

     10.1       13.5       13.1       19.0       17.1  

Derivative instruments

     (0.3     (2.5     3.3       0.6       5.9  

Foreign exchange

     (9.2     (20.2     (23.9     (177.5     10.3  

Equity Method profit

     0.9       1.0       —         —         —    

Profit (loss) before income tax

     21.4       102.1       78.3       (108.5     178.8  

Total income tax expense

     (20.2     (20.1     (34.1     (31.0     (50.3

Net (loss) profit for the year

     1.1       82.0       44.2       (139.5     128.5  

Earnings and Dividends per Share / ADS:

          

Net (loss) profit attributable to equity holders of the parent

     (24.8     48.2       17.0       (155.4     129.3  

Net (loss) profit attributable to non-controlling interest

     25.9       33.8       27.2       15.9       (0.8

Basic and diluted (loss) earnings per share (common and preferred)

     (0.025     0.05       0.04       (0.14     0.13  

Basic and diluted (loss) earnings per ADS

     (0.20     0.40       0.32       (1.12     1.04  

Common and preferred share dividends per share
(COP/$) (2)

     98.6 / 0.04       77 / 0.03       50 / 0.02       198.5 / 0.07       160.1 / 0.07  

Common shares at period end

     660,800,003       660,800,003       660,800,003       660,800,003       660,800,003  

Preferred shares at period end

     336,187,285       336,187,285       336,187,285       336,187,285       336,187,285  

Weighted average of common shares used in computing earnings per share (thousands)

     660,800       660,800       660,800       660,800       665,383  

Weighted average of preferred shares used in computing earnings per share (thousands)

     336,187       336,187       336,187       336,187       331,604  

 

(1)

Includes Aerounion revenue beginning in October 22, 2014.

(2)

At the shareholders meeting held on March 22, 2019, dividends of COP 50 per share to shareholders of preferred stock and dividends of COP 46 per share for holders of common stock were approved. Dividends will be paid in three installments: May 24, August 23 and September 20, 2019 payable from earnings for the year ended December 31, 2018 and retained earnings from prior periods. The U.S. dollar equivalent of such dividends will be determined the date prior to each payment date. Dividends of COP 98.6 per share were declared in March 2018 and were paid in June, July, August and September 2018 based on profits for the year 2017. Dividends of COP 77.0 per share were declared in March 2017, and were paid in July 2017 and October 2017 based on retained earnings for the year 2016. Dividends of COP 50.0 per share were declared in March 2016 and paid in four equal installments of COP 12.50 per share on April 7, 2016, July 1, 2016, October 7, 2016, and December 16, 2016, based on profits for the year 2015.

 

3


Table of Contents
     As of December 31,  
     2018     2017     2016     2015     2014  
     (in $ millions)  

Cash Flow Data

          

Net (loss) profit for the period

     1.1       82.0       44.2       (139.5     128.5  

Net cash provided by operating activities

     703.1       527.3       568.0       363.0       257.1  

Net cash (used in) investing activities

     (493.8     (206.0     (118.4     (330.5     (246.9

Net cash (used in) provided by financing activities

     (426.2     (195.6     (550.5     18.1       (52.8

Cash and cash equivalents at end of the period

     273.1       509.0       375.8       479.4       640.9  

 

     For the Year Ended December 31,  
     2018     2017     2016     2015     2014  
     (in $ millions)  
Other Financial Data           

Adjusted EBITDAR (1)

     890.1       885.8       842.5       767.1       777.3  

Total operating revenue

     4,890.8       4,441.7       4,138.3       4,361.3       4,703.6  

Operating margin (2)

     4.7     6.6     6.2     5.0     5.9

Adjusted EBITDAR margin (3)

     18.2     19.9     20.4     17.6     16.5

 

(1)

Adjusted EBITDAR represents our consolidated net profit for the year plus the sum of income tax expense, depreciation, amortization, and impairment and aircraft rentals, minus interest expense, minus interest income, minus derivative instruments, minus foreign exchange. Adjusted EBITDAR is presented as supplemental information, because we believe it is a useful indicator of our operating performance and is useful in comparing our operating performance with other companies in the airline industry. However, Adjusted EBITDAR should not be considered in isolation, as a substitute for net profit determined in accordance with IFRS or as a measure of a company’s profitability. In addition, our calculation of Adjusted EBITDAR may not be comparable to other companies’ similarly titled measures. The following table presents a reconciliation of our net profit to Adjusted EBITDAR for the specified periods:

 

     2018  

Net (loss) profit for the year

     1.1  

Add: Income tax expense

     20.2  

Add: Depreciation, amortization, and impairment

     389.4  

Add: Aircraft rentals

     267.7  

Minus: Interest expense

     212.3  

Minus: Interest income

     (10.1

Minus: Derivative instruments

     0.3  

Minus: Foreign exchange

     9.2  

Adjusted EBITDAR

     890.1  

 

(2)

Operating margin represents operating profit divided by total operating revenue.

(3)

Adjusted EBITDAR margin represents Adjusted EBITDAR divided by total operating revenue.

 

     As of and for the Year Ended December 31,  
     2018      2017      2016      2015      2014  
     (as indicated below)  
Other data               

Total passengers carried (in thousands)

     30,503        29,459        29,480        28,290        26,230  

Revenue passengers carried (in thousands) (3)

     29,550        28,574        28,578        27,378        25,382  

Revenue passenger kilometers (RPK) (in millions) (4)

     43,730        40,243        38,233        35,478        32,602  

 

4


Table of Contents
     As of and for the Year Ended December 31,  
     2018     2017     2016     2015     2014  
     (as indicated below)  

Available seat kilometers (ASK) (in millions) (5)

     52,624       48,401       47,145       44,513       41,052  

Load factor (6)

     83.1     83.1     81.1     79.7     79.4

Block hours (7)

     584,655       562,431       571,820       547,859       517,943  

Average daily aircraft utilization (8)

     9.7       9.9       10.3       10.1       10.3  

Average one-way passenger fare ($)

     138.1       124.2       115.0       126.3       152.2  

Yield (9)

     9.3       8.8       8.6       9.7       11.8  

Passenger revenue per ASK (PRASK) (10)

     7.8       7.3       7.0       7.8       9.4  

Operating revenue per ASK (RASK) (11)

     9.3       9.2       8.8       9.8       11.5  

Cost per ASK (CASK) (12)

     8.9       8.6       8.2       9.3       10.8  

CASK excluding fuel

     6.5       6.7       6.6       7.0       7.5  

Revenue ton kilometers (RTK) (in millions) (13)

     1,409       1,420       1,291       1,259       1,104  

Available ton kilometers (ATK) (in millions) (14)

     2,460       2,489       2,346       2,152       1,810  

Gallons of fuel consumed (in thousands)

     481,803       483,512       481,803       461,268       427,785  

Average price of jet fuel into plane (net of hedge) ($/gallon)

     1.63       1.91       1.63       2.18       3.15  

Average stage length (kilometers) (15)

     1,129       1,069       1,019       1,002       972  

On-time domestic performance (16)

     67.1       69.9     77.4     83.5     71.9

On-time international performance (17)

     77.2       81.1     83.1     85.7     80.9

Completion rate (18)

     97.3       95.2     98.1     98.5     98.1

Technical dispatch reliability (19)

     99.5       99.5     99.5     99.5     99.4

Departures (20)

     292,596       291,013       304,827       299,192       282,475  

Average daily departures

     802       797       835       820       774  

Airports served at period end

     78       106       106       104       102  

Routes served at period end

     134       171       170       179       168  

Direct sales as % of total sales (21)

     33.8     33.4     33.7     34.1     33.6

Revenue per employee plus cooperative members ($ thousands)

     224       176       196       206       229  

Full-time employees and cooperative members at period end

     18,338       18,641       20,449       20,485       19,961  

Other Full time employees (Includes SAI, La Costeña and Getcom)

     2,901       5,907       —         —         —    

Total employees (Headcount)

     21,861       25,306       21,061       21,145       20,485  

 

(1)

Operating data does not include cargo operations except for block hours, departures, average daily aircraft utilization, gallons of fuel consumed, average price of jet fuel into plane (net of hedge), full-time employees and cooperative members at period end, revenue per full-time employee plus cooperative members, RTK and ATK.

(2)

Operating data does not include regional operations in Central America except for airports served at period end, full-time employees and cooperative members at period end, revenue per full-time employee plus cooperative members.

(3)

Total number of paying passengers (excluding all passengers redeeming LifeMiles frequent flyer miles and other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).

(4)

Revenue passenger kilometers (RPKs) represent the number of kilometers flown by scheduled revenue passengers.

(5)

Aircraft seating capacity multiplied by the number of kilometers the seats are flown.

(6)

Percentage of aircraft seating capacity that is actually utilized. Load factors are calculated by dividing revenue passenger kilometers by available seat kilometers.

(7)

The number of hours from the time an airplane moves off the departure gate for a revenue flight until it is parked at the gate of the arrival airport. Includes Tampa Cargo.

(8)

Average number of block hours operated per day per average number of passenger aircraft. Does not include Sansa operation.

(9)

Average amount (in U.S. cents) one passenger pays to fly one kilometer.

(10)

Passenger revenue (in U.S. cents) divided by the number of available seat kilometers.

(11)

“Operating revenue per ASK” (RASK) represents operating revenue (in U.S. cents) divided by available seat kilometers.

 

5


Table of Contents
(12)

“Cost per available seat kilometer” (CASK) represents service rendering costs and operating expenses (in U.S. cents) divided by available seat kilometers.

(13)

“Revenue ton kilometers” (RTKs) represent the total cargo tonnage uplifted multiplied by the number of kilometers the cargo is flown. RTKs does not include domestic Ecuador.

(14)

“Available ton kilometers” (ATKs) represent cargo ton capacity multiplied by the number of kilometers the cargo is flown. ATKs does not include domestic Ecuador.

(15)

The average number of kilometers flown per flight does not include freight operations.

(16)

Percentage of domestic scheduled flights that arrive at the gate within 15 minutes of the scheduled arrival. Does not include Sansa operation.

(17)

Percentage of international scheduled flights that arrive at the gate within 15 minutes of the scheduled arrival. Does not include Sansa operation.

(18)

Percentage of scheduled flights that arrive at the destination gate (other than flights cancelled with at least 168 hours’ notice). Does not include Sansa operation.

(19)

Percentage of scheduled flights that are not delayed at departure more than 15 minutes or cancelled, in each case, due to technical problems

(20)

Includes passenger and cargo operations.

(21)

Direct sales include sales from our ticket offices, our call centers, direct agents and our website.

 

B.

Capitalization and Indebtedness

Not applicable.

 

C.

Reasons for the Offer and Use of Proceeds

Not applicable.

 

D.

Risk Factors

An investment in the American Depositary Shares, or ADSs, involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. The trading price of the ADSs could decline due to any of these risks, and you may lose all or part of your investment. The risks described below are those known to us that we currently believe may materially affect us.

RISKS RELATING TO OUR BUSINESS

BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements.

In November 2018, under the terms of the United Loan, BRW pledged to Wilmington Trust as collateral agent for the benefit of United, all of the common shares that it owns in Avianca Holdings (representing 78.1% of our common shares), among other assets, as security for BRW’s obligations under the United Loan. In addition, in November 2018, Kingsland pledged to Wilmington Trust, as collateral agent for the benefit of United, all of the common shares that it owns in Avianca Holdings (representing 21.9% of our common shares) as security for the payment and performance of certain contractual obligations owed by Kingsland to United under certain contractual arrangements, including an upside sharing agreement, a put option agreement and a cooperation agreement.

Avianca Holdings is not a party to the United Loan and is not an obligor thereunder, and therefore any default by BRW under the United Loan does not per se constitute an event of default in respect of indebtedness owed by Avianca Holdings or any of its subsidiaries. The United Loan is subject to certain affirmative and negative covenants, including a number of financial covenants that are calculated by reference to the financial position of Avianca Holdings. These financial covenants comprise (i) a leverage ratio (calculated by dividing Avianca Holdings’ adjusted net debt by Avianca Holdings’ adjusted EBITDAR, the required covenant level of which would currently be 5.9:1), (ii) a minimum liquidity covenant (calculated based on Avianca Holdings’ unrestricted cash, the required covenant level of which would currently be $400 million unless certain grace period provisions are complied with by BRW so as to temporarily reduce the minimum liquidity level to $300 million), (iii) a covenant debt provision (calculated by taking Avianca Holdings’ adjusted debt and subtracting the lesser of its unrestricted cash and $200 million, the level of which as of December 31, 2018, must not exceed $5.88 billion) and (iv) a requirement that cumulative Avianca Holdings’ capital expenditures not exceed specified amounts at certain points in time (including $659 million in the year ended December 31, 2018. In the United Loan, BRW agrees not to permit the financial covenants and other applicable affirmative and negative covenants in the United Loan to be breached. As of December 31, 2018, we understand that our financial ratios complied with the covenants described above. We understand from BRW that the minimum liquidity covenant was complied with as a result of a waiver that temporarily reduced the minimum liquidity covenant to $300 million and, as of December 31, 2018, our liquidity level was $330 million (calculated in accordance with the requirements of the United Loan). Based on information available to us at the date of this annual report, we currently expect that, as of March 31, 2019, our liquidity level will continue to be greater than $300 million, but we cannot assure you that the temporary minimum liquidity covenant level remains in effect. The United Loan also includes other covenants that may cause BRW to limit or restrict the business and operational flexibility of Avianca Holdings.

We understand from discussions with BRW that BRW is in breach of at least one additional covenant under the United Loan, consisting of its failure to comply with a collateral coverage ratio set forth in the agreement, and we cannot assure you that BRW is not in breach of, or will not be in breach of, any other covenants. Any such breach constitutes an event of the default under the United Loan. The existence of one or more events of default under the United Loan entitles United or its collateral agent to take enforcement action in relation to 78.1% of our common shares, which could result in United or its collateral agent taking steps to enforce the share pledge, including ultimately taking control of our company or selling such control to a third party, which in turn could constitute an event of default under several of our financing agreements, including material bilateral and multi-lender credit facilities and substantially all of our ECA financings covering our aircraft. There are a number of different definitions of change of control in our financing documents, and any future determination of whether a change in control has occurred may be a complex assessment and may not be without doubt. In addition, if United enforces the share pledge, this may, in certain circumstances, result in the right of Advent International (a 30% minority investor in LifeMiles ) to require Avianca Holdings to purchase Advent’s interest in LifeMiles at a price to be determined pursuant to LifeMiles’ shareholders agreement, and any such obligation would be material. As of the date of this annual report, we understand that United has not provided a waiver of all existing defaults under the United Loan and there can be no assurance that, if a new waiver is requested by BRW after the date of this annual report, any such waiver would be granted. As of the date of this annual report, we are not aware of any action that United or its collateral agent have taken to enforce the share pledge.

Furthermore, the terms of our outstanding 8.375% Senior Notes due 2020 contain a change of control repurchase provision which provides that if there is a rating downgrade in such notes by each rating agency that rates the Notes, and such downgrade results from a change of control, we will be required to offer to all holders of such notes the right to sell such notes to us for a purchase price of 101% of their principal amount plus accrued and unpaid interest.

The aggregate principal amount of our indebtedness that contains change of control events of default, change of control repurchase provisions or cross-default provisions which could be triggered in the circumstances described above is $1,566.1 million, of which $1,006.3 million is secured indebtedness. For a description of certain terms of our material financings, see “Item 5. Operating and Financial Review and Prospects—Part B. Liquidity and Capital Resources—Debt and Other Financing Agreements.” including “—Bank Loans and Export Credit Agency Guarantees” thereunder.

If we are required by our lenders and noteholders to repay all or some of the financings referred to above, or if Advent is able to exercise its put option under the LifeMiles shareholders agreement, there can be no assurance that we will have sufficient funds to comply with our payment obligations. In addition, there can be no assurance that we will be able to modify or amend the terms of our debt, or obtain appropriate waivers in order prevent some or all of such debt becoming immediately due and payable. If we are not able to repay our borrowings as they become due (including any early acceleration of our financings), our inability to repay our debt may result in our creditors seeking to enforce the collateral granted in respect of our secured indebtedness, which constituted approximately 83% of our total indebtedness as of December 31, 2018. In addition, our lenders would have the right to institute insolvency proceedings or foreclose on certain of our assets and we may file for bankruptcy protection under Chapter 11 or otherwise seek to commence a restructuring of our outstanding indebtedness.

As of the date of this annual report, we have commenced the process of obtaining consent from the lenders under our bilateral and multi-lender credit facilities and from the lenders and export credit agencies under our ECA financings in order to add United as a permitted holder under the relevant change of control provisions of such financings. If such amendments are agreed to by the relevant lenders and export credit agencies, if United took ownership or control of our company, this would not constitute a change of control under such bilateral and multi-lender credit facilities and ECA financings. However, there can be no assurance that we will be able to obtain all such consents in a timely manner or at all. Furthermore, such amendments would not address the change of control provisions referred to above under the Senior Notes due 2020 and the Advent put option arrangements.

Furthermore, the exercise of put and call options negotiated in the context of the United Loan may, under certain conditions, lead to the transfer of shares from BRW and Kingsland to United. In addition, subject to certain conditions, BRW may also repay part of the principal and interest under the United Loan with shares of Avianca Holdings stock, which can involve either United taking ownership of the relevant shares or such shares being sold to third parties in the open market. Furthermore, any breach of the obligations of Kingsland that are owed to United and secured by the common shares that Kingsland owns may also entitle United to take enforcement action in respect of the such shares. We cannot assure you that, as a consequence of these arrangements, our current controlling shareholders, BRW and Kingsland, will keep their majority stake and/or exclusive voting control in Avianca Holdings.

In addition, certain key decisions with respect to our business and operations need to be approved by an Independent Third Party appointed by United and BRW (or, if an Independent Third Party has not been appointed, the Independent Third Party shall be Kingsland). Pursuant to the Share Rights Agreement, if United notifies the other parties to the agreement that (a) United has determined that its exercise of any or all of the rights that have been delegated to the Independent Third Party by Kingsland can be exercised by United or its designee without such exercise constituting “control” within the meaning of such term within any of United’s collective bargaining agreements or other material agreements, or (b) United is otherwise prepared to exercise any or all of such rights (which is referred to herein as a United Approval Notice), then United or its designee can assume some or all of the rights given to the Independent Third Party. Such United Approval Notice has not been issued as of the date of this annual report. If United decides to issue an United Approval Notice, unless we obtain all of the amendments to our credit facilities and ECA financings referred to above, we cannot assure you that this would not constitute a change of control under certain financing agreements to which the Company and its subsidiaries are a party.

In addition, any change in our control structure may cause us not to be in compliance with certain governmental requirements agreed between the countries, relating the conditions to be accepted as a designated carrier. Any such non-compliance could cause our permits to be adversely affected to the extent of such non-compliance, which could have a material adverse effect on our business, financial condition and results of operations. See “—Risks Relating to the Airline Industry—We are subject to international bilateral and multilateral air transport agreements in relation to the grant and exchange of air traffic rights between different countries, and to the extent applicable governmental authorities deny permission to us to provide service to domestic and international destinations, our business and results of operations may be adversely affected.”

Any change in our control structure may cause corresponding changes in relation to management and control decisions and could alter our controlling shareholders’ objectives in a manner that is not favorable to our shareholders, or holders of our indebtedness. See “—Risks Relating to the ADSs and our Preferred Shares—We have identified material weaknesses in our internal control over financial reporting and our disclosure controls and procedures are not effective. If we fail to remediate the identified material weaknesses, or if we otherwise fail to maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, detect or prevent fraud, or file our periodic reports in a timely manner, which may, among other adverse consequences, cause investors to lose confidence in our reported financial information and lead to a decline in the value or trading price of our securities” and “—Our audited financial statements as of and for the year ended December 31, 2018 contain a going concern qualification, raising questions as to our continued existence.”

Our audited financial statements as of and for the year ended December 31, 2018 contain a going concern qualification, raising questions as to our continued existence.

Our financial statements as of and for the year ended December 31, 2018 have been prepared assuming that we will continue as a going concern. As discussed in note 2(f) and 36 to our consolidated financial statements included in this annual report, in November 2018, under the terms of the United Loan, BRW pledged to Wilmington Trust as collateral agent for the benefit of United, all of the common shares that it owns in Avianca Holdings (representing 78.1% of our common shares), among other assets, as security for BRW’s obligations under the United Loan. We understand from discussions with BRW that BRW is currently in breach of a collateral coverage ratio under the United Loan, and such breach constitutes an event of the default under the United Loan. The existence of one or more events of default under the United Loan entitles United or its collateral agent to take enforcement action in relation to 78.1% of our common shares, which could result in United or its collateral agent taking steps to enforce the share pledge, including ultimately taking control of our company or selling such control to a third party. As a result, any such action could cause a change of control under several of our financing agreements, including material bilateral and multi-lender credit facilities and substantially all of our ECA financings covering our aircraft. See “—BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements.”

If we are required by our lenders and noteholders to repay all or some of our financings, or if Advent is able to exercise its put option under the LifeMiles shareholders agreement as a result of a change of control, there can be no assurance that we will have sufficient funds to comply with our payment obligations. As stated in the going concern qualification in the audit report to our consolidated financial statements, these circumstance raise a substantial doubt as to our ability to continue as a going concern. Our audited consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The inclusion of a going concern qualification in the audit report to our consolidated financial statements may negatively affect the price of our shares and may adversely impact our ability obtain financing or refinance our existing indebtedness. Any inability to continue as a going concern may result in our shareholders losing their entire investment.

The United Copa Transaction is subject to the receipt of approvals, consents and clearances from regulatory authorities in multiple jurisdictions in North, Central and South America pursuant to which the transaction could be subject to conditions that could prevent or materially impact the transaction, and even if the transaction is approved, we may not be able to extract the full anticipated benefits in relation thereto.

On November 29, 2018, Avianca entered into a three-way Joint Business Agreement with United and Copa to create a strategic and commercial partnership that we expect will bring new services and innovations for passengers and cargo travelling between the United States and 19 countries in Latin America. The partnership is intended to cover routes between the United States and Central and South America (excluding Brazil, Mexico and the Caribbean) and we plan to share revenue, integrate services and coordinate pricing and schedules with United and Copa for service in these regions. We hope that this transaction will enable the companies to better align frequent flyer programs, coordinate flight schedules and improve airport facilities. There can be no assurances, however, that our plans to expand our business and extract value via the United Copa Transaction will be successful given a number of factors, including the need for regulatory approvals in each country, additional transaction-related costs and the possibility that benefits intended to be obtained in connection with the transaction do not materialize.

The United Copa Transaction remains subject to regulatory approval in the United States and multiple jurisdictions in Central and South America (excluding Brazil, Mexico and the Caribbean). In deciding whether to grant the required regulatory approval, the relevant governmental entities will consider the effect of the commercial partnership on competition and air transport within their relevant jurisdictions, and other considerations they may deem appropriate. The regulatory approval process could take between 12 and 18 months (or potentially longer), and

 

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we are not permitted to fully implement the joint business arrangement until we receive governmental approval from the relevant authorities in the United States, Colombia and Panamá, and the rest of the jurisdictions. There can be no assurances that the relevant regulators will not impose unanticipated conditions, terms, obligations or restrictions. Any one of these conditions, terms, obligations or restrictions could jeopardize or delay the effective time of the transaction or delay, reduce or eliminate the anticipated benefits of the transaction. We also cannot assure that all required approvals and consents will be obtained. The occurrence of any of the foregoing could result in a failure to close the transaction and have a material adverse effect on our business, financial condition and results of operations.

Even if approval is received, we may incur additional costs related to management oversight of any new or expanded activities in connection with the United Copa Transaction. The integration of these activities into our existing business and the development of other management tools designed to help achieve profitability from this commercial partnership may create additional and unanticipated costs. Any of these factors and related costs may affect our results and financial condition. Given the current and expected competitive landscape in the airline industry in the United States and Latin America, as well as other market factors and conditions, it is possible that there may be a significant period before we are able to generate profits relating to the transaction and our overall business, and in certain circumstances we may not extract value and/or realize any anticipated or expected benefits from the United Copa Transaction, in each case potentially adversely affecting us.

Oceanair, a Brazilian airline that licenses the trademark Avianca from Aerovias del Continente Americano S.A. – Avianca, recently filed a petition for judicial restructuring in Brazilian courts and, shortly thereafter, for Chapter 15 relief in the United States. In addition, Avian, an Argentinian airline that licenses the trademark Avianca from Aerovias del Continente Americano S.A. – Avianca, recently initiated a preventative crisis procedure as a precursor to dismissing certain employees and reducing the salaries of other employees. Each of these factors may have a negative impact on our brand, business, revenue and financial position and cause significant reputational harm.

On December 10, 2018, Oceanair Linhas Aereas S.A., a Brazilian airline that licenses the trademark “Avianca” from Aerovias del Continente Americano S.A. – Avianca, together with AVB Holding S.A., its parent entity, which, together with Oceanair, we refer to as the “Debtors,” filed a petition for judicial restructuring before the First Bankruptcy Court of the Central Courthouse of the Judicial District of Sao Paulo State, Brazil seeking a voluntary judicial restructuring and emergency relief staying Brazilian foreclosure actions against Oceanair’s fleet. On December 27, 2018, the Debtors also filed for Chapter 15 relief in the United States Bankruptcy Court for the Southern District of New York seeking recognition of the Brazilian Insolvency Proceeding and with the purpose of halting legal action by creditors to collect from the Debtors in the United States. Prior to and subsequently to these filings, several aircraft repossession actions were filed in Brazil by aircraft lessors to immediately respossess the aircraft leased to Oceanair due to Oceanair’s failure to pay rent. While such petitons were initially granted in some cases, such rulings were subsequently cancelled by Brazil’s Superior Court of Justice, although the approach of the courts could change to permit reposessions. As a consequence, the Debtors were granted protection from any acts of foreclosure, including lawsuits and administrative proceedings, until the Debtors’creditor meeting held on April 5, 2019 during which creditors representing the four different categories of claims voted on the reorganization plan proposed by the Debtors. On April 8, 2019, the São Paulo Court of Appeal authorized certain lessors to proceed with the repossession of certain aircraft. In response to such decision, the Debtors filed a petition for the amicable return of 40 aircraft within a period of five months, which is currently under review by the court. As a result of the repossession efforts of the lessors, Oceanair was required to cancel some of its flights. Meanwhile, on March 11, 2019 Azul, another Brazilian airline, announced that it had signed a non-binding agreement to acquire certain operational assets and rights of Oceainair in block. Oceanair has ceased all its international operations on March 31, 2019 and has been reducing their domestic operations. During the first week of April 2019, LATAM and Gol communicated to the market that they also intend to participate at the bidding process for the acquisition of Oceanair slots and other assets. Therefore, the draft of the reorganization plan has been amended to allow the three companies and other interested participants to compete equally in the auction, which remains to be scheduled. This adjusted plan, with some additional modifications, was approved on April 5, 2019 by the majority of OceanAir’s creditors during the creditors’ meeting and it was subsequently ratified by the competent judge on April 12, 2019. In addition, the approved restructuring plan provides that Avianca’s rights as owner of its trademarks shall be respected and that the temporary use of such trademarks depends on the prior authorization of Avianca.

 

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Oceanair and AVB Holding S.A. are not part of our group and, accordingly, its administration, operations and financial statements are separate, and their results are not consolidated with ours. Brazilian law 13.467/2017, better known as the 2017 labor reform law, introduced a more restrictive concept of “economic group” which demands not only common control but also proof of the existence of integrated interests and operations among the relevant entites. Nevertheless, although we are currently not a party in any pending bankruptcy or judicial restructuring proceedings in Brazil, the United States or elsewhere, we are exposed to certain risks related to the Oceanair proceedings, partially because Synergy also owns a majority stake in Oceanair. We have historically entered into a number of commercial arrangements with Oceanair, including the aircraft sublease arrangements pursuant to which Oceanair is required to make monthly lease payments to us. We currently have two aircraft on sublease to Oceanair. In the event that Oceanair does not pay us, we remain liable to our lessor as primary obligor. We estimate that the total number of payments payable by Oceanair in relation to these sublease contracts during 2019 will be $1.14 million. Two subleased aircraft were already redelivered to Avianca in February and March 2019 and we are currently negotiating the redelivery of the remaining two aircraft.

Another airline in Argentina named Avian Lineas Aereas S.A. (“Avian”) that is also part of the Synergy group and operates under the trademark “Avianca” recently initiated a preventative crisis procedure (a procedimiento preventivo de crisis ) as a precursor to dismissing certain employees and reducing the salaries of other employees. We understand that the Labor Ministry in Argentina is currently requesting certain information from Avian in order to evaluate the preventative crisis procedure. Avian is also not part of our group and, accordingly, its administration, operations and financial statements are separate, and its results are not consolidated with ours. We have entered into certain commercial agreements with Avian that are not material for us and there are no aircraft leased to Avian or fleet exposure with Avian similar to the one we face with respect to Oceanair.

In addition, we have already experienced, and could continue to experience, reputational harm as a result of the Oceanair and Avian proceedings. Oceanair operates the trademark “ Avianca ” at no cost under a trademark licensing agreement executed between Avianca and Oceanair since 2009 and a trademark licensing agreement exists between Avainca and Avian since 2016. As a result of our shared name and brand, customers, current or future contractual counterparties and the public in general may easily confuse us with Oceanair and Avian or otherwise assume we are involved in its restructuring. Any such association may impact our brand, ability to negotiate advantageous terms with counterparties, or at all, and could generally result in an overall decrease in customer confidence, any of which could lead to a significant loss of business and revenue or result in operational and/or financial harm.

 

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We have experienced ratings downgrades in the past.

Major rating agencies, including Fitch and Standard and Poor’s, have downgraded us in the past, suggesting the likelihood that we will be able to repay our existing debt obligations has diminished, and may do so again in the future, particularly if we are unable to successfully reduce our significant indebtedness, including the repurchase or repayment of currently outstanding bonds in the international market. If we were to experience a ratings downgrade, this would likely make it difficult for us to refinance our debt and may increase our interest expenses, which could damage our financial condition and results of operations. A default on any of our debt obligations would likely have a negative impact on the market value of our ADSs and generally impair our ability to obtain financing on favorable terms or at all to fund our operations on an ongoing basis.

We have significant indebtedness, fixed financing and other costs and expect to incur additional indebtedness and financing costs as we modernize our fleet and seek selective opportunities for profitable growth.

We have substantial and increasing fixed financial costs in connection with our aircraft financing obligations and other indebtedness. As of December 31, 2018, we had $4,007.6 million of total debt outstanding, and our interest expense was $212.3 million in 2018. In 2018, our aircraft rental expenses under aircraft operating leases aggregated $267.7 million, and our facility rental costs aggregated more than $41.5 million. In addition, we have entered into agreements to acquire up to 124 Airbus A320 Neo family to be delivered between 2019 and 2025. While we have recently reduced our order of such Airbus A320 Neo by 17 aircraft and while we have negotiated with Airbus a postponement in certain scheduled aircraft deliveries for 2020, 2021 and 2022 which will now be delivered between 2026 and 2028, we expect to incur additional indebtedness in connection with these forthcoming aircraft deliveries. See “Item 5. Operating and Financial Review and Prospects—Part A. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations” and “—We have significant off-balance sheet arrangements.”

A high level of leverage may have significant negative effects on our future operations, including:

 

   

impairing our ability to obtain additional financing in the future (or to obtain such financing on acceptable terms) for working capital, capital expenditures, acquisitions or other important needs;

 

   

requiring us to dedicate a substantial portion of our cash flow to the payment of principal and interest on our indebtedness, which could impair our liquidity and reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other important needs;

 

   

increasing the possibility of an event of default under the financial and operating covenants contained in our debt instruments; and

 

   

limiting our ability to adjust to rapidly changing conditions in the market or the airline industry, reducing our ability to withstand competitive pressures and making us more vulnerable to a downturn in general economic conditions or business than our competitors with less debt.

If we are unable to generate sufficient cash flow from operations to service our debt, we may be required to refinance and/or repurchase all or a portion of our existing debt or obtain additional financing. We cannot assure you that any such refinancing would be possible or that any additional financing could be obtained. Our inability to obtain such refinancing or financing may have a material adverse effect on our business, financial condition, ratings and results of operations.

 

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Our existing debt and lease financing arrangements contain restrictive covenants and events of default that impose significant operating and financial restrictions on us.

The majority of our financing arrangements and aircraft leases contain covenants and restrictions including limits on our ability and our subsidiaries’ ability to incur additional debt, create liens and make certain investments. Some of these covenants require that we comply with specified financial ratios, including an EBITDAR coverage ratio of not less than 1.75 to 1.00, a capitalization ratio of not more than 0.86 to 1.00 and a minimum liquidity level of $350 million, in addition to other negative and affirmative covenants. As of December 31, 2018, our EBITDAR coverage ratio was 1.85 to 1.00, our capitalization ratio was 0.85 to 1.00 and our liquidity level was $432.9 million, it being recognized that calculations can differ between our financings. As of December 31, 2018, Avianca was not meeting its debt service ratio for its Colombian-law governed Local Bonds and therefore, cannot pay dividends to Avianca Holdings. The Local Bonds will mature in August 2019. In addition, as a result of such breach, there are restrictions on the indebtedness that Avianca can incur outside of fleet financing and ground support equipment. However, this failure does not constitute an event of default and does not give holders of the Local Bonds the ability to accelerate this debt. Given the scope and breadth of the covenants that Avianca Holdings and its subsidiaries are subject to pursuant to numerous financing agreements with multiple lenders, it is possible that we could breach other covenants in the future, even if unknowingly. See “Item 5. Operating and Financial Review and Prospects—Part B. Liquidity and Capital Resources—Debt and Other Financing Agreements.”

Complying with the covenants in our many financing agreements may cause us to take actions that make it more difficult to execute our business strategy successfully and we may face competition from companies not subject to such restrictions. If we fail to comply with the covenants under any of our indebtedness, we may be in default under the documents governing such indebtedness, which may entitle the lenders thereunder to accelerate the debt obligations. A default under any of our indebtedness could result in cross-defaults under our other indebtedness, which in turn could result in the acceleration of our other indebtedness and in the execution against any collateral securing such indebtedness. In order to avoid defaulting on our indebtedness, we may be required to take actions such as reducing or delaying capital expenditures, reducing or eliminating dividends or share repurchases, selling assets, restructuring or refinancing all or part of our existing debt, or seeking additional equity capital, any of which may not be available on terms that are favorable to us or to our shareholders, if at all.

We have in the past and may in the future fall out of compliance with financial covenants in our debt agreements. A default under such agreements may result in their early termination and, as consequence, the cross-default of certain obligations which would cause a material adverse effect on us.

We may experience decreases in revenue or profitability in the future.

We experienced an increase in revenue in 2018, primarily as a result of an increase in passenger revenue mainly due to an increase in average fare across our network and an increase in loyalty revenue. In the past, however, we experienced a decrease in revenue, primarily as a result of lower yields, which were caused by increased competition, new competitors and the depreciation of the Colombian peso against the U.S. dollar (which caused the dollar-equivalent amount of our revenue earned in Colombian pesos to decrease). There is no assurance that these factors or other factors will not negatively affect our business in the future. Prospective investors should understand that our future results of operations are subject to significant uncertainties.

In addition to seeking to increase our operational efficiency and operating margins, we seek to grow by focusing on our core business and expanding our service to new markets, mainly via strategic alliances, including the United Copa Transaction. We cannot assure you, however, that any future growth will improve our overall profitability and it may, in fact, damage our profitability. For example, when we commence a new route, our load factors tend to be lower than those in our established routes, and our advertising and other promotional costs tend to be higher, which may result in initial losses that would have a negative impact on our consolidated results of operations as well as require a substantial amount of cash to fund. We also periodically offer special promotional fares, particularly in connection with the opening of new routes. Promotional fares may have the effect of increasing load factors while reducing our yield on such routes during the period that they are in effect.

Prior to 2018, demand for air travel and overall performance of the Latin American aviation market weakened partially because the fall of commodity prices, especially fuel, affected the economics of the region, causing a downturn in economic growth rates, significant currency devaluation, an increase in inflation and a decline of international investments. This regional economic downturn affected the demand for air travel and overall performance in our home markets. During 2018, the Latin American aviation market excluding Argentina, which

 

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according to IATA has presented a GDP reduction of 3.5 basis points and an annual currency devaluation of close to 51% versus 2017, presented a slight recovery. We cannot assure you that this trend will continue. Should economics in Latin America begin to weaken once more as a result of a fall in commodity prices or otherwise, the profitability of airlines in the region, including our company, would be once more negatively affected.

In addition, the capacity increase and low fare strategy of North American airlines in our core markets, led by low cost carriers may continue to affect our revenue and those of other Latin American airlines.

Our operating efficiency, growth and profitability depend on the number of markets we serve and our flight frequencies, which in turn depend on our ability to identify the appropriate geographic markets upon which to focus and to gain suitable airport access and route approval in these markets. According to ALTA, air travel in Latin America grew at rates of 5.7%, 5.1% and 3.8% in 2018, 2017 and 2016, respectively. We cannot assure you that this growth will continue in the future or that any new markets we enter will provide sufficient passenger traffic to make our operations in those new markets profitable. Any condition that would prevent or delay our access to key airports or routes, including limitations on the ability to carry more passengers, the imposition of flight capacity restrictions, the inability to secure additional route rights under bilateral agreements or the inability to maintain our existing slots and obtain additional slots, could constrain the expansion of our operations. See “—Risks Relating to Colombia, Peru, Central America and Other Countries in which we operate.” In light of the factors mentioned above, we cannot assure you that we will be able to successfully achieve profitability or expand our existing markets, and our failure to do so could harm our business and results of operations, as well as the value of the ADSs.

Our assets include a significant amount of goodwill.

Goodwill represents 4.34 per cent of our assets. Under IFRS, goodwill is subject to an annual impairment test and may be required to be tested more frequently if events or circumstances indicate a potential impairment. Any impairment could result in the recognition of a significant charge to earnings in our statement of income, which could materially and adversely impact our consolidated results for the period in which the impairment occurs.

We have significant off-balance sheet arrangements.

We have significant off-balance sheet arrangements, which must be taken into account in evaluating our overall level of leverage and financial health. As of December 31, 2018, the balance of our aircraft off-balance sheet arrangements was $1,100.7 million, primarily related to obligations under our operating leases for aircraft in our fleet. See “Item 5. Operating and Financial Review and Prospects—Part E. Off-Balance Sheet Arrangements.” The amount of these off-balance sheet arrangements may grow in the future as we incorporate new aircraft into our fleet under our fleet plan, many of which could be through operating leases. For more information, see “—We have significant indebtedness, fixed financing and other costs and expect to incur additional indebtedness and financing costs as we modernize our fleet and seek selective opportunities for profitable growth.” Although our off-balance sheet arrangements, including our aircraft leases, are not listed as liabilities on our balance sheet, they represent substantial financial obligations. Any conditions that limit our ability to comply with these obligations could materially harm our financial condition and results of operations.

We are subject to litigation that could negatively affect our profitability and cash flow or have a material adverse effect on our business, financial condition or results of operations.

We are, and in the future may be, a defendant in various judicial, arbitral and administrative proceedings arising in the ordinary course of our business and also, on an exceptional basis. Such disputes may relate to civil, tax, labor, social security, regulatory or environmental matters and involve our customers, management or environmental, labor and tax authorities, among others. Many of these matters raise difficult and complicated factual and legal issues and are subject to uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory inquiries, and governmental and other legal proceedings is uncertain. Additionally, the possible outcomes or resolutions to these matters could include materially adverse judgments or settlements, either of which could require substantial payments or other significant financial obligations. We cannot assure you that the outcomes of these proceedings will be favorable to us, or that we will have established sufficient reserves for all potential liabilities in connection with these proceedings. Unfavorable decisions or settlements in relation to these proceedings that prevent us from conducting our business as initially planned, or that involve substantial amounts that have not been adequately provisioned, may materially adversely affect our business, financial condition and results of operations.

 

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In particular, we were party to several litigation matters and other disputes emanating from the Pilots’ Strike which lasted 54 days in 2017 and caused the cancellation of 14,337 flights, approximately 50% of our flights, during that period. On September 28, 2017, by resolution No. 3744 of 2017, the Colombian Ministry of Labor convened a compulsory arbitration tribunal whose awards are comparable to collective bargaining agreements. This tribunal settled the dispute regarding economic claims between ACDAC and Avianca. The tribunal issued an award in favor of ACDAC on December 11, 2017. In February 2018, Avianca filed a motion to clarify the terms of the arbitration and asked to revoke some of the terms on the basis that the tribunal exceeded its competence by rendering a decision beyond the scope of its jurisdiction. On February 8, 2018, the tribunal accepted such motions and remanded the case before the Colombian Labor Supreme Court, which is the competent authority to rule this motions. On March 7, 2018, the Colombian Supreme Court of Justice acknowledged receipt of the request and allowed ACDAC to present its defense. The annulment has been under review since October 8, 2018 and no decision has been issued. If the award is not annulled, it will be confirmed and will have adverse effects on us. On March 6, 2019, we filed a lawsuit against ACDAC seeking up to $125.1 million in damages in respect of the losses that we incurred as a result of the Pilots’ Strike.

In addition, some of our subsidiaries are currently defendants in several lawsuits of a civil, commercial or labor nature originating from alleged acts or omissions related to their activities as carriers or as employers, with varying claims for damages on legal and contractual bases. There are several other proceedings pending in which our subsidiaries are plaintiffs demanding that certain decisions of administrative authorities be declared null. If our subsidiaries do not prevail in such proceedings, not only will the decisions of the authorities remain effective, but our subsidiaries may also be required to pay penalties, sanctions or other additional amounts.

We are also party to several tax disputes and investigations with different authorities, the outcome of which may result in additional taxes, interest or penalties which could give rise to administrative proceedings with applicable authorities.

For more information on the material proceedings to which we are a party, see “Item 8. Financial Information—Part A. Consolidated Statements and Other Financial Information” and Note 32 to our audited financial statements contained elsewhere in this annual report.

If our new aircraft are not delivered or placed into service on time and on competitive terms, our competitive position and results of operations are likely to be harmed.

We have entered into several agreements to acquire up to 124 Airbus A320 Neo family to be delivered between 2019 and 2025. In line with our initiatives directed towards enhancing profitability, achieving a leaner capital structure and reducing the current levels of debt, in April 2016, we negotiated with Airbus a significant reduction of our scheduled aircraft deliveries for 2019, 2018 and 2017 and certain changes to the type of aircraft (both upgrades and downgrades in passenger carrying capacity), but did not alter the total deliveries scheduled between 2019 and 2025. Recently, we signed an amendment to the purchase agreement of the A320 Neo family pursuant to which we have reduced our order of Airbus A320 Neo by 17 aircraft, and we negotiated with Airbus a postponement in certain scheduled aircraft deliveries for 2020, 2021 and 2022 which will now be delivered between 2026 and 2028 as well as agreed on certain changes to the type of aircraft to be delivered (both upgrades and downgrades in passenger carrying capacity). The timely delivery of new aircraft is subject to a number of uncertainties including (i) the unwillingness of our suppliers due to production capacity constraints or otherwise, (ii) unexpected safety or other operational problems that could cause such aircraft to be grounded, as has happened in the past to B787 aircraft operated by other airlines and (iii) our inability to obtain necessary aircraft financing for any reason.

As a result of these changes to our aircraft delivery schedule, in the future we may face more competition for, or a limited supply of, leased aircraft, making it difficult for us to negotiate on competitive terms upon expiration of our current operating leases or to lease additional capacity required for our targeted level of operations. If we are forced to pay higher lease rates in the future to maintain our capacity and the number of aircraft in our fleet, our profitability could be adversely affected.

 

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Even if our new aircraft are delivered on time, certain additional risks may delay our ability to put them into service immediately, including:

 

   

difficulties or delays in obtaining the necessary certifications from the aviation regulatory authorities of the countries to which we fly;

 

   

difficulties in obtaining the required documentation to complete the registration of the aircraft before each local aviation authority;

 

   

difficulties with local customs authorities in the process of reporting the entrance and import of the aircraft into the countries in which we fly;

 

   

difficulties in obtaining parts and other buyer-furnished equipment (such as in-flight entertainment systems); and

 

   

the failure of the new aircraft and their components to comply with agreed specifications and performance standards.

These and other such risks may significantly delay our ability to implement the critically important continuing modernization of our passenger and cargo fleet. While our jet passenger operative fleet had an average age of 7.30 years as of December 31, 2018, our total operative fleet had an average age (including both passenger and cargo and jet and turboprop aircraft) of 8.03 years as of that date. Our ability to remain competitive and to achieve improvements in operating efficiencies is heavily dependent on the prompt modernization of our fleet, and any disruptions of, or delays in, our proposed modernization program may significantly harm our business by eroding our competitive position, delaying our ability to reduce operating costs and complicating our ability to retire our older aircraft on schedule.

Underperformance of aircraft ordered from Airbus, Boeing and ATR may adversely impact our operations and financial results.

We expect our fleet renewal plan to result in increased fuel efficiency, crew productivity, and lower training costs leading to higher operational efficiency and flexibility. However, if the aircraft do not perform as expected or if we experience periods of aircraft unavailability due to unanticipated technical problems with aircraft that we acquire, the introduction of new aircraft as part of our fleet renewal plan may not result in the aforementioned benefits, and additional cost will be incurred associated with their purchase and maintenance and with the replacement of older aircraft. For example, due to an industry-wide issue affecting Rolls Royce engines used on the Boeing 787 fleet, we have experienced periods of unavailability of our Boeing 787 aircraft pending engine maintenance by Rolls Royce. Although our agreements with Airbus, Boeing and ATR would permit us to receive compensation under certain circumstances in the event these aircraft fail to meet their agreed specifications, we can offer no assurance that compensation received, if any, would adequately compensate us for the loss of the anticipated benefits of the new aircraft. The incurrence of the additional financing costs to purchase these aircraft and the additional cost of retiring portions of our current fleet without achieving the related increase in efficiency and cost reductions could have a negative impact on our business, operations and financial performance.

Integration of new aircraft and return of old aircraft into our fleet may be costly in terms of financial and human resources.

We currently expect to integrate 111 new Airbus aircraft and three new Boeing aircraft into our fleet between 2019 and 2025. We may experience difficulties in integrating these new aircraft into our fleet, including in relation to the additional costs, resources, space, personnel and time needed to hire and train new pilots, technicians and other skilled support personnel to operate new aircraft. Our failure to integrate these newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some of our existing leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs.

 

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Upon replacing our aircraft with newer models, we may also face difficulties selling the aircraft we own in a short period of time at favorable prices or returning our leased aircraft and engines on reasonable terms due to rigorous pre-return inspections by the lessors, which can lead to lengthy and costly negotiations during which we are obliged to continue making lease payments for unutilized equipment. We also have a large inventory of spare parts and components for our current fleet and we may not be able to sell this inventory at favorable prices.

Our maintenance costs will increase as our fleet ages, and our operations would be negatively impacted due to unplanned stoppages related to maintenance.

As of December 31, 2018, our operative fleet had an average age of 8.03 years; our jet passenger operative fleet had an average age of 7.30 years; our cargo fleet had an average age of 20.39 years; and our turboprop operative fleet had an average age of 6.70 years. Our maintenance costs can be expected to increase significantly, both on an absolute basis and as a percentage of our operating expenses, if our fleet ages and such fleet is not replaced or the warranties covering such fleet expire and are not renewed. Any significant increase in maintenance and repair expenses would have a material adverse effect on us.

Our business would be significantly harmed by unplanned stoppages or suspensions of operations associated with planned or unplanned maintenance due to mechanical issues. For example, if a design defect or mechanical problem with our aircraft were to be discovered, this would cause our aircraft to be grounded while such defect or mechanical problem was being corrected. We cannot assure you that we would succeed in obtaining all aircraft and parts to solve such defect or mechanical problem, that we would obtain such parts on time, or that we would succeed in solving such defect or mechanical problem even if we obtained such parts. This could result in a suspension of the operations of certain of our aircraft, potentially for a prolonged period of time, while we attempted to obtain such parts and solve such defect or mechanical problem, which could have a materially adverse effect on us.

We depend on strategic alliances or commercial relationships, such as our membership in Star Alliance, in many of the countries in which we operate, and our business may suffer if any of our strategic alliances or commercial relationships terminate.

In many of the jurisdictions in which we operate, we have found it in our interest to maintain a number of alliances and other commercial relationships. We depend on these alliances and/or commercial relationships to enhance our network and, in some cases, to offer our customers alternative services that we could not otherwise offer. If any of our strategic alliances and commercial relationships, in particular with Star Alliance or its members, deteriorates, or any of these agreements are terminated, our business, financial condition and results of operations could be negatively affected.

We are a party to code-share agreements with various international air carriers (see “Item 4—Information on the Company—Part B. Business Overview—Product, Services and Route Network”). These agreements provide that certain flight segments operated by us are held out as our code-share partners’ flights, as the case may be, and that certain of our code share partners’ flights, as the case may be, are held out for sale as Avianca flights. In addition, these agreements provide that our LifeMiles members can earn miles on or redeem miles for such code-share partners’ flights, as the case may be, and vice versa. We receive revenue from flights sold under these code-share agreements. In addition, we believe that these frequent flyer arrangements are an important part of our LifeMiles program. The loss of a significant partner through bankruptcy, consolidation, or otherwise, could adversely affect us. We may also be adversely affected by the actions of one of our significant partners, for example, in the event of nonperformance of a partner’s material obligations or misconduct by such partner, which could potentially result in us incurring liabilities, or poor delivery of services by one of our partners, which could damage our brand.

We may be adversely affected if LifeMiles loses business partners or if these business partners change their policies in relation to the granting of benefits to their clients.

LifeMiles relies on its main business partners (including over 100 financial services companies with whom LifeMiles has co-branded credit card and miles conversion agreements) for a significant portion of its gross billings. A decrease in miles sold to any one of LifeMiles ’ significant partners for any reason, including a temporary or permanent downturn in their business or financial condition, a decrease in their activity or their development of new loyalty strategies for their respective clients, could adversely affect LifeMiles and its financial condition. In addition, a decision by any one of these partners to not participate in the LifeMiles program could have a negative effect on its results of operations.

 

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Most agreements with LifeMiles ’ business partners, other than Avianca, with whom LifeMiles has a long-term agreement, are short-term agreements with terms of up to seven years and may be terminated or renewed under different terms when they expire. For example, co-branded agreements with its financial partners typically have five to seven-year terms. Agreements with other partners often have even shorter terms. In addition, some of these agreements may be terminated prior to expiration in the case of any material uncured breach by LifeMiles . Any such termination or inability to renew these agreements could have a material adverse effect on LifeMiles ’ results.

We do not exercise control or influence over the commercial policy of any of LifeMiles ’ partners. They may freely change their policies for accumulating, transferring and redeeming miles, as well as develop their own platforms for clients to exchange points for rewards, including airline tickets issued by other airlines, and as a result reduce LifeMiles ’ gross billings and demand for miles. Changes in these policies may (i) make the LifeMiles program less attractive or efficient for the clients of its partners, and (ii) increase competition in the loyalty sector, which in turn may reduce and the demand for miles, increase downward pressure on the average price of miles and harm LifeMiles ’. If the loyalty program sector does not grow enough to absorb new participants or if LifeMiles does not adequately react to the market or to the policies of our partners, LifeMiles may be adversely affected.

Any interruption, destruction or loss of data in our information technology systems, including at LifeMiles, due to cyber attacks could have a material adverse effect on our reputation, business, financial condition and results of operations.

We and our service providers, are subject to a variety of information technology and system cyber threats as a part of our normal course of operations, including computer viruses or other malware, cyber-fraud, data breaches, and destruction or interruption of our information technology systems by third parties or our own personnel. Any of these or other events could cause interruptions, delays, loss of critical or sensitive data, misappropriation of or access to personal data or failure to comply with regulatory or contractual obligations with respect to such information, which could result in legal claims or proceedings, liability or regulatory penalties under laws protecting the privacy of personal information, disruption to our operations and damage to our reputation, any or all of which could adversely affect our business, financial condition and results of operations. In an attempt to avoid the materialization of potential risks, we have put in place cybersecurity governance which includes technological and process controls. Even though we will continue our efforts to protect the systems and information, these cyber threats are constantly evolving, therefore, we may not be able to prevent all data breaches or cyber-attacks.

In addition, we recognize the importance of security, privacy and confidentiality of personal information that travelers, clients, shareholders, investors and employees provide us, and we are committed to adequately protect and treat it, pursuant to the personal date legal protection regime available in each territory in which we operate.

In 2018, we had no material cyber incidents affecting our business, financial position or results of operations.

If actual redemptions by LifeMiles members are greater than expected ( other than redemptions in Avianca air tickets ) , or if the costs related to redemption of miles increase ( other than costs of redemptions in Avianca air tickets ) , we could be adversely affected.

LifeMiles derives most of its gross billings from the sale of miles. Based on historical data, the estimated weighted average period between the issuance of a mile and its redemption is approximately 10 months. However, LifeMiles cannot control the timing of the redemption of miles or the number of miles ultimately redeemed. LifeMiles intends to use cash generated by the sale of miles in a given fiscal year to pay for the redemption costs incurred in that year, and intends to maintain a cash reserve to cover estimated future redemptions. As a result, if the redemption costs that LifeMiles incurs in a given fiscal year exceed its available cash and new sales in that period, it may not have sufficient cash on hand to cover all actual redemption costs in that year or future years, which could materially and adversely affect its business, financial condition and results of operations.

 

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LifeMiles ’ main operating costs relate to the purchase of rewards, particularly airline tickets, in order to satisfy the redemption of miles by our members. Because LifeMiles does not incur redemption-related costs for miles that are not redeemed and have expired, its profitability depends in part on the estimated percentage of miles issued that will never be redeemed by our members, or “breakage.”

LifeMiles ’ estimate of breakage is based on historical trends. We expect that breakage will decrease as LifeMiles expands its network of partners and makes a greater variety of rewards available to our members. LifeMiles seeks to offset the decrease in breakage through increases in volume of miles sold and, where practicable, through adjustments to its pricing policy for miles sold to its partners. If actual redemptions exceed expectations and LifeMiles fails to increase the volume of its sales or to appropriately price its miles and rewards, its profitability, and consequently our own profitability could be adversely affected.

We depend on a limited number of suppliers for our aircraft and engines.

One of the elements of our business strategy is to reduce costs by operating a simplified fleet of airplanes. However, as a result of such strategy, we are increasingly reliant on small group of suppliers—Airbus, Embraer, Boeing and ATR—and are thus vulnerable to problems associated with such suppliers, including, among others, in relation to design defects, mechanical problems, contractual performance, adverse public perceptions and regulatory actions. Such supplier concentration risks also extend to the engines that power our aircraft.

If any of Airbus, Embraer, Boeing or ATR or the manufacturers of the engines that power them were unable to perform their contractual obligations, or if we are unable to acquire or lease new aircraft or engines from aircraft or engine manufacturers or lessors on acceptable terms, we would have to find another supplier for a similar type of aircraft or engine. If we have to lease or purchase aircraft from another supplier, we could lose the benefits we derive from our current fleet composition. We cannot assure you that any replacement aircraft would have the same operating advantages as the Airbus, Embraer, Boeing or the ATR aircraft that currently comprise our fleet that would be replaced or that we could lease or purchase engines that would be as reliable and efficient as the engines that currently power them. We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities. Our operations could also be harmed by the failure or inability of Airbus, Embraer, Boeing or ATR or the manufacturers of our engines to provide sufficient parts or related support services on a timely basis.

Our business would be significantly harmed if a design defect or mechanical problem with any of the types of aircraft that we operate were discovered that would ground any of our aircraft while the defect or problem was corrected, assuming it could be corrected at all. For example, in September 2017, we discovered some issues with some of our TRENT 1000 engines of our Boeing B787 fleet, which has led us to preemptively ground and fix one of our Dreamliners. The use of our aircraft could be suspended or restricted by regulatory authorities in the event of any actual or perceived mechanical or design problems. Our business would also be significantly harmed if the public began to avoid flying with us due to an adverse perception of the types of aircraft that we operate stemming from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft. Hidden system failures in acquired aircraft could result in accidents leading to the loss of life of passengers and third parties and damages to third-party property. The Boeing 737-MAX recenty suffered two fatal accidents within six months and the aircraft has been widely grounded around the world. We currently do not have any Boeing 737-MAX aircraft in our fleet or on order, however, we are consolidating our fleet and limiting the types of aircraft we use to provide our services. If in the future, any of the types or aircraft we use face similar restrictions, this could have a material negative impact on our business, operations and financial performance. Carriers that operate a more diversified fleet are better positioned than we are to manage such events.

We are highly dependent on our hubs at Bogotá’s El Dorado International Airport, Lima’s Jorge Chavez International Airport and El Salvador’s International Airport and confront structural challenges at each of these airports.

Our business is heavily dependent on our operations at our three hubs at Bogotá’s El Dorado International Airport, Lima’s Jorge Chavez International Airport and El Salvador’s International Airport Monseñor Oscar Arnulfo Romero y Galdámez. Many of our routes operate through these hubs, which account for a significant portion of our daily arrivals and departures. The hub-and-spoke structure of many of our operations is particularly dependent on the on-time arrival of tightly coordinated groupings of flights to ensure that passengers can make timely connections

 

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to continuing flights. Like other airlines, we are subject to delays caused by factors beyond our control, including air traffic congestion at airports, adverse weather conditions and increased security measures, any of which could affect one or more of our hubs or other airports in any of the regions served by us. Delays inconvenience passengers, reduce aircraft utilization and increase costs, all of which negatively affect our profitability.

In particular, our business is heavily dependent on our operations at our Bogotá hub at El Dorado International Airport, especially following the full migration of our Colombian operations to the El Dorado International Airport in April 2018, thereby fully phasing out operations through Puente Aéreo. During 2018, 40.3% of our domestic flights and 15.8% of our total international flights either departed from or arrived at El Dorado International Airport. As a result, any significant interruption or disruption in service at El Dorado International Airport in particular, or any other condition adversely affecting the international competitiveness of the El Dorado International Airport, could have a serious impact on our business, financial condition and operating results.

El Dorado International Airport currently faces significant traffic congestion due to the lack of capacity in ground operations. The limited capacity of the ground side (parking positions) is the strongest restriction and prevents the terminal capacity increase in Bogotá. In addition, the number of gates at El Dorado International Airport need to be increased to accommodate demand, which currently exceeds the airport’s capacity.

While we believe that the centralization of our Bogota operation in El Dorado terminal 1 enhances customer experience, a new operation scheme also presents challenges in coordination, planning and costs. We may experience difficulties in our operations during the implementation period.

We are working with the Colombian Aeronautic Authority to improve the operational competitiveness of the airport and the on-time performance of Avianca and the rest of the operating airlines, but we are not sure if the discussed operational measures will be implemented by the authority and any failure to do so may have an adverse effect on our operations and results.

In addition, in 2018, we also operated 79 national and international flights out of Lima’s Jorge Chavez International Airport. One of the major operational risks we face on a daily basis in this airport is the limited number of parking positions. Additionally, the indoors infrastructure of the airport limits our ability to manage connections and launch new flights due to the lack of gates and increasing security and immigration controls. Lima Airport Partners (LAP), the concessionaire of Lima’s airport, plans to expand the airport’s capacity with a second runway, more parking positions and a new terminal for passengers. These expansion plans started in 2017 and will be implemented until 2024. IATA began to provide advisory services to the Peruvian Civil Aviation Authority to improve overall runway capacity and ground movement patterns at Jorge Chaves Airport. However, there is no guarantee that these expansion plans will be implemented in the manner contemplated or at all and, if implemented, will be fully effective in eliminating or reducing infrastructure challenges. In the interim period, prior to completion of expansion plans, we expect that Lima’s airport’s capacity will remain unchanged and, therefore, that we will continue to confront operational challenges.

In 2018, we also operated more than 88 daily international flights at El Salvador International Airport Monseñor Oscar Arnulfo Romero y Galdámez. Our growth in this region depends on the airport’s infrastructure. However, among other structural challenges, there is a limited number of parking spaces at this airport. In addition, due to an increasing number of flights out of this airport without any corresponding improvements to facilities, gate capacity has become increasingly limited, and we believe the equipment for security controls to special destinations is inadequate to attend to our passengers. These events could limit our ability to manage connections and operations according to our standards and generally impede growth and expansion in the region.

El Salvador Airport has been in non-compliance with the International Civil Aviation’s international security standards as it does not foresee the required separation between arriving and departing passengers. In 2018, the Aeronautical Authority of El Salvador demanded that we implement a double security screening for all the connecting passengers in the airport. Currently, we cannot implement these measures as the airport does not have the necessary infrastructure. Once implemented, connecting times may increase and we may have to alter our flight network and schedules.

 

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We are in the process of incorporating new information technology systems and distortions and other disruptions may occur during the implementation period.

We may experience problems with the operation of our current information technology systems or the technology systems of third parties on which we rely, as well as the development and deployment of new information technology systems, any of which could adversely affect, or temporarily disrupt, all or a portion of our operations until resolved. For example, in 2018, we executed multiple projects defined on Avianca’s IT roadmap which contains our main strategic projects. As we implement these information technology upgrades, distortions may occur in the process of phasing-in, particularly in relation to our general ledger systems and other related IT systems we use to process our accounting transactions. Accordingly, adjustments may be required during the phase-in period. We also implemented new information technology systems to improve our flight operations and integrate our legacy Avianca and Taca systems and, in the meantime, may experience further operational disruptions. For example, in 2018, we incurred additional passenger compensation expenses to compensate for delays and cancellations emanating from software glitches in connection with the launch of a new crew assignment system.

We cannot assure you that technological failures will not occur as a result of the ongoing implementation of new information technology systems that could result in distortions and other problems. Inabilities and delays in implementing new systems, as well as the possibility of human failure when dealing with new systems, could affect our ability to realize projected or expected cost savings and improve operating efficiency and customer satisfaction as anticipated. Additionally, any systems failures could negatively impact how our customers perceive us and impede our ability to timely collect and report financial results in accordance with applicable laws or result in data losses.

We face significant challenges which may limit our ability to grow our cargo business.

Our cargo business is highly sensitive to macroeconomic conditions and to significant competitive pressures. The air cargo business is generally volatile and reacts quickly to changes in economic conditions. For example, a decrease of a certain percentage in GDP or consumer demand often results in a disproportionately larger decrease in demand for air cargo services, as cargo customers elect to suspend restocking orders and reduce existing inventories and/or to use cheaper forms of transportation for their goods.

A competitive environment and excess capacity in most markets continuously puts pressure on yields. This situation may be worsened by the increased deployment of freighter capacity in certain routes by competitor airlines and strong passenger growth in widebody aircraft, adversely affecting yields and market share and therefore expected profitability.

Cargo demand and flows are unidirectional, and dependent on a small number of product categories. This structural imbalance between inbound and outbound flows poses a challenge to freighter operations as lack of demand in a particular direction may force airlines to rely on different markets in order to maximize loads on return flights. Product concentration may also enhance this challenge, as the volume of goods that we transport on a specific direction may be strongly affected by any event that negatively affects the production of these goods (for example fresh flowers from Ecuador and Colombia).

We rely on third parties to provide us with parts and services.

We have entered into agreements with, and depend upon, a number of suppliers for our parts and engines for both provisioning and maintenance. We also have entered into agreements with third-party contractors to provide us with call-center services, catering, ground handling, and baggage handling and “below the wing” aircraft services. It is our general policy that our agreements with suppliers and third-party contractors are subject to termination on short notice. In some cases, we would be forced to pay penalties for terminating contracts on short notice and our contractors have also the right to terminate on short notice the agreements entered into with us. The termination of these agreements or our inability to renew these agreements or to negotiate new agreements with other providers at comparable rates could harm our business and results of operations. Further, our reliance on third parties to provide essential supplies and services on our behalf gives us less control over the costs, efficiency, timeliness and quality of those supplies and services. We expect to be dependent on such agreements for the foreseeable future, and, if we enter any new market, we will need to enter into additional similar agreements.

 

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Our reputation and financial condition would be harmed in the event of an accident or major incident involving our aircraft or aircraft of the types we use.

Between 1988 and 1993, Avianca had four serious accidents involving significant fatalities, and in 2008, one of Taca’s aircraft had an accident involving five fatalities after landing in Tegucigalpa, Honduras. An accident or major incident in the future involving one of our aircraft could result in significant claims by injured passengers and/or relatives and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent removal from service.

We are required by our creditors and the lessors of our aircraft under our operating lease agreements to carry liability insurance. We believe the insurance coverage and conditions set forth in our liability insurance policies are in accordance with the practice for internationally recognized airlines and comply with the requirements of the aviation authorities in the countries we operate. However, the amount of liability insurance we maintain may not be adequate and we may be forced to bear substantial losses in the event of an accident. If the insurance coverage is not sufficient to cover the potential liabilities incurred from a loss, we may suffer a significant financial impact as we would be liable for any amounts exceeding our insurance coverage. Our insurance premiums may also increase significantly due to an accident or incident affecting one of our aircraft. Substantial claims resulting from an accident in excess of our related insurance coverage or increased premiums would harm our business and financial results. Moreover, any aircraft accident or incident involving our aircraft, even if fully insured, or the aircraft of any major airline could cause negative public perceptions about us, our aircraft or the air transport system, due to safety concerns or other problems, whether real or perceived, which would harm our reputation, financial results and the market price of our ADSs.

Our ability to fly to the United States and the benefits of our strategic alliances or commercial relationships are dependent on the FAA’s continued favorable safety assessment of each of the three countries in which we have hubs.

The FAA periodically audits the aviation regulatory authorities of other countries. As a result of its audits, each country is given an International Aviation Safety Assessment, or IASA, rating. The IASA rating of each of Colombia, Peru, El Salvador, Ecuador and Costa Rica is currently “Category 1,” which means that each such country complies with the International Civil Aviation Organization, or ICAO, safety requirements. As a result, we may continue our service from our hubs in such countries to the United States in a normal manner and take part in reciprocal code-sharing arrangements with U.S. carriers. Nevertheless, any of these ratings may be downgraded for a variety of safety and other reasons. If a downgrading occurs, we will be prevented from offering flights to any new destinations in the United States and from certifying new aircraft for flights to the United States; in addition, our U.S. air carrier code share partners will be required to suspend placement of their codes on our flights.

If any of the countries in which we have a hub or focus is downgraded to “Category 2,” our ability to fly to the United States from such hub would likely be significantly restricted. We cannot assure you that the governments of Colombia, Peru, El Salvador, Ecuador and Costa Rica and their respective civil aviation authorities in particular, will continue to meet international safety standards, and we have no direct control over their compliance with IASA guidelines. If the IASA rating of any of Colombia, Peru, El Salvador, Ecuador or Costa Rica were to be downgraded in the future, this could materially and adversely affect our service to the United States, causing us to lose revenue, including revenue from code sharing, as a result of reducing flight options to our customers.

We understand that Guatemala no longer has its Category 1 status as there are currently no Guatemalan-registered air carriers flying to the United States. Unusually, there is no FAA press release and no Category 2 listing on the FAA’s IASA spreadsheet available on the FAA website. The lack of a press release is particularly unusual because part of the philosophy behind the IASA program is to inform travelers. If Guatemala is now Category 2, operations to the US from Guatemala are frozen to levels in place at the time of the FAA’s determination. Because Aviateca S.A. (Guatemala) does not presently operate any flights using its own aircraft to the US, this means Aviateca S.A. may not begin any new services with its own aircraft until such time as Guatemala returns to Category 1. This will impact Avianca’s operational planning. In respect of codesharing with US carriers, a Cagetory 2 classification means that although US carriers may continue to display Guatemalan carriers’ codes at levels in place at the time of the FAA determination, any US carrier codes displayed on flights operated by Guatemalan carriers must be removed/discontinued. Furthermore, operations to the US may only be undertaken via wet lease with a carrier from the US or a Category 1 nation. Therefore, the existing wet lease with Taca International may continue.

 

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We rely on automated systems to operate our business, and any failure of such systems could harm our business.

We rely on automated systems to operate our business, and any failure of such systems could harm our business. We are dependent on automated systems and technology to operate our business, enhance customer service and reduce operating costs. The performance and reliability of our automated systems and data center is critical to our ability to operate our business and compete effectively. These systems include our computerized airline reservation system, flight operations system, telecommunications systems, website, engineering and maintenance systems, check-in kiosks, in-flight entertainment systems and our primary and secondary data centers. Our website and reservations system must be able to accommodate a high volume of traffic and deliver important flight information. These systems require upgrades or replacement periodically, which involve implementation and other operational risks. Our business may be harmed if we fail to operate, replace or upgrade our systems or data center infrastructure or contracted services successfully.

For some systems, we rely on the third-party providers of automated systems and data center infrastructure as well as for technical support. If the current provider were to fail to adequately provide technical support for any one of our key existing systems or if new or updated components were not integrated smoothly, we could experience service disruptions, which, if they were to occur, could result in the loss of important data, increase our expenses, decrease our revenues and generally harm our business and reputation. Furthermore, our automated systems cannot be completely protected against events that are beyond our control, including natural disasters, computer viruses, other security breaches, or telecommunications failures. Substantial or sustained system failures could impact customer service and ticket sales. We have implemented security and disaster recovery measures and change control procedures; however, we cannot assure you that these measures are adequate to prevent disruptions, which, if they were to occur, could result in the loss of important data, increase our expenses, decrease our revenue and generally harm our business and reputation.

We may incur substantial compliance costs and face sanctions if we fail to comply with U.S. and other international drug trafficking laws.

We are required to comply with strict drug trafficking laws mainly in Colombia, the United States and the European Union and are subject to substantial government oversight in connection with the enforcement of such laws. For example, the U.S. Foreign Narcotics Kingpin Designation Act and Executive Order 12978 contain a list of persons designated by the United States government as drug traffickers. This list is periodically updated. Pursuant to these regulations, we may be subject to severe sanctions and reputational harm if we are found by the U.S. government to have intentionally or inadvertently assisted in the international narcotics trafficking activities of a designated person. Although we monitor this list in an effort to determine that we do not conduct business with any designated person, no assurance can be given that the counterparties with whom we do business in the future will not be subject to these regulations. In the event a counterparty of ours became a designated person, such party might face severe sanctions and as a result be unable to perform under their agreements with us.

We cannot assure you that we will succeed in complying at all times with such laws. For example, in August 2004, the U.S. Attorney for the Southern District of New York advised us that, because of several seizures from our aircraft of baggage, catering and cargo containing narcotics, our security practices and procedures were inadequate. We were required to engage an internationally recognized security consulting firm to identify and implement additional aircraft security measures and were also required to make additional investments in the area of aircraft and facility security. As part of our efforts to improve our practices, we elevated our security standards with respect to hiring and operating procedures and increased training and supervision. The requirement to maintain this consulting arrangement was lifted two years after it was initiated by the U.S. Attorney for the Southern District of New York. In the event, however, that we violate any U.S. or other foreign narcotics restriction in the future, we may be subject to sanctions, severe fines, seizures of our planes or the cancellation of our flights.

Our results of operations fluctuate due to seasonality and other factors.

Our operating results fluctuate due to seasonality including high vacation and leisure demand occurring during the summer months of July and August and again during December and January. As a result of this, our first quarter results are usually higher than our second quarter results, and are also influenced by whether Holy Week falls in the first quarter or the second quarter. We are also more susceptible to adverse weather conditions, including hurricanes, as a result of our operations being concentrated in Colombia, Central America and the Caribbean, than some of our competitors. Price changes in aircraft fuel as well as the timing and amount of maintenance and advertising expenditures also impact our operations. As a result of these factors, quarter-to-quarter comparisons of our operating results may not be a good indicator of our future performance.

 

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We are dependent on key personnel and we may be unable to attract and retain qualified, skilled employees necessary to operate our business.

Our success depends to a significant extent upon the efforts and abilities of our senior management team and key financial, operational and commercial personnel. Our employment agreements with members of our senior management team may be terminated by them at any time, without prior notice and without penalties. Furthermore, in certain countries we are not permitted to have non-competition agreements in place with members of our senior management team after termination of employment. In addition, our business is labor-intensive, and our operations require us to employ a large number of highly-skilled personnel including pilots, maintenance technicians and other skilled operating personnel. In some of the countries in which we operate, there is a shortage of qualified pilots and maintenance technicians or other qualified personnel, and we have faced turnover of our skilled employees, many of whom have left us to work in other countries where compensation is higher, we have to attract new people. Our business is also dependent on customer-service skilled employees, as we are focused on delivering superior customer experience, that skillset is a pre-requisite for all members of our Company.

Further, should the turnover of such employees (particularly pilots and maintenance technicians) increase, our training costs would be significantly higher. We cannot assure you that we will be able to recruit, train and retain the managers, pilots, technicians and other qualified employees that we need to continue our current operations or replace departing employees. We have dedicated recruiting teams focused on hiring new personnel, mainly for our hubs.

A failure to hire and retain such qualified employees at a reasonable cost could materially adversely affect our business, financial condition and results of operations.

Increases in labor benefits, union disputes, strikes, and other worker-related disturbances may adversely affect us, including our ability to carry out our normal business operations.

We operate in a labor-intensive industry that is subject to the effects of instabilities in the labor market, including strikes, work stoppages, protests, lawsuits and changes in employment regulations, increases in wages, controversies in salary nature of labor allowances, and the conditions of collective bargaining agreements that, individually or in the aggregate, could have a material adverse effect on our results. The jurisdictions in which we operate have experienced these types of instabilities in the past and we cannot assure you that these instabilities will not occur again.

There are currently seventeen unions covering our employees and eleven of them are in Colombia. In Colombia approximately 18% of overall employees in Avianca belong to a labor union. In addition, there are three labor unions in Peru that cover 30% of our employees in Avianca Peru, two labor unions in Mexico that cover 96% of our employees in Mexico, and one labor union in Argentina that covers 46% of our employees in TransAmerican Airlines S.A. For additional information regarding the unions that our employees are associated with, see “Item 6. Directors Senior Management and Employees—Part D. Employees.” We may be negatively impacted if we fail to maintain harmonious relationships with the labor unions representing our employees, which could lead to strikes, work stoppages or other labor disruptions by its employees.

Given that the majority of our operations is in Colombia, we are highly and particularly sensitive to labor disruptions affecting the Colombian market and its operations.

Recently, the Labor Chamber of the Colombian Supreme Court has ruled that Avianca provides an essential public service and, therefore, strikes and work interruptions are forbidden by law. However, this does not shield us from any disruptions carried out by unions or any other labor dispute in Colombia. The Pilots’ Strike initiated in 2017 by approximately 700 members of the Colombian Association of Civil Aviators pilots’ union lasted 51 days. This was the result of a unilateral decision made by the union, resulting in the cancellation of 50% of our flights during this period and compelling us to enter into wet lease agreements to continue our operations. For a detailed account of the events surrounding the Pilots’ Strike, see “Item 5. Operating Financial Review and Prospects—Principal Factors Affecting our Comparability—Pilots’ Strike.” Depending on the type and duration of any labor disruptions, our operating expenses could increase significantly, which could adversely affect our financial condition, results of operations and cash flows.

 

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In addition, our personnel costs may increase significantly as a result of our renegotiation of collective bargaining agreements. Our business and results of operations may be materially adversely affected if we are not able to pass the increased costs arising from the renegotiation of collective bargaining agreements onto our customers through inflation-based price increases.

Avianca signed three formalization agreements in 2012, 2016 and 2017 with the Colombian Ministry of Labor in compliance with labour standards. In accordance with the signed agreements, the Ministry of Labor can supervise and verify our compliance with labor obligations of workers that were directly hired by Avianca. During 2018, officials of Ministry of Labor confirmed compliance with these agreements. Any breach of these agreements may cause labor disruption that may lead to significant increases on our operating expenses, which could adversely affect our financial condition, results of operations and cash flows.

If we are unable to attract passengers to our website and make direct ticket sales, our revenue would be negatively impacted.

Direct internet bookings by our customers represent our lowest cost distribution channel. Our direct e-commerce sales represented 21.5% of our passenger revenue in 2018 and, over recent years, have represented a growing proportion of our total sales. Our website also serves as a platform to offer ancillary products to increase our revenue from non-ticket sources. Accordingly, it is increasingly important that we are able to attract customers to our website and encourage them to purchase tickets online.

We intend to continue working to increase sales through online channels, in particular sales through our website and our mobile app, as these sales are more cost-efficient and involve lower distribution costs than sales through travel agencies. In furtherance of this goal, we continue to make significant capital expenditures to improve our website and generally increase our online presence; however, there is no guarantee that such efforts and marketing campaigns will be effective.

Given the importance of online ticket sales, it would damage our revenue and potentially our reputation and customer relations if due to technological failures, cybersecurity attacks or otherwise, we are unable to process online sales. Any interruption in these systems or their underlying infrastructure could result in the loss of important data, increase our expenses and generally negatively impact our reputation.

We may not be able to maintain or grow our ancillary revenue.

Our business strategy includes continually growing our stream of passenger related revenue. A considerable fraction of these revenue are delivered by our portfolio of ancillary products and services. There can be no assurance that passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the ancillary products and services we currently offer. Failure to maintain our non-ticket passenger revenue could have a negative effect on our results of operations and financial condition.

If we are unable to protect our intellectual property rights, specifically our trademarks and service marks, our ability to compete could be negatively impacted.

We own the rights to certain trademarks and trade names used in connection with our business including “Avianca” and “ LifeMiles ”. We believe that our names, trademarks and other related intellectual property are important to the success of our business. We protect our intellectual property rights through a variety of methods, including, but not limited to, applying for and obtaining trademark protection in Colombia, Central America, the United States and certain other countries throughout the world in which we operate our business. Any violation of our intellectual property rights or refusal to grant record of such rights in foreign jurisdictions may result in having to devote our time and resources to protect these rights through litigation or otherwise, which could be expensive and time consuming. If we fail to protect our intellectual property rights for whatever reason, it could have an adverse impact on our operations and financial condition.

 

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Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our inability to maintain our existing landing rights and slots at reasonable costs, and obtain additional landing rights and slots, could materially adversely affect us.

We must pay fees to airport operators for the use of their facilities. Passenger taxes and airport charges have increased in recent years, in some cases substantially. Consistent with such trend, it is possible that the airports we use will impose, or further increase, passenger taxes and airport charges in the future. To the extent we are unable to pass these costs to our customers in the form of increases fares, any substantial increase in airport charges could have a material adverse impact on our results of operations.

Certain airports that we serve (or that we plan to serve in the future) are subject to capacity constraints and impose slot restrictions during certain periods of the day. We cannot assure you that we will be able to obtain a sufficient number of slots, gates and other facilities at airports to maintain and/or expand our services in a manner consistent with our business strategy. It is also possible that airports not currently subject to capacity constraints may become so in the future. In addition, an airline must use its slots on a regular and timely basis or risk having those slots re-allocated to others. Where slots or other airport resources are not available or their availability is restricted in some fashion, we may have to adjust our schedules, change routes or reduce aircraft utilization. If we are unable to obtain or maintain favorable take-off and landing authorizations, slots, gates or other facilities at certain high-density airports, our business, financial condition and results of operations could be materially adversely affected.

Moreover, some of the airports to which we fly impose various other operational restrictions, including limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. Additional airports may adopt similar restrictions or tighten such restrictions in the future. Such restrictions may limit our ability to continue to provide or expand services at such airports.

At some airports, we may use airport slots if we do not comply with certain on-time performance requirements.

We may be liable for the potential under-funding of a pilots’ pension fund.

We are obligated to make contributions to a pilots’ pension fund for the Colombian Association of Civil Aviators known as “ La Caja de Auxilios y de Prestaciones de la Asociación Colombiana de Aviadores Civiles ”, or CAXDAC, on behalf of certain of our eligible pilots. The pensioners affiliated with CAXDAC include not only some of our current pilots and former pilots, but also pilots employed and formerly employed by other Colombian airlines. The assets that we have contributed to CAXDAC are segregated into a separate account that is restricted for the payments of retirement benefits payments of our employees. The amount in the common CAXDAC fund used to pay the pensions may not be sufficient to cover all accrued pension liabilities, since other Colombian airlines have gone bankrupt or have been liquidated and have failed to pay their ratable contributions to the pension fund. Although CAXDAC, as a pension manager, is the only entity obligated to pay retirement pensions to those pensioners legally affiliated with CAXDAC, it is uncertain how the expected deficiency will ultimately be funded, and whether or not pensioners and other third parties may bring actions against contributing airlines, including ourselves, seeking contributions to cover such deficiency, in which case we will be required to defend our position that we are not liable for this deficiency and face the uncertainty of judicial review. However, the obligation of pension contribution to CAXDAC shall terminate at the time we transfer the full value of actuarial calculation, which, under Colombian law, should occur no later than the end of 2023.

Any violation or alleged violation of anti-corruption, anti-bribery and anti-money laundering laws could adversely affect us, including our brand and reputation.

We are subject to several anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”). The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials with the purpose of obtaining or keeping business and/or other benefits. Although our code of ethics and standards of conduct requires our management and employees to comply with the FCPA and similar laws, and our board of directors has issued an anticorruption policy, we are still in the process of FCPA compliance training for our employees and consultants. In addition, despite our ongoing efforts to ensure compliance with the FCPA and similar laws, there can be no assurance that our employees, executives, board members, agents, and the companies to which we outsource certain of our business operations, will not breach their duties under our policies, for which we may be ultimately held responsible. There can be no assurance that our employees, executives, board members, agents, and the companies to which we outsource certain of our business operations, will not take actions in violation of our anti-corruption, anti-bribery and anti-money laundering policies, for which we may be ultimately held responsible. If we were not in compliance with anti-corruption laws, anti-money laundering laws and other laws governing the conduct of our business, including conduct with government entities, we could be subject to criminal and civil penalties and other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition, results of operations and prospects. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, results of operations and prospects.

 

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RISKS RELATING TO THE AIRLINE INDUSTRY

We operate in a highly competitive industry and actions by our competitors could adversely affect us.

We face intense competition on domestic and international routes from competing airlines, charter airlines and potential new entrants in our market and also with regards to our loyalty program LifeMiles . Airlines compete mainly in the areas of pricing, scheduling (frequency and flight times), on-time performance, on-board experience, frequent flyer programs and other services.

Each year we may face increased competition from existing and new participants in the markets in which we operate. The air transportation sector is highly sensitive to price discounting and the use of aggressive pricing policies. Other factors, such as flight frequency, schedule availability, brand recognition, and quality of offered services (such as loyalty programs, VIP airport lounges, in-flight entertainment and other amenities) also have a significant impact on market competitiveness. In addition, the barriers to entering the domestic market are relatively low and we cannot assure you that existing or new competitors in our markets will not offer lower prices, more attractive services or increase their route capacity in an effort to obtain greater market share.

In particular, our financial performance is highly sensitive to competitive conditions in the Colombian, Peruvian and Ecuadorian domestic air travel markets. Our primary competitors in the Colombian domestic market are LATAM Airlines Group, VivaAir Colombia (formerly Viva Colombia), EasyFly, Satena and Wingo. Despite our track record of market leadership in the Colombian market, we may face stronger domestic competition in the future and, accordingly, past performance should not be relied upon as indicative of future performance. Our primary competitors in the Peruvian domestic market are LATAM Airlines Group, VivaAir Peru, Star Peru and Peruvian and in the Ecuadorian domestic market our primary competitors are LATAM Airlines Group and TAME. We also compete with a number of large airlines that serve the same international routes we fly, including, among others, Copa Airlines, LATAM Airlines Group, American Airlines, United Airlines, Iberia, Delta Air Lines, Aeromexico, Interjet, Jet Blue Airways, Spirit Airlines, Aerolineas Argentinas, Air Europa, Volaris and Viva Air Group. We expect that increasing competition from international airlines may present additional challenges in the future. For additional information regarding our competitors, see “Item 4. Information on the Company—Part B. Business Overview—Competition.”

Some of our competitors have larger customer bases and greater brand recognition in the markets we serve outside of Colombia, and most of our international competitors have significantly greater financial and marketing resources than we do. In addition, some of our competitors may receive support from external sources, such as their national governments, which may be unavailable to us. Support may include, among others, subsidies, regulatory facilities, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our operations and financial performance.

In addition to traditional competition among airline companies, we face competition from companies that provide ground transportation, especially in our domestic cargo and passenger business, as well as companies that provide sea transportation in relation to our cargo business specifically. In addition, technology advancements may limit the desire for air travel. For example, video teleconferencing and other methods of electronic communication may reduce the need for in-person communication and add a new dimension of competition to the industry as travelers seek lower cost substitutes for air travel.

Furthermore, new competitors may target LifeMiles ’ business partners and members or enter the loyalty marketing industry. We cannot assure you that an increase in competition faced by LifeMiles will not have an adverse effect on the growth of our business with respect to LifeMiles or in general. If we are unable to adjust rapidly to the changing nature of competition in our markets or if the Colombian loyalty marketing industry does not grow sufficiently to accommodate new participants, it could have an adverse effect on us.

 

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We expect to face increasing competition from low-cost carriers offering discounted fares.

Low-cost carrier business models have been gaining increasing momentum in the Latin American aviation market in recent years, particularly as challenging macroeconomic conditions in Latin American persist with the effect of limiting consumer purchasing power. The recent successes of VivaAir Group and Wingo in Colombia, Gol and Azul, in Brazil and Interjet, Viva Aerobus and Volaris in Mexico, JetSMART in Chile and Flybondi in Argentina are evidence of such trend.

Low-cost carriers’ operations are typically characterized by point-to-point route networks focusing on the highest-demand city pairs, high aircraft utilization, single-class service and fewer in-flight amenities. Our business model is significantly different from that of low-cost carriers and is predicated on providing a level of service that we consider superior and charging higher prices for such service. However, as low-cost carriers continue to penetrate our home markets, this could result in significant and lasting downward pressure on the fares we charge which could have a material adverse effect on our financial condition and results of operations and even compel us to reconsider our business model to adapt it to evolving passenger preferences.

We face increasing competition from other international airlines due to the continuing liberalization of restrictions traditionally affecting the global airline industry.

The global airline industry has been shifting to increasing acceptance of liberalized and “open skies” air transport agreements among nations. For example, “open skies” agreements currently exist among the countries of the European Union, and between Europe and the United States. In Latin America, multilateral “open skies” agreements exist among Colombia, Ecuador, Peru and Bolivia and bilateral “open skies” agreements among each of these countries and the United States, Chile, Panama, Venezuela and the countries of Central America. El Salvador also has an “open skies” policy. As a general matter, these liberalized or “open skies” air transport agreements serve to (i) reduce (or, in the case of “open skies,” eliminate) restrictions on route rights, designated carriers, aircraft capacity or flight frequencies and (ii) promote competitive pricing. On the other hand, Colombia and Peru have an air transportation political position based on reciprocity, which means a liberalization of the transportation of passenger on direct flights between the two countries according to the third and fourth freedom rights, as defined in the Chicago Convention on International Civil Aviation, or the Chicago Convention. In 2018, the Colombian government and congress started to discuss the benefits and disadvantages of the open skies model for the Colombian market and whether any changes to it should be made.

As a result of this continuing trend toward liberalized air transport agreements, a number of countries to which we fly have been negotiating with local governments to further liberalize or provide more flexibility to its bilateral agreement with such countries and to permit more flights to and from each country. Such ongoing discussions may cause additional changes to the competitive environment.

We expect that governmental authorities will continue to liberalize the current restrictions on international travel to and from countries, which may involve, among other initiatives, the granting of new route rights and flights to competing airlines and an attendant increase in the numbers of market participants on routes we serve. As a result of such liberalization, we could face substantial new competition, which may erode our pricing and market share and have a material adverse effect on our consolidated financial position and consolidated results of operations. For example, it is likely that the Colombian government will eventually liberalize the current restrictions on international travel to and from our Bogota hub by, among other things, granting new route rights and flights to competing airlines and generally promoting increasing numbers of market participants on the routes we serve. Furthermore, the joint business agreement entered into between LATAM Airlines Group, American Airlines and IAG (British Airways and Iberia) allows them to expand their airlines networks by adding frequencies and capacity to markets between South America, North America and Europe, where we operate. The implementation of these commercial agreements is still pending authorization by the United States although it was approved last year in Chile. It cannot be fully implemented until all the requirements are met by the parties to both agreements. Similarly, the transborder alliance established by Delta and Aeromexico between México and the United States provide customers with benefits in both countries. This puts increasing pressure on us to successfully implement the United Copa Transaction.

 

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We face increased competition from certain airlines that have recently been restructured or emerged from bankruptcy.

In recent years, a number of air carriers have sought to reorganize in bankruptcy. The successful completion of reorganizations has in many cases increased the competitiveness of such airlines, including by significantly lowering operating costs derived from favorable labor, supply and financing contracts renegotiated under the protection of the applicable bankruptcy laws. In addition, many air carriers involved in reorganizations have historically undertaken substantial fare discounting in order to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could further lower yields for all carriers, including us. During 2018, LATAM announced the layoff of 1,300 employees, due to the outsourcing of airport and handling services in Brazil. In addition, Interjet announced that 550 employees (10% of their workforce) will be laid off due to the redeployment of their Sukhoi fleet.

Further consolidation of the Latin American airline industry may adversely affect our business and results of operations.

As a result of the competitive environment in which we operate, there may be further consolidation in the Latin American and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry. Our competitors could increase their scale, diversity and financial strength and may have a competitive advantage over us, which would adversely affect us. Consolidations in the airline industry and changes in international alliances are likely to affect the competitive landscape in the industry and may result in the formation of airlines and alliances with increased financial resources, more extensive global networks and reduced cost structures than us.

For example, in 2016, we faced increased competition following Qatar Airways’ acquisition of 10% of LATAM Airlines Group, which served to further bolster the airline’s strength in the region. The 2017 joint cooperation agreement between Delta Air Lines and Aeromexico is another example of this consolidation trend which may result in increased competition. In addition, in 2018, former Brasilian President Michael Temer issued an executive order that now allows foreign groups to own 100% of a Brazilian airline, opening opportunities to competitors like Delta Air Lines to increase its share in Gol Linhas Aéreas.

Volatility in our fuel costs or disruptions in our fuel supply would materially and adversely affect our operating results.

Aircraft fuel costs constitute a significant portion of our total operating expenses, representing 20.2%, 22.3% and 26.0%, respectively, of our operating expenses in 2016, 2017 and 2018. Historically, international and local fuel prices have been subject to wide price fluctuations and, in some cases, sudden disruptions, based on geopolitical issues and supply and demand as well as market speculation in relation thereto. Fuel availability is also subject to periods of market surplus and shortage and is affected by demand for both home heating oil and gasoline. Events resulting from prolonged instability in the Middle East or other oil-producing regions, or the suspension of production by any significant producer, may result in substantial price increases and/or make it difficult to obtain adequate supplies, which may adversely affect us. Natural disasters or other large unexpected disrupting events in regions that normally consume significant amounts of other energy sources could have a similar effect. The price and future availability of fuel cannot be predicted with any degree of certainty, and significant increases in fuel prices may affect our operating results and otherwise harm our business.

Between December 2017 and December 2018, jet fuel prices had a 26% volatility, with a minimum of $1.55/gal and a maximum of $2.35/gal. We cannot assure you that fuel costs will not continue to increase significantly above their current levels, similar to what occurred in 2013 to mid-2014, when West Texas Intermediate, or WTI, crude prices, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, gradually increased from $93.12 in January 2013 to $107.26 per barrel in June 2014. Our hedging activities may not be sufficient to protect us from fuel price fluctuations, as they are limited in volume and duration and may carry counterparty risk. When fuel prices decrease, for example, we may be exposed to losses on our hedge contracts, which can partially offset savings in fuel costs emanating from lower fuel prices. Under the fuel hedge contracts we periodically enter into, we may also be required to fund the margin associated with any loss position on the contracts if (i) the instrument used requires such margin and (ii) the price of the underlying commodity falls below specified levels. Meeting our obligations to fund these margin calls could adversely affect

 

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our liquidity, as experienced between 2014 and 2015, when WTI prices fell from $107.26 per barrel in June 2014 to $34.73 per barrel by December 2015. We may not be able to adjust our fares adequately or otherwise respond quickly to protect us from volatility in fuel costs, and our competitors may have better access and terms in satisfying their fuel needs.

We currently have two fuel distributors in Bogotá. Since August 2018, 80% of our fuel is provided by Organización Terpel S.A. and Chevron provides, on a yearly contract, 20% of our fuel. Terpel supplied us with, 84.86%, 98.01%, and 97.9% of our fuel needs in Colombia for each of 2018, 2017 and 2016, respectively. During 2018, 2017 and 2016, respectively, it supplied 36.72%, 42.61% and 43.9% of our total fuel consumption. Our aircraft fuel purchase agreements with Terpel and otherwise do not protect us against price increases or guarantee the availability of fuel. In addition, Terpel is entitled to terminate its fuel supply contracts with us for a number of reasons, thereby potentially compelling us to renegotiate our fuel supply in a market with a limited number of suppliers, which might result in higher costs for us. If we were unable to obtain fuel on similar terms from alternative suppliers, our business would be adversely affected. Accordingly, if this agreement is terminated, we will be required to enter into alternative hedging or pay higher prices, which would adversely affect us. Our fuel risk in Colombia is intensified to the extent that Ecopetrol S.A. (Colombia’s government-controlled oil company) experiences any disruption or slow-down in its fuel production or pumping capacity, particularly in Bogotá. In such event, we or our suppliers may be unable to obtain fuel or may be forced to pay significantly higher prices to do so. This risk is heightened by the low oil storage levels that we understand are maintained by Ecopetrol S.A. and its distributors in Bogotá.

Our business is highly regulated and changes in the regulatory environment in which we operate may adversely affect our business and results of operations.

Our business is highly regulated and substantially depends upon the regulatory environment in the countries in which we operate or intend to operate. For example, price controls on fares may limit our ability to effectively apply customer segmentation profit maximization techniques (referring to a practice that uses passenger demanding forecasting and fare-mix optimization techniques to maximize profit for an airline) and adjust prices to reflect cost pressures. High levels of government regulation may limit the scope of our operations and our growth plans, especially in the event of deterioration of the relations between the countries in which we operate or the public perception of foreign companies in local markets. Accordingly, regulatory issues could adversely affect our business and results of operations.

Our business, financial condition and results of operations could be adversely affected if we fail to maintain the required governmental authorizations in the various jurisdictions where we operate. In order to maintain the necessary authorizations issued by the different civil aviation and consumer protection authorities in jurisdictions where we operate, we must continue to comply with applicable statutes, rules and regulations pertaining to the airline industry, including any rules and regulations that may be adopted in the future. We cannot predict or control any actions that the civil aviation and consumer protection authorities or other aviation regulators may take in the future, which could include restricting our operations or imposing new and costly regulations.

Further, if we are unable to obtain favorable take-off and landing authorizations at certain high-density airports, our business, financial condition and results of operations could be adversely affected. There can be no assurance that we will be able to obtain all requested authorizations and slots in the future because, among other factors, government policies regulating the distribution of the authorizations and slots are subject to change.

There is a trend in some countries (for example, Colombia, Canada, Brazil, Aruba, Curacao, Mexico, USA, Paraguay, Perú, Dominican Republic and El Salvador, among others), that aim to establish new passenger’s rights, and imposes changes to airlines Contracts of Carriage or limit their scope, based on consumer protection law. If we do not comply with those regulations, we may be subject to investigation, potentially resulting in sanctions or fines, which could adversely affect our business, financial condition and results of operations.

We are working closely with the regional and local airline associations to avoid and prevent our business from suffering unnecessary and burdensome obligations. Throughout 2018, we worked with governments and policy makers on, among others, tax, open skies and passenger rights reforms in Colombia. As of the date of this annual report, passenger rights and open skies reform are still under discussions and therefore the final versions may vary substantially from the proposed version. On the other hand, and effective January 1, 2019, Law 1943 of 2018 (2018

 

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Tax Reform) went into effect introducing numerous changes to Colombian tax rules. In addition, in Costa Rica, we worked on topics such as security fee, non-aeronautical services fee, and passenger rights and in Ecuador on topics such as passenger rights regulation for regular and charter flights, and fares.

We are subject to international bilateral and multilateral air transport agreements in relation to the grant and exchange of air traffic rights between different countries, and to the extent applicable governmental authorities deny permission to us to provide service to domestic and international destinations, our business and results of operations may be adversely affected.

Bilateral aviation agreements as well as local aviation approvals frequently involve political and other considerations beyond our control. Accordingly, a modification, denunciation of or withdrawal of any country in which we operate from one or more bilateral agreements could have a material adverse effect on our business, financial condition and results of operations. The suspension or revocation of our permission to operate in certain airports or destinations or the imposition of other sanctions could also have a material adverse effect. A change in the administration of current laws and regulations or the adoption of new laws and regulations in any of the countries in which we operate that restricts our route, airport or other access may have a material adverse effect on our business, financial condition and results of operations. We cannot give you any assurance that existing bilateral agreements among the countries in which we are based and to which we fly, and permits from local and foreign governments, will continue, or that we will be able to obtain more traffic rights to accommodate our future expansion plans.

In addition, certain bilateral air transport agreements on which we rely (including, among others, agreements of Colombia with Bolivia, Ecuador, Mexico, Peru, Panama, Chile, Argentina, Brazil, the Dominican Republic, Cuba, the Netherlands and Costa Rica) require that our relevant operating airlines must be incorporated and have their principal domicile, management, operations, technical maintenance and offices in certain designated countries. Also, all of the agreements negotiated by El Salvador (except for the agreements with Ecuador, Colombia, Emirates, Qatar and Chile) contain a clause that our airline in El Salvador (Taca International) remains substantially owned and effectively controlled by Salvadoran nationals. A substantial part of the agreements negotiated by Costa Rica also contain ownership and control requirements. Other bilateral air transport agreements, including, among others, agreements with the United States, United Kingdom and Brazil, respectively, contain requirements that we remain substantially owned and effectively controlled by a national governmental entity or its nationals.

We cannot assure you that national citizens, directly or indirectly, will continue to own and control a majority of our capital stock indefinitely. For example, if for any reason Germán Efromovich, José Efromovich and/or Roberto Kriete, who each have citizenships in several countries and are the beneficial owners of nearly all of our common stock, cease to have substantial ownership of our capital stock, or the effective control of our management and operations ceases to be exercised by nationals, we may no longer be in compliance with the Colombian bilateral agreements. Our route and landing rights in a number of important countries may be adversely affected to the extent of such non-compliance, with a corresponding material adverse effect on our business, financial condition and results of operations. See “Information on the Company—Part B. Business Overview—Regulation.”

We may not be able to grow our operations to or in the United States and Europe and may be adversely affected if we fail to comply with the United States and European civil aviation regulatory frameworks.

As of December 31, 2018, 74.0% of our total fleet was U.S.-registered. The U.S. Federal Aviation Administration, or FAA, and the European Aviation Safety Agency, or EASA, are our most significant foreign government regulators. The FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. FAA requirements, which apply to our U.S.-registered aircraft, cover, among other things, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. We expect to continue incurring expenses to comply with these and other international government regulations, and any increase in the cost of compliance could have an adverse effect on our financial condition and results of operations. Additional new regulations continue to be regularly implemented by various U.S. and European agencies, including, among others, the U.S. Transportation Safety Administration, or TSA, the U.S. Drug Enforcement Agency and the European Aviation Safety Agency, or EASA.

 

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We cannot assure you that the laws and regulations of the jurisdictions to which we fly (including, without limitation, immigration and security regulations, which directly affect passengers) will not change or that new laws adverse to us will not be enacted, and any such events may adversely affect our business, financial condition and results of operations.

Failure to comply with applicable environmental regulations could adversely affect our business and reputation

The airline industry is subject to increasingly stringent global, regional, federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those relating to emissions to the air, levels of noise, discharges to surface and subsurface waters, safe drinking water, and the management of hazardous substances, oils and waste materials. These laws and regulations are enforced by various governmental authorities. Non-compliance with such laws and regulations may subject the violator to administrative and criminal sanctions, in addition to the obligation to repair or to pay damages caused to the environment and third parties. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and adversely affect our operations and financial results.

In 2016, the International Civil Aviation Organization (“ICAO”) adopted a resolution creating the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), providing a framework for a global market-based measure to stabilize carbon dioxide (“CO2”) emissions in international civil aviation. CORSIA will be implemented in phases, starting with the participation of ICAO member states on a voluntary basis during a pilot phase (from 2021 through 2023), followed by a first phase (from 2024 through 2026) and a second phase (from 2027). Currently, there are more than 70 countries that have informed ICAO of their intention to be volunteers starting in 2021 (including the United States, México, Costa Rica, El Salvador, Guatemala, Dominican Republic, most of the European countries). This could impose an extra cost for airlines operating routes between those countries. In 2019, all operators have started monitoring their emissions. If Colombia reaches a level of RTKs specified by ICAO, it may be required to comply with CORSIA, on a mandatory basis, starting in 2027. This determination will depend on the growth of RTKs during the years 2019 and 2020.

The proliferation of national regulations and taxes on CO2 emissions in the countries that we have domestic operations, including environmental regulations that the airline industry is facing in Colombia, may also affect our costs of operations and our margins. Concerns about climate change and greenhouse gas emissions may result in additional regulation or taxation of aircraft emissions in Colombia, the United States or Europe. Future operations and financial results may vary as a result of the adoption of such regulations in Colombia, the United States or Europe.

In addition, the European Union has proposed a directive under which the existing emissions trading scheme, or ETS, in each European Union member state was to be extended to all airlines. This directive would require us to submit annual emission allowances in order to operate routes to and from European Union member states. As of December 31, 2018 this proposal would affect only intra-European flights. Currently, we operate a limited number of routes to and from Europe, and service additional destinations through our code-share agreements. The cost of compliance with any international emissions program, and/or national taxes imposed, is difficult to estimate; however, these costs could be significant and could require us to reduce our emissions, purchase allowances or otherwise pay for our emissions, which could have a significant impact on our operating costs or impact the frequency of our flights to and from such destination. Additionally, the Catalonia region has implemented a tax on nitrogen oxide (nox tax) emissions for its flights to and from the Catalunya region. Through international associations such as IATA, we have been contesting such taxes; however, in the meantime, we are required to pay such tax under protest. It is increasingly likely that we will be required to participate in some form of an international aircraft emissions program in the future, which will increase costs.

Failure to comply with these regulations, or future environmental regulations and licensing requirements, could adversely affect us in a variety of other ways, including the suspension or revocation of operating authorizations and/or adverse effects on our reputation. Remediation obligations can result in significant costs associated with the investigation and clean-up of contaminated properties, as well as claims for damages initiated by affected parties.

 

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Because the airline industry’s financial performance is characterized by low profit margins, high fixed costs and relatively elastic revenue, we cannot quickly respond to shortfall in expected revenue or reduce our costs to compete effectively with airlines with greater financial resources or lower operating costs.

The airline industry is characterized generally by low profit margins and high fixed costs, primarily consisting of wages and salaries of crew and other personnel, fuel costs and aircraft and engine lease payments and other financing costs related to aircraft equipment, headquarter facility and information technology system license costs. Revenue per flight are primarily driven by the number of passengers transported and fares, which may vary significantly depending on several factors which are generally outside of our control, including general economic conditions, weather-related factors and our competitors’ pricing strategies. However, the operating costs of each flight do not vary significantly with the number of passengers flown and, therefore, a relatively small change in the number of passengers, fare pricing or traffic mix could have a significant effect on operating and financial results.

We expect to incur additional fixed costs, including contractual debt as we lease or acquire new aircraft and other equipment to implement our fleet modernization and longer term growth strategy or other purposes. As a function of our fixed costs, we may (i) have limited ability to obtain additional financing, (ii) be required to dedicate a significant part of our cash flow to fixed costs resulting from operating leases and debt for aircraft, (iii) incur higher interest or leasing expenses for the event that interest rates increase or (iv) have a limited ability to plan for, or react to, changes in our businesses, the civil aviation sector generally and overall macroeconomic conditions. In addition, volatility in global financial markets may make it difficult for us to obtain financing to manage our fixed costs on favorable terms or at all.

As a result of the foregoing, we may be unable to quickly adjust our fixed costs in response to changes in our revenue. A shortfall from expected revenue levels could have a material adverse effect on us.

We rely on maintaining a high daily aircraft utilization rate, which makes us vulnerable to delays.

We seek to maintain a high daily aircraft utilization rate (the number of hours we use our aircraft per day). High daily aircraft utilization allows us to generate more revenue from our aircraft and is achieved in part by reducing turnaround time at airports, so we can fly more hours on average in a day. Nevertheless, aircraft utilization is reduced by delays and cancellations arising from a number of different factors, many of which are beyond our control, including, among others, air traffic and airport congestion, adverse weather conditions, security requirements, unscheduled maintenance and delays by third-party service providers relating to matters such as fueling and ground handling. On the other hand, high aircraft utilization increases the risk that, if an aircraft falls behind schedule during a given day, it could remain behind schedule for several additional days. Such delays could result in a disruption of our operating performance, leading to customer dissatisfaction due to delayed or cancelled flights and missed connections, which could in turn adversely affect our reputation, business, financial condition and results of operations.

Terrorist attacks or hostilities could adversely affect the airline industry by decreasing demand and increasing costs.

Any future terrorist attacks or threats of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations, including an escalation of military involvement in the Middle East, or otherwise and any related economic impact, could result in decreased passenger traffic and materially and adversely affect us.

For example, the terrorist attacks in the United States on September 11, 2001 had an adverse impact on the airline industry. Airline traffic in the United States fell dramatically after the attacks. Following the 2001 terrorist attacks, airlines experienced increased costs resulting from additional security measures that may be made even more rigorous in the future. A substantial portion of the costs of these security measures is borne by the airlines and their passengers and, therefore, may adversely affect our profit margins.

Premiums for insurance against aircraft damage and liability to third parties increased substantially following the 2001 terrorist attacks, and insurers could reduce their coverage or increase their premiums even further in the event of additional terrorist attacks, hijackings, airline crashes or other events adversely affecting the airline industry abroad or in Latin America. In the future, certain aviation insurance could become unaffordable,

 

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unavailable or available only with amounts of coverage that are insufficient to comply with the levels of insurance coverage required by aircraft lenders and lessors or applicable government regulations. While governments in other countries have agreed to indemnify airlines for liabilities that they might incur from terrorist attacks or provide low-cost insurance for terrorism risks, the Colombian government has not indicated any intention to provide similar benefits to us. Increases in the cost of insurance may result in both higher airline ticket prices and decreased demand for air travel generally, which could materially and negatively affect our business, financial condition and results of operations.

The outbreak or the threat of an outbreak of a contagious disease may have a negative impact on the airline industry.

Outbreaks of contagious diseases with epidemic or pandemic potential, such as the Ebola virus, the Middle East respiratory syndrome, Dengue fever, the bird flu virus, cholera and influenza, among others, can have a significant effect on the aviation industry and our business. First, the disease may affect the health of the crew and operations personnel, preventing the normal operation of the aircraft, which may affect the income, the reputation of the organization and the value of the ADSs. Second, the aircraft itself may be affected through passengers with contagious diseases on it and can be put out of operation until conditions of reliable health and safety for passengers and crew are again guaranteed. Third, contagious diseases in any way related to the operation of an airline may generate a negative impact on the intentions of passengers to fly, decreasing the flow of passengers and generating a negative economic impact on us. Therefore, it is necessary to strengthen monitoring and surveillance of infectious diseases, to establish very clear protocols for passengers that may be a risk to the crew and other passengers, to maintain protocols for cleaning and disinfection of aircraft, and to promote actions for immunization against diseases that are immuno- preventable.

The preparation of actions in predetermined protocols to attend to contingencies related to infectious diseases is necessary, and the company is preparing for this, through preparedness, response and mitigation plans.

RISKS RELATING TO COLOMBIA, PERU, CENTRAL AMERICA, AND OTHER COUNTRIES IN WHICH WE OPERATE

Our performance is heavily dependent on economic and political conditions in the countries in which we do business.

Passenger demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations. See “—Although we experienced an increase in revenue in the fiscal year ended December 31, 2018, we may experience decreases in revenue or profitability in the future.” However, in the past, we have been negatively impacted by poor economic performance in certain countries in which we operate. Any of the following developments in the countries in which we operate could adversely affect our business, financial condition and results of operations:

 

   

changes in economic or other governmental policies;

 

   

changes in regulatory, legal or administrative practices;

 

   

other political or economic developments over which we have no control;

 

   

governments of the countries where we have assets may expropriate those assets under certain circumstances; or

 

   

potential instability may cause expropriation, nationalization, renegotiation or nullification of existing contracts.

Additionally, a significant portion of our revenue is derived from discretionary travel and leisure travel, which are especially sensitive to economic downturns. A worsening of economic conditions could result in a reduction in passenger traffic, and leisure travel, which in turn would materially and negatively affect our financial condition and results of operations. Any perceived weakening of economic conditions in the Andean region and/or Central America could likewise negatively affect our ability to obtain financing to meet our future capital needs in international capital markets.

 

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Our results of operations and financial condition may be adversely affected by changes in governmental policies and actions, and judicial decisions, involving a broad range of matters, including interest rates, exchange rates, exchange controls, inflation rates, taxation, banking, labor and pension fund regulations and other political or economic developments affecting Colombia, Peru, Ecuador and Central America. The governments in these countries have historically exercised substantial influence over their respective economies, and their policies are likely to continue to have a significant effect on companies operating in such countries, including us. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia, Peru, Ecuador and/or Central America. We cannot predict what policies will be adopted by the governments in these countries and consequently cannot assure you that future development in government policies or in the economies of these countries will not impair our business or financial condition or the market value of the ADSs.

Our three main hubs are located in Colombia, El Salvador and Peru, we have focus markets in Costa Rica and Ecuador and we are organized under the laws of the Republic of Panama. Accordingly, our financial condition and results of operations are significantly dependent on the macroeconomic, social and political conditions prevailing in these countries and in the other jurisdictions in which we operate. As a result, decreases in the growth rate, periods of negative growth, increases in inflation, changes in policy, or future judicial interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia, El Salvador, Costa Rica, Peru, Ecuador and Panama and/or the other jurisdictions where we operate may affect the overall business environment and may in turn impact our financial condition and results of operations.

Our performance is heavily dependent on economic and political conditions in Colombia.

Our financial condition and results of operations depend significantly on macroeconomic and political conditions prevailing in Colombia. Decreases in the economic growth rate, periods of negative growth, increases in inflation, changes in law, regulation, policy, or future judicial rulings and interpretations of policies involving exchange controls and other matters such as (but not limited to) currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in or affecting Colombia may affect the overall business environment and may, in turn, impact our financial condition and results of operations.

Colombia’s central government fiscal deficit and growing public debt could adversely affect the Colombian economy. The Colombian fiscal deficit was 3.1% of GDP in 2018, 3.6% of GDP in 2017 and 4.0% of GDP in 2016. According to the projections published in December 2018 by the Ministry of Finance and Public Credit, the Colombian government expected a fiscal deficit of 2.4% of GDP for the year 2019. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. In addition, Colombia held presidential elections in May 2018 with runoffs in June 2018. Iván Duque Márquez was elected president and took office in August 2018. President Duque’s administration will inherit high levels of spending, and if it fails to make significant reductions in investments, Colombia may be unable to meet its fiscal deficit targets. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia. We cannot predict what policies will be adopted by the Colombian government and whether those policies would have a negative impact on the Colombian economy or our business and financial performance.

Furthermore, the outlook of Colombia’s credit rating was changed to negative by Standard & Poor’s Financial Services LLC (“S&P”) and Fitch Ratings (“Fitch”) in 2016 and by Moody’s Corporation (“Moody’s”) in February 2018. However, in March 2017 Fitch upgraded its rating outlook for Colombia from negative to stable due to the perceived reduction in macroeconomic imbalances as a result of the sharp reduction in the current account deficit, diminished uncertainties surrounding Colombia’s fiscal consolidation path due to the tax reform measures passed in December 2016, and the expectation that inflation will meet the Colombian Central Bank’s target. The “stable” outlook was reaffirmed by Fitch in May 2017. In December 2017, S&P downgraded the rating of Colombia’s long-term foreign currency sovereign credit ratings on Colombia from “BBB” to “BBB-.” Additionally, on February 22, 2018 Moody’s changed Colombia’s rating outlook from stable to negative. Currently, Colombia’s long-term debt denominated in foreign currency is rated “Baa2” by Moody’s, “BBB-” by S&P and “BBB” by Fitch.

 

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Any further downgrade of Colombia’s credit rating could adversely affect the Colombian economy and our results of operations. In 2017 and 2019 tax reforms were implemented, which included among other changes raising the VAT rate from 16% to 19%, increasing the withholding income tax rate for foreign providers from 15% to 20%, introducing further taxation in the context of the indirect transfer of share of Colombian entities. Colombia’s economic outlook is more positive for 2019 and the prices of oil have increased. Although the Colombian economy is expected to experience a modest recovery in growth in 2019, along with a decrease in the current account deficit and a marginal increase in debt in the coming three years, we cannot assure you that this will be the case. If the condition of the Colombian economy were to deteriorate, or Colombia’s credit rating were to change, our business, results of operation and financial condition could be adversely affected.

The Colombian government and the Central Bank may seek to implement new policies aimed at controlling further fluctuation of the Colombian peso against the U.S. Dollar and fostering domestic price stability. The Central Bank may impose certain mandatory deposit requirements in connection with foreign-currency denominated loans obtained by Colombian residents, including us. Although the current deposit requirement is zero percent, and therefore non-existent in practical terms, we cannot predict or control future actions by the Central Bank in respect of such deposit requirements, which may involve the establishment of a different mandatory deposit percentage. The use of such measures by the Central Bank may be a disincentive for us to obtain loans denominated in a foreign currency. The U.S. dollar/Colombian peso exchange rate has shown some instability in recent years. We cannot assure you that measures adopted by the Colombian government and the Central Bank will suffice to control this instability or that the Colombian peso will not depreciate or appreciate relative to other currencies in the future. We also cannot predict the effects that such policies will have on the Colombian economy.

2018 was an electoral year in Colombia. After 8 years in power and having signed a peace deal with the FARC, former President Juan Manuel Santos left office. His successor, Iván Duque, is a member of the Centro Democrático party, one of the most stringent critics of the peace deal between Mr. Santos and the FARC. On March 10, 2019, President Duque objected to six of the articles contained in the Special Peace Jurisdiction Law ( Ley Estatutaria de la Jurisdicción Especial para la Paz ), created as a result of the peace deal with the FARC. It is unclear if these objections will be sustained or denied by the Colombian Congress and what effect any of these changes will have on the implementation of the peace deal.

Mr. Duque has faced several challenges in his first 6 months in office. His relationship with Congress has been difficult which made it more difficult to pass certain bills, among others a tax bill which Mr. Duque was forced to pass given Colombia’s fiscal deficit. Violence and criminality, including burglaries, illegal mining, drug production and trafficking have have continued to be challenges for Colombia.

The political and economic conditions in Venezuela could also have an impact on the Colombian economy. There is mass migration by Venezuelans that enter the country in search of food, medicines and jobs. The rupture between Bogotá and Caracas is evident, and there are significant tensions at border between the two countries. The situation at the border and the events in Venezuela will have an increasing influence in Colombia in the upcoming months. In addition, on January 10, 2019, President Nicolas Maduro was sworn in for his second term as President of Venezuela. The National Assembly of Venezuela stated that the results of the May 2018 election were invalid and declared Juan Guaidó as Acting President of Venezuela, a declaration that the Supreme Tribunal of Justice in Venezuela declared unconstitutional. On January 23, 2019, the U.S. government recognized Mr. Guaidó as Acting President of Venezuela. On January 25, 2019, President Trump signed an Executive Order amending prior economic sanctions targeting the Maduro government. Since January 23, 2019 a number of other countries have recognized Mr. Guaidó as Acting President of Venezuela. Given that Colombia is one of Venezuela’s neighboring countries, the political and economic instability in Venezuela could affect the Colombian economy, which could in turn affect our financial conditions and results of operation.

Despite efforts by the Colombian government, drug-related crime, guerrilla paramilitary activity and criminal bands continue to exist in Colombia, and allegations have surfaced regarding members of the Colombian congress and other government officials having ties to guerilla and paramilitary groups. Although the Colombian Government and the National Liberation Army (“ELN”) have been in talks since February 2017 to end a five-decade war, the Colombian Government has suspended the negotiations after a series of rebel attacks. On January 17, 2019, a car with explosives burst through the gates at a police academy in Bogotá resulting in 21 people dead and many injured. Colombian Attorney General informed that the vehicle had last been registered in Arauca, a largely rural state bordering Venezuela that is a stronghold of the leftist guerrilla group, the ELN. The Colombian Defense

 

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Minister subsequently confirmed that the terrorist attack was perpetrated by the ELN. Any possible escalation in the violence associated with this terrorist attack and/or these activities may have a negative impact on the Colombian economy or on us, which may affect our customers, employees, assets or projects. In addition, given that the peace protocols to be applied in the event of a suspension of peace negotiations were entered into by the prior administration, the current administration has not honored these protocols, on the grounds that these protocols are only binding to the administration that agreed to them. This situation could result in escalated violence by the ELN and may have a negative impact on the credibility of the Colombian Government which could in turn have a negative impact on the Colombian economy.

Furthermore, recent political and economic actions in the Latin American region, including the corruption investigations and proceedings in Brazil may negatively affect international investor perception of the region. For example, on January 12, 2017, the Colombian Fiscalía General de la Nación initiated a corruption investigation into the activities of the Brazilian construction firm Odebrecht. While the investigation is still ongoing, to date, five individuals have been convicted, including two former public officials. These investigations involve Corficolombiana, a subsidiary of Grupo Aval and its former CEO José Elias Melo. On September 14, 2018, the Superintendencia de Industria y Comercio initiated a corruption investigation in Colombia into Corficolombiana’s actions in relation to the adjudication of the Ruta del Sol II highway concession. Meanwhile, on December 6, 2018 the Administrative Tribunal of Cundinamarca imposed on Episol (a Corficolombiana subsidiary) and others a fine of COP 800,000,000,000 (approximately $259 million) to be paid jointly and severally for the perturbations caused to popular rights (access to public services, free competition, public morality) as a result of the alleged corruption acts involving the Ruta del Sol II agreement. This decision was appealed and will be decided by the Council of State. These corruption investigations have affected the political class and we cannot assure you they will not affect the Colombian economy and in turn our results of operation.

Our performance is heavily dependent on economic and political conditions in El Salvador.

El Salvador has a history of political instability marked by long periods of civil unrest and military rule. From 1979 until 1991, El Salvador was mired in guerrilla activities, which were ended by a United Nations-brokered peace accord in January of 1992. Since the peace accords were signed, El Salvador has experienced political stability. The Nationalist Republican Alliance Party, or ARENA, controlled the presidency from 1989 to 2009, at which time the FMLN (a former guerrilla organization now turned into a political party) won the presidential elections with Mauricio Funes. Salvador Sánchez Cerén, also an FMLN member, was elected by a narrow margin and became president on June 1, 2014. Insecurity and violence indexes have decreased during the last year, however the country is still listed as one of the most insecure in the world. In addition, presidential elections were held on February 3, 2019, with Nayib Bukele of the political party GANA being elected with 53.8% of the votes. He will take office on June 1, 2019. We are uncertain what the future administration’s policies may be and how they will affect our business and operations. Future government policies in response to social unrest could include, among other things, increased taxation, as well as expropriation of assets. These policies could materially and adversely affect the Salvadorian economy and, as a result, our business, financial condition and results of operations.

El Salvador’s economy has recently been growing at a moderate pace, yet its unemployment and poverty rates remain high. In November 2018, there was a year-to-date inflation rate of 1.1% and the GDP level reached a quarterly average of 2.6% growth compared to 2017. Despite reforms and initiatives, El Salvador still ranks among the ten poorest countries in Latin America and suffers from inequality in the distribution of income. We cannot assure that El Salvador will not face political, economic or social problems in the future, and we may be seriously affected by such problems.

Our performance is heavily dependent on economic and political conditions in Peru.

In the past, Peru has experienced periods of severe economic recession, large currency devaluation and high inflation. In addition, Peru has experienced periods of political instability. This has however changed in the past years with several democratic procedures completed without any violence.

While Peru has experienced economic growth in the recent past, political tensions, high levels of poverty (according to the latest available data provided by Peru’s National Center of Statistics and Informatics, or INEI, 21.7% of the total population in 2017 was living in poverty), unemployment, and social conflicts within local communities continue to be pervasive problems in Peru. In the past, certain areas in the south and the northern

 

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highlands of Peru with significant mining developments have experienced strikes and protests related mainly to the environmental impact of metallic mining activities and illegal mining activities, which have resulted in political tensions, commercial disruptions and a climate of uncertainty with respect to future mining projects. Future government policies in response to social unrest could include, among other things, increased taxation rates, new environmental law requirements to execute projects and modifications to the labor law regulation. These policies could materially and adversely affect the Peruvian economy and, as a result, our business, financial condition and results of operations.

For example, prior to 1991, Peru exercised control over foreign exchange markets by imposing restrictions to multiple exchange rates and restrictions to the possession and use of foreign currencies. Currently, foreign exchange rates are determined by market conditions, with regular operations by the Central Reserve Bank in the foreign exchange market in order to reduce volatility in the value of Peru’s currency against the U.S. dollar. Because of the economic growth, there is a reduced risk that the Peruvian government may institute restrictive exchange rate policies in the future. Any such restrictive exchange rate policy could affect our ability to engage in foreign exchange activities and could also have a material adverse effect on our business, financial condition and results of operations.

In March 2018, due to a political crisis involving allegations of links to Odebrecht the Brazilian construction giant and a scandal of a video showing the president’s supporters attempting to buy political support, Mr. Pedro Pablo Kuczynski resigned from his presidency, which led to the designation of Martin Vizcarra as Peru’s new president (former Vice President). President Vizcarra and his new ministers have promised a continuation of the commitment to maintain moderate economic policies, that sustain and foster economic growth, while controlling the inflation rate at historically low levels. His government’s biggest challenges will be repairing relations with Congress and to prove that he was not involved in any wrongdoing linked to Odebrecht while he served as Minister of Transportation and Vice President. However, given the allegations of congressional links to Odebrecht as well as the imprisonment of the opposition party’s leader, Keiko Fujimori, various congressmen of the opposition party “Fuerza Popular” resigned, including the president of the Congress which have left a reduced opposition party. Furthermore, the diminished political influence of the legislative body was further manifested in amendments to the Peruvian Constitution proposed by the current government, the related prohibition of reelection of congressmen and the regulation political parties finance, approved in a Referendum on December 9, 2018. Any changes in the Peruvian economy or the Peruvian government’s economic policies may have a negative effect on our business, financial condition and results of operations.

Our performance is heavily dependent on economic and political conditions in Costa Rica.

While Costa Rica has been an attractive destination for foreign investment and is considered one of Latin America’s oldest and transparent democracies, we cannot assure you that these conditions will continue. Despite a sustained real GDP growth for the last four years, in 2018, Costa Rica faced a poverty level estimated at 20.0% and an accumulative inflation rate of 2.0%, level inside the expectations of the Central Bank of Costa Rica.

One of the major points of discussion between the candidates in the recent 2018 presidential elections was the current 6.2% fiscal deficit of the country, the largest deficit in its history. The government has indicated that such deficit must be reduced by increasing the public revenue through tax reform combined with a general reduction of governmental expenses.

Our performance is heavily dependent on economic and political conditions in Ecuador.

The Ecuadorian economy is heavily dependent on the oil industry and was severely impacted by the 2009 financial crisis, which adversely affected the country’s economic growth. While Ecuador’s economic growth has since improved, it faces a poverty level estimated at 23.2% and 21.5% in 2018 and 2017, respectively, according to the National Center of Statistics, or ECU. In addition, Ecuador defaulted on a sovereign debt obligation in 2008 and its economic policies have created a great deal of uncertainty about its future. The decline of oil prices in 2014 and 2015 may also prove to have a significant impact on the Ecuadorian economy. In addition, the earthquake which occurred in 2016 impacted in the economy.

 

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Ecuadorian exports have also lost competitiveness due to currency depreciation among its neighbors. In a dollarized economy, most of the adjustments are coming from raising unemployment levels, which also affects consumption and demand in general. All of the foregoing has led the government to enact new regulations, changing the prior legal framework, which in turn, has increased uncertainty.

Lenin Moreno was elected President in a runoff election held on April 2, 2017. This change in administration was the first time since January 15, 2007 that former President Rafael Correa has not held the office.

President Moreno has presented initiatives with the goal of reducing debt, such as by reducing burocreacy and privatizing state-owned companies. In addition, the government seeks new financings to service existing debt.

Our performance is heavily dependent on economic and political conditions in Panama.

The Issuer is organized under the laws of the Republic of Panama and as a result may be affected by economic and political conditions prevailing from time to time in Panama. The Panamanian economy is small and relatively undiversified, largely focused on the service sector, which currently represents approximately 75% of the country’s GDP. A significant portion of Panama’s economic activity is linked directly or indirectly to the Panama Canal, shipping and port activities, a large free trade zone, an international banking center and tourism services. Due to the small size and limited focus of the Panamanian economy, adverse developments in Panama could have a more pronounced effect than would be the case if the developments occurred within the context of a larger, more diversified economy. Recently enacted tariffs, potential changes to import/export regulations, renegotiations of certain bilateral or multi-lateral trade agreements and other limitations on foreign investments and trade by the United States and other countires may have a material adverse effect on global economic conditions and the stability of global financial markets. They may significantly reduce global trade and, in particular, trade conducted through Panama, and negatively affect our business, financial results and financial condition.

Although the Panamanian government is democratically elected, and the Panamanian political climate is currently stable, we cannot assure you that current conditions will continue. If the Panamanian economy experiences a recession or a reduction in its economic growth rate, or if Panama experiences significant political disruptions and high corruption issues in the Government, our business, financial condition and results of operations could be materially and negatively affected.

We cannot assure you that any crises such as those described above, or similar events will not negatively affect the economies of Colombia, El Salvador, Costa Rica, Peru, Panama or the other jurisdictions where we operate. Future developments in the countries in which operate could impair our business or financial condition.

The next presidential elections in Panama will be held on May 5, 2019.

Developments and the perception of risk in other countries, especially emerging market countries, may adversely affect the market price of many Latin American securities, including the ADSs.

The market value of securities issued by companies with operations in the Andean region and Central America may be affected to varying degrees by economic, political and market conditions in other countries, including other Latin American and emerging market countries. Although macroeconomic conditions in such Latin American and other emerging market countries may differ significantly from macroeconomic conditions in Colombia and the other countries in which we operate, investors’ reactions to developments in these other countries may have an adverse effect on the market values of our securities. For example, as a result of economic problems in various emerging market countries in recent years (such as the Asian financial crisis of 1997, the Russian financial crisis of 1998, the Argentine financial crises of 2001 and 2018 and the Turkish and South African crises of 2018), investors have viewed investments in emerging markets with heightened caution. Crises in world financial markets, such as those of 2008, could affect investors’ views of securities issued by companies that operate in emerging markets. Crises in other emerging market countries may hamper investor enthusiasm for securities of Panamanian issuers, including the ADSs, which could adversely affect the market price of the ADSs. This could also make it more difficult for us and our subsidiaries to access the capital markets and finance our operations in the future on acceptable terms, or at all.

 

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Natural disasters in the countries in which we operate could disrupt our businesses and affect our results of operations and financial condition.

We are exposed to natural disasters in each of the countries in which we operate, such as earthquakes, volcanic eruptions, tornadoes, tropical storms, lightning and hurricanes. For example, heavy rains in Colombia have resulted in severe flooding and mudslides. El Salvador has experienced many significant earthquakes, including in 1982, 1986 and 2001, that in each case resulted in numerous fatalities. Peru has also experienced numerous significant earthquakes, including in 2001, 2005, 2007 and 2011. Moreover, the Central American isthmus, in particular El Salvador, Costa Rica, Guatemala and Nicaragua, is home to one of the world’s largest concentrations of active volcanos. Colombia has also experienced significant volcanic activity, affecting important cities covered by our domestic operation. Such volcanic ash clouds would not only affect airport operations, but also the route conditions of flights operating near the affected zone.

In 2018, Avianca cancelled 75 flights due to tropical and electric storms, and 33 flights due to volcanic ash emissions. During 2017, we cancelled 12 flights due to volcanic ash emissions but during 2016, we cancelled 88 flights due to the activity from the volcanoes Ruiz (Colombia) and Turrialba (Costa Rica). In the event of a natural disaster, there is a risk of damage to our airport hubs and other facilities which could have a material adverse effect on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In any such event, our property damage and business interruption insurance might not be sufficient to fully offset our losses, which could adversely affect our results of operations and financial condition. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised.

Government policies and actions, and judicial decisions, in Colombia, Peru, Ecuador or Central America could significantly affect the local economy and, as a result, our results of operations and financial condition.

We have significant operations in Colombia, Peru, Ecuador, El Salvador and Costa Rica and Avianca Holdings is incorporated in Panama. Accordingly, our financial condition and results of operation depend on the level of economic activity in those countries. Our financial condition and results of operations could be affected by changes in economic and other policies of the governments of those countries, some of which have exercised and continue to exercise substantial influence over many aspects of the private sector, including through government policies and actions and judicial decisions. For example, the Colombian government and the Colombian Central Bank have historically exercised and continue to exercise, substantial influence over the Colombian economy; they occasionally make significant changes in monetary, fiscal and regulatory policy. On May 25, 2018, the Board of Directors of the Central Bank issued External Resolution 1 of 2018 and External Circular DCIN—83 of 2018, which compiled and modified the foreign exchange regime. Changes in macroeconomic policies could materially and adversely affect our business and the market value of our securities.

Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Panama, Colombia, Costa Rica or other countries where we operate could adversely affect our consolidated results.

Uncertainty relating to applicable tax legislation poses a constant risk to us. Changes in legislation, regulation, jurisprudence, even country risks, can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting eligible expenses and deductions, and eliminating incentives and non-taxed income. Currently, Panama imposes no income tax on revenue generated from an active income source outside of Panama and subjects dividends paid to a withholding tax of only 10% of the portion of the dividend that is attributable to Panamanian sourced active income (as defined pursuant to the territoriality principles that govern Panamanian tax law) and to a withholding tax of 5% of the portion of the dividend that is attributable to foreign-source active income. Currently, Panama does not impose a withholding tax on dividends distributed by entities incorporated under the laws of Panama or otherwise that do not operate in Panama nor earn income from Panamanian sources.

Colombia has gone through three tax reforms in the last five years, but the Colombian Government continues to face serious budgetary constraints and pressure from rating agencies that could lead to future tax reforms, with potential adverse consequences on our financial results. On December 28, 2018, a tax reform was implemented by means of Law 1943 intended to strengthen the mechanisms to prevent tax evasion and introduced other substantial changes to the then-existing tax legal framework. As a result, income tax withholding rates from

 

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payments made to foreign entities were increased to a general rate of 20% (from the current 15%), however this general rate does not apply to foreign indebtedness exceeding one year, in which case the applicable income tax withholding remains at 15%. Dividends paid out of profits that were subject to corporate income tax are now subject to a withholding tax of 7.5% (increased from 5% currently) and dividends paid out of profits that were not subject to corporate income tax are now subject to a withholding tax of 33% for 2019, 32% for 2020, 31% for 2021 and 30% for 2022 etc., plus the foregoing 7.5%, which applies to the amount remaining after the 33%, 32%, 31% or 30% withholding is applied, in accordance with the applicable taxable year. As a result, withholding taxes on dividends paid by Avianca now increased. The reform also includes the taxation of the indirect transfer of shares in a Colombian entity, a new Colombian holding company regime (a Colombian participation exemption regime) and a mutual agreement procedure before the tax administration with the possibility to reduce interest and penalties in connection with tax disputes by 70% to 80%. In addition, the reform introduced a new VAT treatment: under such treatment, input-VAT paid in an acquisition, import, creation or construction of real productive fixed assets may be treated as a credit for income tax purposes.

We cannot assure you that Panamanian and Colombian tax laws or tax laws in other countries where we operate will not change or may be interpreted differently by authorities as a result of the implementation of IFRS, and any change could result in the imposition of significant additional taxes. Moreover, the Colombian and Salvadoran governments have significant fiscal deficits that may result in future tax increases. Additional tax regulations could be implemented requiring additional tax payments, negatively affecting our results of operations and cash flow. In addition, national or local taxing authorities may not interpret tax regulations in the same way that we do. Differing interpretations could result in future tax litigation and associated costs.

In December 2018, the Costa Rican Congress enacted the Law in Support of Strengthening Public Finances that includes two major amendments to the Costa Rican tax legislation. First, the tax reform substituted the application of a sales tax with a value added tax of 13% with respect to almost all goods and services (for air transportation services a reduce rate of 4% applies). Second, any surplus of revenue distributed as a dividend or in comparable form is also taxed as capital gains. The government has declared that the enactment of this new law will need to be complemented with further new fiscal regulations to stop or lower the fiscal deficit. However, such regulations have not yet been approved by the Costa Rican government. This situation could lead to a more negative economic outlook in the medium-term future and at the same time, there are no political agreements to remedy this situation and therefore we cannot assure you that taxes will not increase and negatively affect our results of operations.

High rates of inflation may have an adverse impact on our business, results of operations, financial condition and prospects, and the market price of the ADSs.

Rates of inflation in the countries in which we operate, such as some other countries in Latin America have been historically high, and we cannot assure you inflation will not return to high levels. Inflationary pressures may adversely affect our ability to access foreign financial markets, leading to adverse effects on our capital expenditure plans. In addition, inflationary pressures may, among other things, reduce consumers’ purchasing power or lead certain anti-inflationary policies to be instituted by the relevant governments, such as an increase in interest rates. Recently, inflation has increased, and there is no assurance that measures taken by the relevant governments will suffice to curb inflation. Inflationary pressures may harm our business, results of operations, financial condition and prospects, or adversely affect the price of our ADSs.

Fluctuations in foreign exchange rates and restrictions on currency exchange could negatively affect our financial performance and the market price of the ADSs.

The currency used by us is the U.S. dollar in terms of setting prices for our services, the composition of our statement of financial position and effects on our operating income. We sell most of our services in U.S. dollars or price equivalent to the U.S. dollar, and a large part of our expenses are also denominated in U.S. dollars or equivalents to the U.S. dollar, particularly fuel costs, aircraft leases, insurance and aircraft components and accessories.

In 2018, 76.0% of our costs and expenses and 81.2% of our revenue were denominated in, or linked to, U.S. dollars. The remainder of our expenses and revenue were denominated in currencies of the countries in which we operate, of which the most significant is the Colombian peso. Changes in the exchange rate between the

 

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Colombian peso and the U.S. dollar or other currencies in the countries in which we operate adversely affected our business in 2018 and could adversely affect our business, financial condition and results of operations in the future. In particular, during times when our non-U.S. dollar-denominated revenue exceed our non-U.S. dollar-denominated expenses, the depreciation of non-U.S. currencies against the U.S. dollar could have an adverse effect on our results, because conversion of these amounts into U.S. dollars will decrease our net income. We operate in numerous countries and face the risk of variation in foreign currency exchange rates against the U.S. dollar or between the currencies of these various countries.

In addition, a relevant portion of our liabilities are denominated in Colombian pesos. At times when the Colombian peso appreciates against the U.S. dollar, the value of these liabilities will increase in U.S. dollar terms, resulting in an increase in our non-operating expenses, which can have a negative effect on our consolidated financial statements and can have a real or perceived impact on our financial performance, which could negatively affect the market price of the ADSs. Our $9.2 million currency exchange loss in 2018 was principally the result of exchange rate variations in markets like Argentina, Brazil and Venezuela where the company has an asset monetary position. Variations in the values of other currencies may have similar effects.

Variations in interest rates may have adverse effects on our business, financial condition, results of operations and prospects and the market price of the ADSs.

We are exposed to the risk of interest rate variations. Our Colombian peso-denominated debt is mainly exposed to variations in long-term interest rates and the Colombian 90-day deposit rate for commercial banks ( establecimientos bancarios ), financial corporations ( corporaciones financieras ) and financing companies ( companies de financiamiento ), the banking benchmark IBR or the fixed term deposit rate DTF, as published by the Colombian Central Bank. Our non-Colombian peso-denominated debt is mainly exposed to variations in the London Interbank Offer Rate, or LIBOR. Any increase in inflation or other macroeconomic pressures may lead to increases in these rates. As of December 31, 2018, we had $844.1 million in aggregate principal amount of variable-rate debt.

Increases in the above-mentioned rates may result in higher debt service payments under our loans, and we may not be able to adjust the prices we charge to offset the impact of these increases. If we are unable to adequately adjust our prices, our revenue might not be sufficient to offset the increased payments due under our loans and this would adversely affect our results of operations. Accordingly, such increases may adversely affect our business, financial condition, results of operations and prospects and the market price of the ADSs.

In addition, on July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. Such announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. We have material financings that use LIBOR as a factor in determining the applicable interest rate. As a result, it appears highly likely that LIBOR will be discontinued or modified by 2021. At this time, it is not possible to predict the effect that these developments, any discontinuance, modification or other reforms to LIBOR or any other reference rate, or the establishment of alternative reference rates may have on LIBOR, other benchmarks or floating rate debt securities and, in turn, the impact of such changes on us, which may include the need to renegotiate our indebtedness that use LIBOR as a factor in determining the applicable interest rate. The extent and manner of any such future changes may result in interest rates that are higher than, lower than, or do not otherwise correlate over time with, the interest rate or payments that would have been made on our obligations if a LIBOR-based rate was available in its current form. If LIBOR remains available, there may be sudden or prolonged increases or decreases in the reported LIBOR rates, which could materially impact our interest payments.

RISKS RELATING TO THE ADSs AND OUR PREFERRED SHARES

BRW, the Independent Third Party and United (if it has issued a United Approval Notice), have veto power over certain strategic and operational transactions, and their interests may differ significantly from the interests of our other shareholders.

We, our controlling shareholders, BRW and Kingsland, and United are parties to the Amended and Restated Joint Action Agreement and the Share Rights Agreement. Such agreements give BRW, the Independent Third Party and United (if it has issued a United Approval Notice) veto power over significant strategic and operational transactions including, among others:

 

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mergers, consolidations, and dispositions of all or substantially all of the assets, of Avianca Holdings or any of its subsidiaries to a third party;

 

   

the issuance or sale of voting common or preferred stock or other form of voting equity interest in Avianca Holdings or any of its subsidiaries;

 

   

except as specifically identified in our annual business plan and budget approved pursuant to the Amended and Restated Joint Action Agreement, certain acquisitions of (i) securities or other interests in any joint venture, partnership or other person, (ii) assets related to the airline business or activities ancillary or related thereto in each case over $10 million in any single instance or over $25 million in the aggregate during any fiscal year, or (ii) assets not related to the airline business or activities ancillary or related thereto;

 

   

changes to our annual business plan and budget that is approved from time to time pursuant to the Amended and Restated Joint Action Agreement;

 

   

capital expenditures over $10 million in the aggregate during any fiscal year, except as specifically identified in our annual business plan and budget approved pursuant to the Amended and Restated Joint Action Agreement;

 

   

certain changes to our organizational documents or those of our material subsidiaries;

 

   

certain related party transactions or certain contracts outside the ordinary course of business;

 

   

termination of the Joint Business Agreement (or any other joint business agreement entered into in connection with the Joint Business Agreement) under certain circumstances;

 

   

any action or omission which would cause the Company to breach, or would constitute a default under, the Joint Business Agreement (or other joint business agreements entered into in connection with the Joint Business Agreement);

 

   

commence any bankruptcy or insolvency proceeding; and

 

   

dissolution or liquidation of a material subsidiary of Avianca Holdings.

In addition, pursuant to the Share Rights Agreement, if United notifies the other parties to the agreement that (a) United has determined that its exercise of any or all of the rights that have been delegated to the Independent Third Party by Kingsland can be exercised by United or its designee without such exercise constituting “control” within the meaning of such term within any of United’s collective bargaining agreements or other material agreements, or (b) United is otherwise prepared to exercise any or all of such rights (which is referred to herein as a United Approval Notice), then United or its designee can assume some or all of the rights given to the Independent Third Party. Such United Approval Notice has not been issued as of the date of this annual report.

Furthermore, if all of the obligations under the United Loan are repaid in full, the Amended and Restated Joint Action Agreement provides that there shall be certain changes to the veto rights described above.

As a result of the foregoing veto rights, BRW, the Independent Third Party and United (if it has issued a United Approval Notice) can prevent us from taking strategic and other actions that may be in your best interests, including transactions that may enhance the long-term value of the ADSs and/or provide you with an opportunity to realize a premium on your investment in ADSs.

 

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Furthermore, German and José Efromovich who indirectly control BRW also control Oceanair, which operates under the trade name Avianca Brazil and provides passenger services primarily in the Brazilian market. Mr. Roberto Kriete is a Director of Volaris, a growing Mexican airline that provides passenger services to markets including North America. We cannot predict the extent to which we may compete in the future with Oceanair or Volaris in Brazil, Mexico and elsewhere, and therefore cannot assure you that the interests of BRW, the Independent Third Party and United (if it has issued a United Approval Notice), will be aligned with those of ADSs’ holders, and cannot give you any assurance that BRW, the Independent Third Party and United (if it has issued a United Approval Notice), will exercise their respective rights under the Amended and Restated Joint Action Agreement in a manner that is favorable to your interests as a holder of ADSs. In addition, any potential change in our control structure as a result of the United Loan may cause corresponding changes in relation to management and control decisions and could alter our controlling shareholders’ objectives in a manner that is not favorable to holders of ADSs (see “”—Risks Relating to our Business—BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements.”)

Our controlling shareholders can direct our affairs, and their interests may conflict with those of ADSs’ holders.

BRW and Kingsland beneficially own all of our outstanding common shares (except one common share owned by United). Holders of our preferred shares and ADSs are not entitled to attend or vote at any of our general shareholders’ meetings, except under the following circumstances:

 

   

our anticipated dissolution, merger, integration or transformation or change of our corporate purpose;

 

   

the suspension or cancellation of the registration of preferred shares at the Colombian Stock Exchange;

 

   

determination by the Colombian Financial Superintendency that there have been concealed or diverted benefits that decreased our distributable profits;

 

   

when modifications that could impair the rights of holders of preferred shares are being voted upon;

 

   

when the conversion of the preferred shares into common shares is being voted upon; and

 

   

if the number of preferred shares were to exceed the number of common shares (subject to certain exceptions).

Also, each holder of preferred shares shall be entitled to one vote on all matters submitted to a vote at a general shareholders’ meeting (as if they were holders of common shares) when the holders of preferred shares represent more than 75% of our capital stock.

Holders of our preferred shares and ADSs are not entitled to vote on other matters, many of which may be significant and may adversely affect the value of our preferred shares and ADSs. As a result, holders of our common shares can determine the outcome of substantially all matters submitted for a vote and thus exercise control over our business’ policies and affairs, including, among others, the following:

 

   

the composition of our board of directors and, consequently, any determinations of our board related to our business’ direction and policy, including the appointment and removal of our executive officers;

 

   

whether dividends are paid, or other distributions are made, and the amount of any such dividends or distributions;

 

   

whether we offer preemptive and accretion rights to holders of our preferred or common shares in the event of a capital increase;

 

   

sale, transfer or any disposition of our assets; and

 

   

the amount of debt financing that we incur.

 

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Holders of our common shares may direct us to take actions that could be contrary to your interests and may be able to prevent other shareholders, including you, from blocking such actions or from causing different measures to be taken. Also, they may prevent transactions implying change of control from happening, which might otherwise provide you with an opportunity to dispose of or realize a premium on your investment in our ADSs. In addition, we have entered into various transactions with Oceanair, an entity indirectly controlled by Synergy, including, among other things, licensing Oceanair to use our Avianca trademark in Brazil, leasing and subleasing aircraft to Oceanair and entering into various agency agreements. We cannot assure you that holders of our common shares will act in a manner consistent with your best interests.

Substantial future dispositions or conversions of our Class A shares by our controlling shareholder or other large holders of our shares could cause the price of our ADSs to decline.

As of December 31, 2018, BRW, our controlling shareholder, owned 78.1% of our voting common shares which represents 51.5% of our total outstanding shares. Although we are not aware of any current intention of BRW to sell or transfer its controlling interest in us, BRW may do so at any time in compliance with the conditions prescribed by the Amended and Restated Joint Action Agreement and the Share Rights Agreement. The market price of our ADSs could drop significantly if our controlling shareholder (or other large holders of our shares) were to dispose of a significant amount of our voting shares or ADSs (including the sale of the pledged shares referred to below) or convert a significant number of our common shares into our preferred shares, or if the market perceives that such a disposition or conversion is likely to occur.

BRW and Kingsland have pledged their holdings of our common shares to secure certain financial and other obligations, including in connection with the United Loan, and such pledged shares represent all of our common shares (other than one common share held by United). If enforcement action is taken by or on behalf of the entities that have the benefit of the share pledges, or if shares of common stock are otherwise transferred in satisfaction of debt obligatons, such enforcement action or transfers could result in transfer of such shares to United and one or more third parties and could result in a change of control with respect to us. See “—Risks Relating to our Business—BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. We believe that BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements” above. Furthermore, pursuant to the terms of the Share Rights Agreement, call rights have been granted to United, which give United the right to call for the purchase by United of our common shares that are held by BRW and Kingsland in the event of, among other things, certain terminations of the Joint Business Agreement (or any other joint business agreement entered into in connection with the Joint Business Agreement). A change of control may trigger a default under certain of our debt instruments and other material agreements, which may cause a material adverse effect on our business, operations, financial condition, liquidity and results of operations.

Holders of ADSs have even more limited rights than holders of our preferred shares and may encounter difficulties in exercising some of such rights.

Holders of the ADSs may encounter difficulties in exercising some of their rights as shareholders for as long as they hold the ADSs rather than the underlying preferred shares. For example, holders of the ADSs are not entitled to vote at shareholders’ meetings, and they are only able to exercise their limited voting rights by giving timely instructions to the depositary in advance of a shareholders’ meeting, and only in respect of certain matters. Moreover, holders of the ADSs are only entitled to exercise inspection rights through a representative designated for that purpose and such rights may only be exercised 15 business days prior to an ordinary shareholders’ meeting.

The depositary is the holder of the preferred shares underlying the ADSs and holders may exercise voting rights with respect to the preferred shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. To the limited extent permitted by the deposit agreement, the holders of the ADSs should be able to direct the depositary to vote the underlying preferred shares in accordance with their individual instructions. Nevertheless, holders of ADSs may not receive voting materials in time to instruct the depositary to vote the preferred shares underlying their ADSs. Also, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of ADS or for the manner of carrying out such instructions, unless such failure can be attributed to gross negligence, bad faith or willful misconduct on the part of the depositary or its agents. Accordingly, holders of ADSs may not be able to exercise voting rights, and they will have little, if any, recourse if the underlying preferred shares are not voted as requested.

 

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Our ADSs are subject to certain foreign exchange regulations from the Colombian Central Bank which may impose registration requirements upon certain events of the ADS Program.

Colombia’s International Investment Statute regulates the way foreign investors may participate in the Colombian securities market, prescribes registration of certain foreign exchange transactions before the Colombian Central Bank, and specifies procedures under which certain types of foreign investments are to be authorized and administered. A holder of ADSs who withdraws preferred shares from the ADS deposit facility under certain circumstances, may have to comply directly with certain requirements under Colombian foreign investment regulations. Failure of a non-resident investor to comply with foreign exchange regulations may prevent the investor from obtaining remittance payments – including for the payment of dividends –, constitute an exchange control violation and/or may result in a fine.

Our shareholders’ ability to receive cash dividends may be limited.

Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. The Company’s by-laws provide that in principle all dividends declared by our general shareholders’ meeting will be paid equally to holders of preferred shares and common shares. Although there’s a dividend policy that provides for the payment of dividends of at least 15% of our annual consolidated net income, the board of directors may at any time, in its sole discretion and for any reason, amend or discontinue the dividend policy. If no dividends are declared, you will not have any right to participate in or override that decision. Future dividends with respect to our preferred stock, if any, will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions, business opportunities, provisions of applicable law and other factors that the holders of our common shares and board of directors may deem relevant. As a result, we cannot give you any assurance that we will pay dividends in accordance with our current dividend policy or otherwise.

Holders of our preferred shares are not entitled to preemptive rights, and as a result you may experience substantial dilution upon future issuances of stock.

Under our organizational documents, and in accordance with Panamanian law, holders of our preferred shares are not entitled to any preemptive rights with respect to future issuances of capital stock. Therefore, unlike companies organized under the laws of many other Latin American jurisdictions, we will be free to issue new stock to other parties without first offering them to our existing preferred shareholders. In the future we may sell common or other shares to persons other than our existing preferred shareholders, at a lower price than the shares offered as ADSs on the New York Stock Exchange, and as a result you may experience substantial dilution of your interest in the Company.

ADS holders may be subject to additional risks related to holding ADSs rather than shares.

Because ADS holders do not hold their shares directly, they are subject to the following additional risks, among others:

 

   

as an ADS holder, we do not treat you as one of our direct shareholders and you may not be able to exercise shareholder rights;

 

   

distributions on the preferred shares represented by your ADSs are paid to the depositary, and before the depositary makes a distribution to you on behalf of your ADSs, withholding taxes, if any, that must be paid will be deducted and the depositary will be required to convert the Colombian pesos received into U.S. dollars. Additionally, if the exchange rate fluctuates significantly during a time when the depositary cannot convert the Colombian pesos received into U.S. dollars, or while it holds the Colombian pesos, you may lose some or all of the U.S. dollar value of the distribution;

 

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we and the depositary may amend or terminate the deposit agreement without the ADS holders’ consent in a manner that could prejudice ADS holders or that could affect the ability of ADS holders to transfer ADSs; and

 

   

the depositary may take other actions inconsistent with the best interests of ADS holders.

The market price for the ADSs could be highly volatile, and the market price of our ADSs may be negatively impacted.

Volatility in the market price of our ADSs may prevent you from being able to sell your ADSs at, above or near the price you paid for them. The market price and liquidity of the market for our ADSs may be significantly affected by numerous factors, including, among others:

 

   

fluctuations in our periodic operating results;

 

   

changes in financial estimates, recommendations or projections by securities analysts;

 

   

changes in conditions or trends in the airline industry;

 

   

changes in the economic performance or market valuation of other airlines;

 

   

announcements by our competitors of significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

 

   

increased competition in the airline industry;

 

   

general economic trends in Colombia, El Salvador, Costa Rica, Peru, Ecuador and the other jurisdictions in which we operate;

 

   

events affecting equities markets in the countries in which we operate;

 

   

legal or regulatory measures affecting our financial condition;

 

   

departures of managers and other key personnel; and

 

   

potential litigation or the adverse resolution of pending litigation against us or our subsidiaries.

Volatility in the price of the ADSs may be caused by factors outside of our control and may be unrelated to our operating results or disproportionate to the effect upon us of such factors. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against us, as well as announced changes in our business plans or those of competitors, could adversely affect the trading price of the ADSs, regardless of the likely outcome of those developments or proceedings. Broad market and industry factors could also adversely affect the market price of the ADSs, regardless of our actual operating performance. As a result, the market price of our ADSs may be negatively impacted.

We have identified material weaknesses in our internal control over financial reporting and our disclosure controls and procedures are not effective. If we fail to remediate the identified material weaknesses, or if we otherwise fail to maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, detect or prevent fraud, or file our periodic reports in a timely manner, which may, among other adverse consequences, cause investors to lose confidence in our reported financial information and lead to a decline in the value or trading price of our securities.

We are required to comply with the internal control, evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in the annual report on Form 20-F for the year ending December 31, 2018. In addition, our independent registered public accounting firm is required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002. This process requires the investment of substantial time and resources, including by our chief financial officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete.

 

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In connection with the preparation of our consolidated financial statements as of and for the year ended December 31, 2018 for inclusion in this annual report, we identified material weaknesses in our internal control over financial reporting as of December 31, 2018. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim financial statement will not be prevented or detected on a timely basis or cause us to fail to meet our reporting obligations under applicable securities laws. The material weaknesses identified related to controls that were not sufficiently complete and comprehensive so as to ensure that (a) relevant information was communicated to persons responsible for the execution of controls to monitor compliance with the company’s obligations under its debt agreements which include provisions related to changes of control, which can influence the status of the company as a going concern and (b) accurate application of accounting policies related to the recording and presentation of certain accounts subject to valuation, as described under Item 15 “Controls and Procedures.” The deficiencies identified resulted in misstatements to our preliminary 2018 financial statements, which were corrected prior to issuance of this annual report. As a consequence of these material weaknesses, management concluded that our internal control over financial reporting, and consequently our disclosure controls and procedures, were not effective as of December 31, 2018. See “—Risks Relating to our Business—BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements” and “—Risks Relating to our Business —Our audited financial statements as of and for the year ended December 31, 2018 contain a going concern qualification, raising questions as to our continued existence.”

If we fail to remediate the identified material weaknesses, or if we otherwise fail to maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results, detect or prevent fraud, or file our periodic reports in a timely manner, which may, among other adverse consequences, cause investors to lose confidence in our reported financial information and lead to a decline in the value or trading price of our securities.

As a foreign private issuer, we are permitted to, and do, rely on exemptions from certain New York Stock Exchange, or NYSE, corporate governance standards applicable to U.S. issuers. This may afford less protection to holders of our ADSs.

Section 303A of the NYSE Listed Company Manual sets forth certain corporate governance requirements that a company must fulfill in order to be listed on the NYSE. However, exemptions from many of the requirements are available to foreign private issuers such as us. As a foreign private issuer, we are permitted to, and do, follow home country practice in lieu of the NYSE corporate governance standards from which we are exempt. Our home country standards are those of the Colombian Stock Exchange and Colombian securities laws. Although we are a Panamanian company, our preferred shares are listed on the Colombian Stock Exchange and are subject to Colombian securities laws.

In particular, we are exempt from the requirements of §303A.03 and §303A.04 of the NYSE Listed Company Manual. §303A.03 requires non-management directors to meet regularly in executive sessions without management and independent directors to meet alone in an executive session at least once a year. §303A.04 requires a nominating/corporate governance committee composed of independent directors to be established. Under our bylaws and in accordance with the Colombian Stock Exchange regulations, our non-management directors are not required to meet regularly in executive sessions without management and we are not required to have a nominating/corporate governance committee, although our board of directors has the power to establish such a committee in the future. In addition, we are exempt from the requirements to give shareholders the opportunity to vote on equity-compensation plans and to have a compensation committee composed entirely of independent directors, as defined by the NYSE, and governed by written charters. We are also exempt from certain director independence requirements of the NYSE, the requirement to hold executive sessions of directors without management present, certain additional requirements of audit committees, the requirement to adopt corporate governance guidelines and a code of conduct and annual certification requirements. For more detail on differences in corporate governance between NYSE standards and our home country standards, see “Item 16G—Corporate Governance.” As long as we rely on these foreign private issuer exemptions, the management oversight of our Company may be more limited than if we were not exempt from these requirements of Section 303A.

As a foreign private issuer, we are not subject to U.S. proxy rules and are exempt from filing certain Exchange Act reports.

As a foreign private issuer, we are exempt from the rules and regulations under the United States Securities Exchange Act of 1934, as amended, or the Exchange Act, related to the furnishing and content of proxy statements, and our officers, directors, and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We are also exempt from Regulation FD, which prohibits issuers from making selective disclosures of material non-public information. Moreover, we are not required under the Exchange Act to file annual, quarterly and current reports and financial statements with the Securities and Exchange Commission, or SEC, as frequently or as promptly as U.S. domestic companies whose securities are registered under the Exchange Act.

 

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In addition, we would lose our foreign private issuer status if a majority of our directors or executive officers are U.S. citizens or residents and we fail to meet additional requirements necessary to avoid loss of foreign private issuer status. Although we have elected to comply with certain U.S. regulatory provisions, our loss of foreign private issuer status would make such provisions mandatory. The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly higher. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive than the forms available to a foreign private issuer. We may also be required to modify certain of our policies to comply with governance practices associated with U.S. domestic issuers. Such conversion and modifications will involve additional costs. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers.

We are a “controlled company” within the meaning of the New York Stock Exchange rules and qualify for and rely on exemptions from certain corporate governance requirements.

Certain of our shareholders control a majority of the combined voting power of all classes of our voting stock, and we are a “controlled company” within the meaning of the New York Stock Exchange corporate governance standards. Under these rules, a company of which more than 50% of the voting power is held by an individual, a group, or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements of the New York Stock Exchange, including:

 

   

the requirement that a majority of the Board consist of independent directors,

 

   

the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities, and

 

   

the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.

As a result, we may not have a majority of independent directors and our compensation committee does not consist entirely of independent directors. Accordingly, we do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

The protections afforded to minority shareholders in Panama are different from, and more limited than, those in the United States and may be more difficult to enforce.

Under Panamanian law, the protections afforded to minority shareholders are different from, and more limited than, those in the United States and some other Latin American countries. For example, the legal framework regarding shareholder disputes, such as derivative lawsuits and class actions, is less developed under Panamanian law than under U.S. law, mainly because of Panama’s short history with these types of claims and the small number of successful cases in the country. In addition, there are different procedural requirements to initiate shareholder lawsuits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us, our directors or controlling shareholders, than it would be for shareholders of a U.S. company.

Holders of ADSs may find it difficult to enforce civil liabilities against us or our directors, officers and controlling persons.

We are organized under the laws of Panama, and our principal place of business ( domicilio social ) is in Panamá City, Panamá. All of our directors, officers and controlling persons reside outside of the United States except for our CEO, Hernán Rincón, who has resigned effective April 30, 2019 and one member of our board of directors, James Leshaw. In addition, substantially all our assets are located outside of the United States. As a result, it may be difficult for holders of ADSs to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of our Panamanian and Colombian counsel, there is doubt as to the enforceability against such persons in Panama and

 

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Colombia, whether in original actions or in actions to enforce judgments of U.S. courts, of liabilities based solely on the U.S. federal securities laws. Colombian courts will enforce a U.S. judgment predicated on the U.S. securities laws through a procedural system known under Colombian law as exequatur. Colombian courts will enforce a foreign judgment, without reconsideration of the merits, only if the judgment satisfies the requirements set out in Articles 605 through 607 of Law 1564 of 2012, or the Colombian General Code of Procedure ( Código General del Proceso ), which provides that the foreign judgment will be enforced if certain conditions are met.

Relative illiquidity of the Colombian securities markets may impair the ability of an ADS holder to sell preferred shares.

Our preferred shares are listed on the Colombian Stock Exchange, which is relatively small and illiquid compared to stock exchanges in major financial centers. In addition, a small number of issuers represent a disproportionately large percentage of market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for our securities might not develop or continue on the Colombian Stock Exchange. A limited trading market could impair the ability of an ADS holder to sell preferred shares (obtained upon withdrawal of such shares from the ADS facility) on the Colombian Stock Exchange in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.

Exchange rate fluctuations may adversely affect the foreign currency value of the preferred shares represented by ADSs and any dividend or other distributions.

Preferred shares represented by ADSs are quoted in Colombian pesos on the Colombian Stock Exchange. Dividends and other distributions regarding preferred shares, if any, will be paid in Colombian pesos. Fluctuations in the exchange rate between Colombian pesos and U.S. dollars will affect, among other things, the foreign currency value of any such dividends or distributions.

It may be difficult to enforce your liquidation preference reimbursement right if we enter into a bankruptcy, liquidation or similar proceeding in Panama.

Panama’s insolvency laws, particularly as they relate to the priority of creditors, may be less favorable to your interests than the bankruptcy laws of the United States. Your ability to enforce your liquidation preference reimbursement right as a holder of ADSs may be limited if we become subject to the insolvency proceeding set forth in Title I of the Third Book of the Commercial Code, as amended from time to time, which establishes the events under which a petition for a company’s declaration of insolvency can be filed before a circuit court, considering that this preference reimbursement will be feasible after payment to third-party creditors.

Our ability to pay dividends would be limited if any of our relevant operating subsidiaries enters into a bankruptcy, liquidation or similar proceeding in their home jurisdictions.

Our ability to pay dividends may be limited if any of our relevant operating subsidiaries becomes subject to insolvency proceedings under the applicable laws of Colombia, the Bahamas, El Salvador, Costa Rica or Peru, as amended from time to time. These laws establish the events under which a company, its creditors or the authorities may request the company’s admission to insolvency proceedings to reach an agreement with its creditors as to the terms of its debt structure. In addition, if a debtor breaches an insolvency agreement, or if continuation of a debtor’s business is not economically feasible, the restructured company may be liquidated. Payments of our dividends may also be contingent upon operating subsidiaries’ earnings and business considerations.

Our shares are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.

Our preferred shares have been traded on the Colombian Stock Exchange since May 2011 and our ADSs representing preferred shares have been traded on the NYSE since November 2013. Trading in our ADSs or preferred shares on these markets takes place in different currencies (U.S. dollars on the NYSE and COP on the Colombian Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Colombia). The trading prices of our shares on these two markets may differ due to these and other factors. Any decrease in the price of our preferred shares on the Colombian Stock

 

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Exchange could cause a decrease in the trading price of our ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange. In addition, holders of ADSs cannot immediately surrender their ADSs and withdraw the underlying preferred shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs

We are a holding company with no independent operations or assets, and our ability to repay our debt and pay dividends to holders of the ADSs depends on cash flow generated by our subsidiaries, which are subject to limitations on their ability to make dividend payments to us.

We conduct no operations, and our only material asset is our equity interests in our operating subsidiaries. Accordingly, our ability to repay our indebtedness and pay dividends to holders of the ADSs is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries’ ability to generate sufficient cash from operations to make distributions to us will depend upon their future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond their control.

In addition, our subsidiaries may not be able to, or may not be permitted to, make distributions to us to enable us to make payments in respect of our indebtedness or to pay dividends. Restrictions in our subsidiaries’ debt instruments and under applicable law limit their ability to provide funds to us, and if our subsidiaries are not able to make funds available to us by dividend, debt repayment or otherwise, we may not have sufficient funds to fulfill our obligations under our indebtedness or pay dividends to our shareholders, including holders of the ADSs. For example, our Local Bonds restrict Avianca’s ability to pay dividends from January 1, 2016 and going forward unless certain covenants are satisfied. As of December 31, 2018, Avianca was not meeting the ratio necessary to pay dividends to us under its Local Bonds.

 

Item 4.

Information on the Company

 

A.

History and Development of the Company

Avianca Holdings

We are an airline holding company incorporated in Panama as a result of Avianca and Taca’s combination in February 2010. The combination of Avianca and Taca was announced and agreed in October 2009 by their respective controlling shareholders who, after obtaining approval by antitrust and regulatory authorities, contributed their respective interests in Avianca and Taca to the Company. Avianca Holdings S.A. (formerly AviancaTaca Holding S.A.) changed its domicile from the Commonwealth of the Bahamas to Panama and adopted its by-laws under Panamanian law on March 2, 2011.

In May 2011, we completed our initial public offering in Colombia on the Colombian Stock Exchange. In connection with that public offering, we sold 100,000,000 preferred shares for COP 500,000 million (approximately $279 million as of such date). In May 2013, we issued $300 million in aggregate principal amount of 8.375% Senior Notes due 2020, our first offering in the international capital markets. In November 2013, we completed our initial public offering in the United States, listing our ADSs on the NYSE. In April 2014, we issued $250 million in aggregate principal amount of additional 8.375% Senior Notes due 2020, which were first issued in May 2013.

In December 2014, we issued our first aircraft financing through a private placement. The transaction financed three new aircraft deliveries (A319, A321 and B787) for Avianca and totaled $152.9 million. Since 2015, we issued two more aircraft financings through private placements. The first transaction financed eight aircraft (one A319, three A320, two A321 and two B787) for a total amount of $384.2 million. The second transaction financed three aircraft (two A319 and one B787) for a total amount of $150.7 million. During 2017, we financed the purchase of three aircraft through a Japanese operating lease with a call option structure “JOLCO”, for an aggregate amount of $207.5 million. In August 2018, we entered into a credit and guaranty agreement for a total amount of $100.0 million with the proceeds being used for fleet renovation and general corporate purposes.

 

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On November 9, 2018, in anticipation of the United Copa Transaction, Synergy, then our controlling shareholder that, in turn, is indirectly controlled by Mr. José Efromovich and his brother Germán Efromovich, transferred 489,200,000 of our common shares (corresponding to 74% of our total outstanding common shares and 48.9% of our total issued share capital) to BRW, a Delaware limited liability company and wholly owned subsidiary of Synergy. This transfer was made in the context of an overall restructuring process at Synergy in connection with the United Copa Transaction and did not change Synergy’s stake, now held indirectly through BRW, in Avianca Holdings. On November 30, 2018, Synergy transferred 26,800,000 of our common shares (corresponding to 5.1% of our voting share capital and 2.6% of our total outstanding share capital) to BRW. As a result of these transactions, BRW now holds 515,999,999 of our common shares, or 78.1 % of our voting share capital which represents 51.5% of our total outstanding share capital. On November 30, 2018, BRW transfer one common share to United.

Avianca

Avianca was organized in 1919 as SCADTA ( Sociedad Colombo-Alemana de Transportes Aéreos ) by a group of Colombian and German investors that pioneered aircraft navigation in Colombia with Junkers F-13 hydroplanes. By the early 1920s, Avianca was offering international service to Venezuela and the United States. During World War II, the German investors sold their stake to Pan American World Airways, a U.S. corporation. In 1940, Aerovias Nacionales de Colombia S.A., or Avianca, was incorporated in connection with the merger of SCADTA and SACO ( Servicio Aéreo Colombiano ). In 1977, Avianca acquired SAM S.A., a Medellín based passenger airline. In 1981, Avianca built and began operating the Puente Aéreo terminal in Bogotá to service domestic routes in Colombia. Avianca remodeled this terminal in 2006 and enjoyed exclusive rights to use it for domestic routes in Colombia until May 2018, when Operadora Aeroportuaria Internacional, or OPAIN, provided Avianca the necessary space to have its domestic and international operations integrated under one terminal at El Dorado International Airport. In 2004, our indirect controlling shareholder, Synergy, acquired Avianca, helping it emerge from its Chapter 11 reorganization. In 2005, Avianca changed its name to Aerovías del Continente Americano S.A. Avianca. In 2008, Avianca acquired Tampa Cargo, a leading Colombian cargo airline, and in 2010 it acquired Avianca Eduador, formerly known as Aerogal, which currently is a direct subsidiary of Avianca Holdings S.A., and merged with SAM S.A., with Avianca as the surviving entity.

Taca

Taca was organized in 1931 in Honduras as Transportes Aéreos Centroamericanos (TACA). During the 1930s and 1940s, Taca expanded throughout Central America, including Costa Rica, El Salvador, Guatemala, Nicaragua and Panama. By the 1950s, the operations were consolidated into one airline, Taca International, based in El Salvador. In 1963, the Kriete family acquired a majority interest in Taca. In the 1990s, Taca began acquiring interests in the flag carriers of each of the other Central American countries. In 1998, Taca modernized its fleet and redesigned its schedule into a dual hub and spoke network, with hubs in San Salvador and San José. In 1999, Taca launched Avianca Peru, formerly Transamerican Airlines S.A., and added a hub in Lima, Peru.

Recent Acquisitions, Divestments and Strategic Alliances

Ground Handling Business

On October 17, 2017, we entered into an agreement with the shareholders of Servicios Aeroportuarios Integrados SAI S.A.S., or SAI, to make an investment on the agreed terms and conditions. SAI is a Colombian company with more than 30 years of experience in providing ground handling services. The services offered by the company include ground operations, passenger services and equipment rental. On October 27, 2017, upon completion of the agreement’s conditions precedent, SAI issued, and Avianca Holdings purchased 10 type A shares, which represent 90% of both economic and voting rights in SAI in a $4,985,376.2 transaction. According to SAI’s bylaws, each type A share confers extraordinary voting powers (2,700,000 votes per share) as compared to ordinary shares (one vote per shares). The economic rights correspond to the number of votes that each shareholder is entitled to.

SAI currently serves more than 15 clients and is present in the airports of Bogotá, Medellín, Cartagena, Cali, Armenia, Pereira and Corozal. SAI provides services to a total of 80,000 flights in 2018.

 

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Joint Venture with CAE International Holdings Limited and Subsequent Sale

On April 20, 2018, we formed Avianca—CAE Flight Training (ACFT) S.A.S. (“Avianca CAE”) with the objective of establishing a 50/50 joint venture between Avianca Holdings and CAE International Holdings Limited (“CAE Holdings”) to provide training and in-flight simulations to our crew as well as to third party civil and commercial pilots. CAE is a Canadian Company and a worldwide leader in training for the civil aviation, defence, security and healthcare markets.

On May 22, 2018, the Colombian Superintendence of Industry and Commerce approved the transaction from an antitrust perspective and shortly thereafter, we entered into a joint venture agreement authorizing the joint venture. On June 12, 2018, we entered into a joint venture agreement with CAE Holdings to control Avianca Holdings’ investment in Avianca CAE.

On January 30, 2019, we entered into an agreement to sell to CAE Holdings all of our participation in the training business with flight simulators, which included certain of our assets and of all our shares owned in Avianca CAE, as part of an exclusive 15-year outsourcing training agreement. As a result of this agreement, Avianca CAE will be the exclusive provider of training services and will provide support to Avianca’s training needs in the region.

Joint Business Agreement with 3Sixty

On December 31, 2018, we executed a comprehensive amendment to the agreement to provide duty free services with 3Sixty (formerly known as the DFASS Group), a duty-free air and ship supply company, to convert the inflight concessions currently offered into a stronger and new joint business model under which we plan to develop, together with 3Sixty, an innovative online market platform that will allow more than 30 million passengers to pre-order duty-free and duty paid goods and services with on board and ground-based deliveries. The joint business will initially be amongst Avianca Colombia, Avianca Ecuador, Avianca Perú, Taca International and Avianca CostaRica, and will include up to 6,000 weekly flights serving more than 100 destinations in 27 countries. To develop the online market platform, 3Sixty agreed to fund the initial investment of approximately $2,500,000, which shall be amortized in the joint business’ profit and loss over the next five years.

Incorporation of Regional Express Americas

On May 2, 2018, we formed Regional Express Americas S.A.S. to provide transportation services, engineering and maintenance services, training and operational support. Regional Express Americas S.A.S.’ capital is COP 5,500,000, which has been subscribed and paid. Avianca Holdings owns 100% of the outstanding shares. Regional Express Americas S.A.S. obtained technical certification by the Colombian Civil Aviation Authority and began its operations in March 2019 with two ATRs serving domestic routes in Colombia.

Sale of Stake in Getcom Int’l Investments S.L.

On December 28, 2018, we entered into an agreement for the sale and transfer of our 50% equity interest in Getcom Int’l Investments S.L. (“Getcom”), a company incorporated in Spain (commercially known as OneLink BPO), to Seger Investments, Corp, a company domiciled in Panama, who already owned 50% equity interest in Getcom as our joint venture partner. The transaction closed on the same day, and as a result of the transaction, we will cease to consolidate Getcom’s results in our financial statements beginning January 1, 2019. Getcom is a call center servicing our customers as well as those of other companies. The main impact of this transaction will be reflected in the operating expenses, mainly because the great majority of Getcom’s revenue come from services given to other companies of Avianca Holdings, therefore they are not reflected in the consolidated results. On the other hand, Getcom’s expenses which were previously distributed among different line items of the income statement (such as in salaries, wages and benefits or general and administrative expenses) will now be consolidated in one line item as services will now be provided by one external third party service provider. These expenses may be higher than the expenses previously incurred in the operation of Getcom.

 

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Joint Business Agreement with United and Copa

On November 29, 2018, Avianca entered into a three-way revenue-sharing joint business arrangement with United and Copa to start a strategic and commercial partnership that we expect will bring new service and innovation for passengers travelling between the United States and 19 countries in Latin America. This long-term revenue sharing arrangement, which we refer to in this annual report as the “United Copa Transaction,” covers routes between the United States and Central and South America (excluding the Caribbean, Mexico and Brazil). The agreement will allow us to share revenue, integrate services and coordinate pricing and schedules with United and Copa for service between the United States and Latin America.

Through the United Copa Transaction we, together with United and Copa, plan to offer travelers more connection options on routes between the United States and Latin America, new nonstop routes, additional flights on existing routes and reduced travel times. The transaction is also expected to enable the companies to better align frequent flyer programs, coordinate flight schedules and improve airport facilities.

The United Copa Transaction remains subject to regulatory approval in the United States and numerous jurisdictions in Central and South America (excluding the Caribbean, Mexico and Brazil), and we plan to apply for antitrust immunity from the U.S. Department of Transportation. The regulatory approval process is expected to conclude in 12 to 18 months, and we are not permitted to fully implement the joint business arrangement until we receive the necessary government approvals. Accordingly, United, Copa and us will continue to operate independently during the interim period and will not merge operations until the requisite regulatory approvals are obtained.

Capital Expenditures

Our capital expenditures consist primarily of expenditures related to our purchase of new aircraft and engines, and advance payments on aircraft purchase contracts as well as maintenance events of our aircraft. In 2018, 2017 and, we invested $111.7 million, $119.0 million, and $78.5 million, respectively, in advance payments on aircraft purchase contracts and $430.6 million, $215.3 million, and $210.8 million, respectively, in the acquisition of property and equipment, which primarily consisted of aircraft and engines.

In line with the Company’s deleveraging strategy, we have started re-prioritize capital expenditures by adjusting our fleet plan to slower growth. Our recent agreement entered into with Airbus reduces our order of new A320 Neo aircraft by 17 aircraft, changes the delivery date of the ordered aircraft between 2019 and 2028 and makes certain changes to the type of aircraft ordered (both upgrades and downgrades in passenger carrying capacity). It allows as to reduce our financial commitments for the next years. Also, we will focus on projects with robust risk-adjusted returns, thereby reducing our overall investments by approximately 40%—50%. We will concentrate our efforts on existing projects and plans for which outcomes tend to be better controllable.

 

B.

Business Overview

In both 2018 and 2017, we were the market leader in terms of passengers carried in the domestic market of Colombia (the third largest domestic market in Latin America), according to the Colombian Civil Aviation Authority (“CCAA”), boasting a consolidated market share of 54.2% in the Colombian domestic market in 2018, according to CCAA. We are also a leader in terms of passengers carried on international flights within the Andean region and Central America (our home markets) according to internal data we derive from Travelport Marketing Information Data Tapes (“MIDT”). Our strong presence within the Andean region and Central America enables us to consolidate regional passenger traffic in our hubs and provide connectivity to international destinations, making us a leader in terms of international air passengers carried from our home markets to both North America and South America.

We operate an extensive route network from our strategically located hubs in Colombia, Peru and El Salvador and our focus markets of Guatemala and Ecuador. We offer passenger and cargo service through approximately 5,245 weekly scheduled flights to more than 100 destinations in over 26 countries around the world. Our code share alliances, together with our membership in Star Alliance, which we joined in 2012, provide our customers with access to a worldwide network of over 1,300 destinations. In 2018 and 2017, we transported approximately 30.5 million and 29.5 million passengers, respectively, and 563 thousand and 566 thousand metric tons of cargo, respectively.

 

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We have grown significantly since the combination of Taca and Avianca, including by delivering significant revenue-enhancing synergies from the integration of Avianca’s and Taca’s networks. Our consolidated operating profit decreased 10.2% from $258.5 million in 2016 to $232.1 million in 2018. Our network integration allowed us to optimize our route capacity and efficiency, through which we added new routes and increased our available seat kilometers (ASKs) and our total passengers carried by 44.0% and 32.1%, respectively, from 2012 to 2018, and by 18.2% and 7.8%, respectively, from 2015 to 2018. Our load factor increased from 79.6% to 83.1% between 2012 and 2018, and from 79.7% to 83.1% from 2015 to 2018.

As of December 31, 2018, we operated a modern fleet of 190 aircraft (148 jet passenger aircraft, 30 turboprop passenger aircraft and 12 cargo aircraft), mainly from the Airbus family. This does not include one A330-200 that was subleased to Oceanair and returned to Avianca at the end of February 2019 and one A330-200F that was returned in March 2019. Our continuous fleet modernization process has increased our jet passenger fleet’s capacity and has made our jet passenger operative fleet one of the youngest among Latin American airlines, with an average aircraft age of 7.30 years as of December 31, 2018. One of our main focuses in terms of fleet management is to increase the homogeneity of our fleet and, in the process, increase efficiency by decreasing the number of aircraft models we operate and service. We intend to enhance our modern jet fleet further by continuing to add new aircraft. In line with our initiatives directed toward enhancing profitability and achieving a leaner capital structure, we have entered into an amendment to the purchase agreement to acquire up to 124 Airbus A320 Neo family pursuant to which we have reduced our order of Airbus A320 Neo by 17 aircraft, and we negotiated with Airbus a postponement in certain scheduled aircraft deliveries for 2020, 2021 and 2022 which will now be delivered between 2026 and 2028 as well as agreed on certain changes to the type of aircraft to be delivered (both upgrades and downgrades in passenger carrying capacity). This agreement enables us to further strengthen our cash position and reduce leverage, capital expenditures and future financial commitments.

We also provide other products and services that complement our passenger and cargo businesses and diversify our sources of revenue. In March 2011, we launched our LifeMiles loyalty program, which has quickly grown to become one of the largest and most recognized coalition loyalty programs in Latin America, particularly in its core markets of Colombia and Central America (excluding Panama). From 2011 to 2018, our LifeMiles loyalty program experienced a compound annual membership growth of 10.5%, increasing from approximately 4.4 million members as of December 31, 2011 to approximately 8.9 million members as of December 31, 2018. LifeMiles currently partners with nearly all of the leading banks in Colombia and Central America (excluding Panama), including many of the largest financial institutions in each respective key region, based on actual credit card balances outstanding. Moreover, for the majority of those financial partners with whom LifeMiles offers co-branded credit cards, we are the exclusive airline-based co-brand card partner. LifeMiles also maintains relationships with premier hotels, major car rental companies, popular restaurants, and other commercial establishments such as gas stations, supermarkets and leading apparel brands in these markets. As of December 31, 2018, LifeMiles had 515 active commercial partners. In August 2015, we sold a 30.0% stake in LifeMiles to Advent International (“Advent”), for $343.7 million and retained a 70.0% ownership stake.

On November 29, 2018, Avianca entered into a three-way revenue-sharing joint business arrangement with United and Copa to effect a strategic and commercial partnership that, subject to obtaining the requisite corporate approvals, we expect will bring new service and innovation for passengers travelling between the United States and 19 countries in Latin America. This long-term revenue sharing arrangement, which we refer to in this annual report as the “United Copa Transaction,” covers routes between the United States and Central and South America (excluding the Caribbean, Mexico and Brazil). The agreement will allow us to share revenue, integrate services and coordinate pricing and schedules with United and Copa for service between the United States and Latin America. We, together with United and Copa, plan to offer travelers more connection options on routes between the United States and Latin America, new nonstop routes, additional flights on existing routes and reduced travel times. The transaction is also expected to enable the companies to better align frequent flyer programs, coordinate flight schedules and improve airport facilities. For information on the Company’s new corporate governance structure pursuant to the Amended and Restated Joint Action Agreement and the Share Rights Agreement, introduced in connection with the United Copa Transaction, see “Item 6. Directors, Senior Management and Employees” and “Item 7. Major Shareholders and Related Party Transactions—Part B. Related Party Transactions—Amended and Restated Joint Action Agreement.”

 

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Avianca Holdings is a Panamanian company ( sociedad anónima ), and 34.0% of its outstanding capital stock is represented by non-voting preferred shares that are listed on the Colombian Stock Exchange ( Bolsa de Valores de Colombia ), including preferred shares represented by American Depositary Shares (“ADSs”) listed on the New York Stock Exchange as a result of Avianca Holdings’s international initial public offering in November 2013. As of the date of this annual report, 78.1% of Avianca Holdings’s voting common shares are owned by Synergy via its indirectly controlled subsidiary, BRW, and 21.9% of its voting common shares are owned by Kingsland, a corporation controlled by the Kriete family. Following the United Copa Transaction, United also holds a single common share. For information on the United Loan, see “—Risks Relating to our Business—BRW, our controlling shareholder, has pledged its common shares to secure its obligations under the United Loan. BRW is currently in breach of certain provisions of the United Loan and if United or its collateral agent take any enforcement action with respect to the share pledge, this could result in a breach of certain of our financing agreements.”

Our Strengths

We believe that our most important business strengths include the following:

Market leader in a dynamic Latin American region

We have a leading presence in the Colombian domestic market and also in the market for international passenger service within the Andean region and Central America, a region with approximately 156 million inhabitants as of December 31, 2018, encompassing what we believe to be dynamic and growing economies. We believe our strong presence in the regions in which we operate positions us to benefit from economies of scale and continue to grow from a position of strength.

A strong brand associated with a superior customer experience

We believe the Avianca brand is associated with superior service in the minds of our customers in our core Latin American markets. We have unified, strengthened and developed our service standards with the objective of providing an “Exceptional Experience” that connects us with our customers in Latin America and the rest of the world. In 2016, we were recognized as “One of the Best Airlines in the World” ( Condé Nast Traveler magazine), “Eco-Friendly Aviation” ( Business Year magazine), the “Best Airline in South America and in Latin America” ( Business Traveller North America magazine) and “e-commerce Leader in the Region and Colombian Tourism Industry” (Colombia e-commerce Award). In 2017, we received the prestigious Skytrax World Airline Award as “2017 Best Airline in South America” and “Best Regional Airline in South America” as well as the Organization of Consumers and Users awards for “Second Best Airline in the World.” In addition, Airbus distinguished Avianca with the award for “Best Operational Performance of A320 fleet” in the Americas. In 2018, for the second consecutive year, we again received the Skytrax World Airline Award as “2018 Best Airline in South America”.

A multi-hub network in Latin America

Our strategically located hubs in Bogotá, Lima and San Salvador provide coverage of the domestic markets in Colombia, Peru, Ecuador and Central America and support a broad international network connecting South America, Central America, the Caribbean, North America and Europe. Our hub network is complemented by focus city operations in Guatemala City in Guatemala, Quito and Guayaquil in Ecuador and our membership in Star Alliance, the largest airline network in the world as of December 31, 2018 in terms of member airlines, daily flights, destinations and covered countries. We believe that the broad reach of our network, together with our code share alliances and Star Alliance membership, provide our customers with a wide range of destination options and provide us with a geographically diversified source of revenue that affords us flexibility and adaptability with respect to demand cycles in our industry.

One of the most modern passenger fleets among Latin American airlines

Our continuous fleet modernization process has increased our jet passenger fleet’s capacity and has made our jet passenger operative fleet one of the youngest among Latin American airlines, with an average aircraft age of 7.30 years as of December 31, 2018. Since 2010, as a result of our fleet modernization program, we have increased fuel efficiency and improved our technical dispatch reliability. In addition, we have reduced the number of jet passenger aircraft types or models we use, and our current passenger fleet now consists primarily of Airbus aircraft. The increased homogeneity of our fleet has enabled us to reduce crew and staff training costs and also maintenance costs through the implementation of unified spare parts inventories and maintenance processes.

 

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World-class loyalty program

Launched in March 2011, our loyalty program LifeMiles has enhanced our brand recognition by providing superior customer service through member engagement and an outstanding miles-to-rewards ratio. The LifeMiles program has enhanced loyalty to Avianca with approximately 8.9 million members as of December 31, 2018. With eleven Freddie Awards, LifeMiles is one of the most awarded programs in the Americas since 2013 (including one in 2018 and two in 2017) and is the only Latin American program to have won a Freddie since 2012. LifeMiles’ 515 commercial partners include thousands of retail stores in core markets such as Colombia, El Salvador, Costa Rica, Guatemala and Peru, where members can earn and redeem their miles at the point of sale. These local coalitions strengthen engagement with existing members and allow members to earn miles on a higher percentage of their monthly spending. In addition, members using a LifeMiles credit card to pay for merchandise within the coalition can “double dip” (earn miles on their credit card and earn miles through the retailer) on the same transaction. In this way, in addition to accelerated program growth and increased presence of both the Avianca and LifeMiles brands in the day to day lives of our members, our rapidly growing coalitions create increased demand for LifeMiles credit cards, as well as other LifeMiles products such as “Multiply Your Miles” and “Club LifeMiles.”

Our Strategies

Our goal is to position our superior customer service and leverage our leadership position to take advantage of opportunities for profitable and sustainable growth in the Latin American aviation market by expanding our network and continuing to reduce our operating costs. Key elements of our business strategy include the following:

Enhance customer loyalty through providing superior customer service and a culture of “Exceptional Experience”

Providing superior customer service is a cornerstone of our business across all of our units, and we seek to create a culture that delivers exceptional service. We believe our culture differentiates us from our competitors by combining high-quality operating performance with a world-class service culture that we believe caters to the preferences of passengers around the world. Our strategy is based on engaging, training and rewarding dedicated personnel, implementing the latest technological platforms to improve our personnel’s productivity, provide high-quality operations, and enhance customer’s digital experience by delivering products and services such as improved VIP lounges, self-service check-in (over the internet, at kiosks or from mobile phones) mobile app, virtual assistance and a superior experience aboard modern aircraft with a varied selection of in-flight entertainment options. We also intend to leverage our LifeMiles loyalty program to increase customer loyalty and attract new customers by providing competitive benefits, including priority seat availability, check-in and baggage handling and VIP lounge access, as well as continue to provide innovative technological solutions designed to make our members’ experience more seamless.

Focus on consolidating our operations in our core business areas to achieve greater business and operational efficiency, increase revenue, enhance customer experience, improve our personnel’s productivity and reduce costs

We believe there is potential to continue to increase our revenue through the consolidation of our operations and improvement of our revenue management practices. In addition, we continually seek to increase our operational efficiency and achieve cost synergies by optimizing our operational and administrative procedures related to fleet management, consolidating our maintenance procedures across the regions we serve and optimizing our flight operations, increasing aircraft utilization through interchangeability of aircraft, optimizing crew planning and using our regional hubs more efficiently. In addition, we continue to develop several projects to unify and upgrade our IT and digital platforms in finance, maintenance, operations and customer service. Starting in 2017, we refocused our general business strategy on our three core business areas: passenger, cargo and loyalty. In connection with this, we intend to streamline our operations and optimize efficiency in our core business areas while deemphasizing other ancillary business areas, including by divesting certain assets unrelated to our core business the proceeds of which will be used to further improve our capital structure. For example, as part of our effort to refocus our business on our core business areas, in December 2018, we sold to our joint venture partner our stake in Getcom Int’l Investments S.L. (commercially known as OneLink BPO), a call center servicing our customers as well as those of other companies. In addition, in order to increase our operational efficiency, reduce both our capital expenditures and future financial commitments and align aircraft deliveries with our expected passenger traffic growth rate, we have

 

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reduced our order of Airbus A320 Neo by 17 aircraft, and we negotiated with Airbus a postponement in certain scheduled aircraft deliveries for 2020, 2021 and 2022 which will now be delivered between 2026 and 2028 as well as agreed on certain changes to the type of aircraft to be delivered (both upgrades and downgrades in passenger carrying capacity). This agreement enables us to further strengthen our cash position and reduce leverage. We are further streamlining our fleet by phasing out 10 Embraer E190 aircraft, thereby increasing fleet efficiency and reducing training and maintenance costs. We have also launched our regional airline “Regional Express Americas,” in which we have deployed our short-haul ATR aircraft, to achieve a reduction in labor costs and greater specialization whereby we intend to serve domestic markets more efficiently. Regional Express Americas began its operations in March 2019 with two ATRs serving domestic routes in Colombia, with additional ATRs to be deployed within Regional Express Americas during 2019 onwards.

Pursue selective opportunities for profitable growth in our passenger segment, including through strategic alliances such as the United Copa Transaction

We seek to pursue selective growth opportunities in our passenger business by protecting and leveraging our strong presence and optimizing our network in the markets we serve. We continue to maintain our presence in the region with domestic and international routes through our Bogotá and Lima hubs, as well as by enhancing our connectivity for passengers traveling between South and North America via our San Salvador hub, and we seek to take advantage of selective growth opportunities that we consider to offer the potential for profitable growth. However, we align our growth in response to prevailing macroeconomic environment, demand and other factors related to the primary markets we serve in order to maintain our profitability. For example, in line with this strategy, we recently cancelled 10 underperforming international routes (principally to destinations in the United States) and one underperforming domestic route and we have reduced the number of domestic flights of Avianca Peru while maintaining its international flights from Lima. These changes are examples of our strategy to optimize our network, reduce low-performance flights and prioritize the network’s profitability as well as redistribute the released capacity to meet customer demand within our key markets. We also expect to continue to selectively evaluate additional growth opportunities through strategic alliances with other airlines, such as the Joint Business Agreement with United and Copa that we entered into in November 2018, as well as potential acquisitions and strategic opportunities that would complement our existing operations. We expect that this transaction will bring new service and innovation for passengers traveling between the United States and 19 countries in Latin America via revenue sharing, service integration and coordination on pricing and scheduling.

Grow our cargo operations

We believe our cargo operations offer an attractive opportunity for growth, complementing our passenger operations and diversifying our sources of revenue and profit. We believe we have been successful in increasing our footprint in the cargo business in Latin American markets by optimizing our freighter schedules in spite of market imbalances, by maximizing the belly utilization in our passenger fleet, and by continuously analyzing opportunities for growth in strategic markets. We have also strengthened our strategic alliances, starting in 2014 with the acquisition of an ownership interest of 25% of the voting rights and 92.7% of the economic rights of Aero Transporte de Carga Unión, S.A. de C.V. (“Aerounion”), a Mexican cargo company. During 2018, Avianca Peru’s new A330 freighter service in Peru, regional expansion projects and strategic alliances were crucial in the network optimization as well as the new direct operation Miami—Brussels—Miami in A330F, which opened new commercial opportunities, mainly for flower growers in Ecuador and Colombia. Avianca Cargo, the trademark we use to identify our international cargo services, grew by approximately 13% in revenue in 2018. Our diversification and strategic alliances have allowed us to offer new routes and services, including increased service in lower South America, flower cargo shipping to the west coast of the United States, shipping perishable goods to Amsterdam and increasing traffic to Europe and Asia from Bogotá.

Expand our LifeMiles program to enhance our overall value

We believe our LifeMiles loyalty program enhances our brand recognition, strengthens our position in strategic markets and provides ancillary revenue opportunities. We intend to further enhance the program’s revenue growth by (1) increasing the number of active members, (2) increasing the accrual and redemption of miles per active member and (3) strengthening the network of commercial partners who allow their customers to earn LifeMiles , including by developing new co-branding products and partnerships and similar initiatives with hotel chains, car rental companies, financial institutions, retail stores and other airlines.

 

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As we expand our partner base, we expect to gain access to potential new members, in particular those who may travel infrequently, and increase engagement among our existing members. For example, when we launched our partnership with Terpel in September 2017, we gained access to Terpel’s approximately 2 million daily customers and have added over 500,000 members to our program as of December 31, 2018. We anticipate that Club Terpel and similar partnerships in the future will be important sources of member growth going forward.

Recent Developments

Judicial Restructuring of Oceanair ( Avianca Brasil ) and Avian

On December 10, 2018, Oceanair, together with AVB, its parent entity (which, together with Oceanair, we refer to as the Debtors), filed a petition for judicial restructuring before the First Bankruptcy Court of the Central Courthouse of the Judicial District of Sao Paulo State, Brazil seeking a voluntary judicial restructuring and emergency relief staying Brazilian foreclosure actions against Oceanair’s fleet. On December 27, 2018, the Debtors also filed for Chapter 15 relief in the United States Bankruptcy Court for the Southern District of New York seeking recognition of the Brazilian Insolvency Proceeding and with the purpose of halting legal action by creditors to collect from the Debtors in the United States. Prior to and subsequently to these filings, several aircraft repossession actions were filed in Brazil by aircraft lessors to immediately repossess the aircraft leased to Oceanair due to Oceanair’s failure to pay rent. While such petitions were initially granted in some cases, such rulings were subsequently cancelled by Brazil’s Superior Court of Justice, although the approach of the courts could change to permit repossessions. As a consequence, the Debtors were granted protection from any acts of foreclosure, including lawsuits and administrative proceedings, until the Debtors’ creditor meeting held on April 5, 2019 during which creditors representing the four different categories of claims voted on the reorganization plan proposed by the Debtors. On April 8, 2019, the São Paulo Court of Appeal authorized certain lessors to proceed with the repossession of certain aircraft. In response to such decision, the Debtors filed a petition for the amicable return of 40 aircraft within a period of five months, which is currently under review by the court. As a result of the repossession efforts of the lessors, Oceanair was required to cancel some of its flights. Meanwhile, on March 11, 2019 Azul, another Brazilian airline, announced that it had signed a non-binding agreement to acquire certain operational assets and rights of Oceanair in block. Oceanair has ceased all its international operations on March 31, 2019 and has been reducing their domestic operations. During the first week of April 2019, LATAM and Gol communicated to the market that they also intend to participate at the bidding process for the acquisition of Oceanair slots and other assets. Therefore, the draft of the reorganization plan has been amended to allow the three companies and other interested participants to compete equally in the auction, which remains to be scheduled. This adjusted plan, with some additional modifications, was approved on April 5, 2019 by the majority of OceanAir’s creditors during the creditors’ meeting and it was subsequently ratified by the competent judge on April 12, 2019. In addition, the approved restructuring plan provides that Avianca’s rights as owner of its trademarks shall be respected and that the temporary use of such trademarks depends on the prior authorization of Avianca.

Oceanair and AVB Holding S.A. are not part of our group and, accordingly, its administration, operations and financial statements are separate, and their results are not consolidated with ours. Brazilian law 13.467/2017, better known as the 2017 labor reform law, introduced a more restrictive concept of “economic group” which demands not only common control but also proof of the existence of integrated interests and operations among the relevant entities. Nevertheless, although we are currently not a party in any pending bankruptcy or judicial restructuring proceedings in Brazil, the United States or elsewhere, we are exposed to certain risks related to the Oceanair proceedings, partially because Synergy also owns a majority stake in Oceanair. We have historically entered into a number of commercial arrangements with Oceanair, including the aircraft sublease arrangements pursuant to which Oceanair is required to make monthly lease payments to us. We currently have two aircraft on sublease to Oceanair. In the event that Oceanair does not pay us, we remain liable to our lessor as primary obligor. We estimate that the total number of payments payable by Oceanair in relation to these sublease contracts during 2019 will be $1.14 million. Two subleased aircraft were already redelivered to Avianca in February and March 2019 and we are currently negotiating the redelivery of the remaining two aircraft.

 

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As per our public disclosure dated December 26, 2017, we had begun legal, financial and operational diligence in connection with a potential business combination with Oceanair prior to its judicial restructuring proceedings. However, at this time, our consideration of this venture has been generally interrupted by the Brazilian Insolvency Proceedings and related events.

Another airline in Argentina named Avian that is also part of the Synergy group and operates under the trademark “Avianca” recently initiated a preventative crisis procedure (a procedimiento preventivo de crisis ) as a precursor to dismissing certain employees and reducing the salaries of other employees. We understand that the Labor Ministry in Argentina is currently requesting certain information from Avian in order to evaluate the preventative crisis procedure. Avian is also not part of our group and, accordingly, its administration, operations and financial statements are separate, and its results are not consolidated with ours. We have entered into certain commercial agreements with Avian that are not material to us, and there are no aircraft leased to Avian or fleet exposure with Avian similar to the one we face with respect to Oceanair.

Joint Venture with CAE International Holdings Limited

On April 20, 2018, we formed Avianca CAE with the objective of establishing a 50/50 joint venture between Avianca Holdings and CAE International Holdings Limited (“CAE Holdings”) to provide training and in-flight simulations to our crew as well as to third party civil and commercial pilots. Avianca CAE’s capital is COP 1,000,000,000, which has been subscribed and paid with 100% of the shares initially owned by Avianca Holdings.

On May 22, 2018, the Colombian Superintendence of Industry and Commerce authorized the joint venture. Shortly thereafter, on June 12, 2018, we entered into a joint venture agreement with CAE Holdings governing Avianca Holdings’ investment in Avianca CAE.

On January 30, 2019, we entered into an agreement to sell to CAE Holdings all of our participation in the training business with flight simulators, which included certain of our assets and of all our shares owned in Avianca CAE.

Joint Business Agreement with 3Sixty

On January 31, 2019, we signed an agreement with 3Sixty, a duty-free air and ship supply company, to convert the current inflight concessions with our controlled airlines into a joint business agreement under which we plan to develop, together with 3Sixty, an innovative online market platform that will allow more than 30 million passengers to pre-order duty-free and duty paid goods and services with on board and ground-based deliveries. The joint business agreement will start with Avianca (Colombia), Aerogal (Ecuador), Avianca Peru (Peru), and Avianca Costa Rica (Costa Rica), and will service up to 6,000 weekly flights serving more than 100 destinations in 27 countries.

Fleet Management Initiatives

In March 2019, we signed an amendment to the purchase agreement of the A320 Neo family with Airbus which reduces our order of 124 A320 Neo aircraft by 17 aircraft. It also changes the delivery date of 35 A320 Neo aircraft which will now be delivered between 2019 to 2028. In addition, the amendment provides for certain changes to the type of aircraft which will be delivered (both upgrades and downgrades in passenger carrying capacity). This agreement will reduce capital expenditures related to our fleet by more than $350 million over the next three years and reduces financial commitments for the period from 2020 to 2022 by more than $2.6 billion. The updated delivery schedule decreases the speed at which new aircraft are incorporated into our operating fleet, enabling the Company to strengthen its cash position and reduce leverage.

The revised Airbus A320 Neo family delivery schedule is as follows:

 

     2019      2020      2021      2022      2023      2024      2025      2026      2027      2028      Total  

Original Order

     6        20        23        20        20        20        19        —          —          —          128  

Deferred Aircraft

     —          —          —          —          —          —          —          15        14        6        35  

Cancelled Aircraft

     —          —          —          —          —          —          —          5        6        6        17  

Adjusted Order

     3        6        4        4        20        20        19        15        14        6        111  

 

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Route Rationalization

To optimize our network, reduce low-performance flights and prioritize the network’s profitability, in March 2019, we decided to cancel 10 underperforming international routes and one of our domestic routes. We have reduced the number of domestic flights of Avianca Peru while maintaining its international flights from Lima. See “—Our Strategies—Pursue selective opportunities for profitable growth in our passenger segment, including through strategic alliances such as the United Copa Transaction.”

Framework Agreement with Grupo Aeromar

On October 31, 2018, Avianca Holdings executed a framework agreement with Grupo Aeromar S.A. de C.V., Transportes Aeromar, S.A. de C.V., and Legolas Investments, S.L., related to a potential investment in Grupo Aeromar for up to 49% of its outstanding equity interest. Completion of the transaction is subject to a number of conditions precedent including, but not limited to, customary corporate, regulatory and governmental approvals.

As of the date of this annual report, Avianca Holdings has lent $35.0 million to Transportes Aeromar for working capital purpose, of which $20.0 million is unsecured. The amount of the loans shall be recognized as part of the purchase price of the equity interest of Grupo Aeromar, in addition to a purchase price of $20.0 million payable by Avianca Holdings (half of which may be paid in shares of Avianca Holdings, at its option).

Our board of directors has not approved the transaction due to the financial position of Grupo Aeromar/Transportes Aeromar. This may affect the ability of Avianca Holdings to recover any amounts lent to Transportes Aeromar and could result in Avianca Holdings recognizing losses in connection with the transaction. Grupo Aeromar is a Mexican regional airline operating since 1988, based at the Mexico City International Airport and operates services to 19 destinations in Mexico and Texas, USA, with a fleet of fifteen ATR-42 aircraft.

Resignation of Chief Executive Officer

Mr. Hernán Rincón Lema has tendered to our board of directors his resignation as Chief Executive Officer effective April 30, 2019, the terms of which were finalized on April 24, 2019. Prior to his departure, Mr. Rincón will remain our “principal executive officer” for SEC reporting purposes. Pursuant to our bylaws and Amended and Restated Joint Action Agreement, we have already retained a third-party international consulting firm to assist us in searching for a successor for Mr. Rincón. Our board of directors has resolved that, if a successor Chief Executive Officer is not appointed prior to the departure of Mr. Rincón, our Secretary Mr. Renato Covelo, who has been acting as Legal Vice President and General Counsel since December 2016, shall become our interim Chief Executive Officer until a successor has been appointed. If Mr. Covelo becomes our interim Chief Executive Officer, Mr. Richard Galindo, who has been acting as our Legal Director since February 2017, will become our interim Secretary.

For more information, see “Item 6. Directors, Senior Management and Employees—Part A. Directors and Senior Management—Executive Officers.”

Sale of Turboprop Leasing Company Ltd. and Aerotaxis La Costeña S.A.

On April 23, 2019, our subsidiaries Taca and NICA entered into an agreement to sell all of Taca’s 68% interest in Turboprop Leasing Company Ltd. and all of NICA’s 68% interest in Aerotaxis La Costeña S.A. to Regional Airline Holding LLC, a third-party purchaser. Completion of the sale is subject to the satisfaction of certain conditions precedent. The sale agreement is subject to customary representations and indemnities, among other provisions. The purchase price is payable in a fixed amount of $11.7 million and in variable earn-out consideration of up to $3.8 million.

Product, Services and Route Network

Our principal product is the scheduled air transportation of customers, which generates passenger revenue. We target business travelers, to whom the majority of our domestic and Latin American traffic corresponds. We also target leisure travelers with our extensive network. Leisure traffic tends to coincide with holidays, school schedules and cultural events and peaks in July and August and again in December and January and also during the Easter holiday in March/April.

In addition, we generate revenue through our LifeMiles loyalty program and through our cargo and courier transportation operations, which consists of revenue derived from shipment of small parcels between countries, on a door-to-door basis and with defined transit time commitments from carriers. Our other revenue activities include air transport-related services such as maintenance, crew training and other airport services provided to other carriers through our Avianca Services division, as well as service charges and ticket penalties. Aircraft and property leases, marketing rebates, duty-free sales, charter flights and other general operating revenue are also included in this category.

Passenger Operations

Our passenger airline business includes 105 destinations and our passenger revenue consists primarily of ticket sales, including revenue from redemption of miles under our LifeMiles loyalty program. Ancillary revenue contribute to passenger revenue and include additional charges that are billed to passengers, such as fees for excess baggage, changes of date, destination and name as well special services such as with regards to empty seats, unaccompanied minors, lounge passes.

Our passenger revenue represented 79.4%, 79.9%, and 83.4% of our total revenue in 2016, 2017 and 2018, respectively.

Domestic Passenger Revenue

Domestic revenue accounted for 49.1%, 53.5%, and 53.3% of our total passenger revenue in 2018, 2017 and 2016, respectively. It should be noted, however, that for accounting purposes, we measure domestic and international flights based solely on origin, not destination.

Our Colombian domestic passenger revenue accounted for 86.5%, 84.2% and 86.6% of our total domestic passenger revenue in 2018, 2017 and 2016, respectively. The majority of our domestic traffic corresponds to business travelers, but during peak vacation and holiday seasons in July and August, in December and January, and during the Easter holiday in March/April, the heaviest volumes of traffic come from leisure travelers. In Colombia, during 2018, approximately 62% of our domestic passengers regarded Bogotá as their destination or origination point, 29% of our domestic passengers passed through Bogotá in transit to other points on our domestic route network and the remaining 9% of our domestic passengers are point-to-point travelers who do not travel to or through Bogotá. Bogotá is a significant business center with a population of approximately 8.2 million. Medellín, Cali and Barranquilla are also important destinations, with a population of approximately 2.5 million, 2.4 million and 1.2 million, respectively.

 

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Our Peruvian domestic passenger revenue accounted for 6.9%, 8.8% and 8.3% of our total domestic passenger revenue for 2018, 2017 and 2016, respectively. We have flown a daily route between Lima and Cuzco for more than 11 years. Currently, we fly approximately 12 daily frequencies to four domestic destinations. In 2018, 2017 and 2016, according to the data provided by the Peruvian Civil Aviation Authority, we were the third domestic carrier in Peru with 9.8%, 11.5% and 11.9%, respectively, of the domestic passenger market.

Starting on April 1, 2019, we are repositioning our network strategy, reducing the services offered by our local subsidiary Avianca Peru within Peru’s domestic market. Pursuant to this strategy, we are eliminating underperforming domestic routes from Lima to Trujillo, Juliaca and Puerto Maldonado and enhancing connectivity by capitalizing on the airline’s strongest routes while maintaining its 35 weekly departures between Lima’s Jorge Chávez International Airport and the Alejandro Velasco Astete International Airport in Cusco. Daily flights between Cusco and Bogota are not affected by these plans. The changes in the network accompany the Company’s strategy that prioritizes the profitability of the network and routes, reducing low-performance flights, ensuring that the Company’s network is optimized and redistributing the capacity released to meet the demand of customers within our key markets.

Our Ecuadorian domestic passenger revenue accounted for 6.7%, 7.0% and 5.1% of our total domestic passenger revenue in 2018, 2017 and 2016, respectively.

International Passenger Revenue

Our international traffic is served through our airlines Avianca (Colombia), Taca International (El Salvador), Avianca Costa Rica S.A. (Costa Rica), Avianca Ecuador S.A. and Avianca Peru S.A. (Peru). Two of our subsidiaries, Aviateca S.A. (Guatemala) and Taca de Honduras (Honduras), operate their international routes through charter flights and wet leases with other of our subsidiaries. On April 23, 2019, we entered into an agreement to sell Nicaraguense de Aviación S.A.—Nica (Nicaragua), which does not currently operate any international flights. See “—Recent Developments—Sale of Turboprop Leasing Company Ltd. and Aerotaxis La Costeña S.A.”

International revenue accounted for 50.8%, 46.5% and 46.7% of our total passenger revenue in 2018, 2017 and 2016, respectively.

Regional operations in Central America

Our regional operation in Central America is served through our regional airlines: Aerotaxis La Costeña S.A.—La Costeña (Nicaragua), Isleña de Inversiones S.A.—Isleña (Honduras), Servicios Aéreos Nacionales S.A.—Sansa (Costa Rica) and Aviateca (Guatemala). Our passenger revenue from our regional operation in Central America accounted for 1.2%, 1.6% and 1.6% of our total passenger revenue in 2018, 2017 and 2016, respectively. On April 23, 2019, we entered into an agreement to sell La Costeña. See “—Recent Developments—Sale of Turboprop Leasing Company Ltd. and Aerotaxis La Costeña S.A.”

Route Network and Schedules

Through our network, we operate more than 802 daily scheduled flights (including domestic flights) to 105 different destinations in North America, Central America, South America and Europe. Our network combines three strategically located hubs in Bogotá, San Salvador and Lima, as well as strong point-to-point service from and to different major destinations in North America, Central America, South America and Europe. We also provide our passengers with access to flights to 140 destinations worldwide through code-sharing arrangements with Aeroméxico, All Nippon Airways, Air China, Air India, Oceanair, Air Canada, COPA, Etihad, EVA Airways, Iberia, Lufthansa, Silver Airways, Singapore Airlines, Turkish Airlines and United Airlines. Additionally, by joining Star Alliance in 2012, we increased the reach of our frequent flyer program, granting access to our clients to more than 1,300 airports in 191 countries and more than 1,000 VIP lounges throughout the world, as well as mileage accruals and redemptions with the 28 Star Alliance carrier members. In March 2019, we decided to cancel 11 of our international routes and one of our national routes due to our new focus on profitability and the intention to sell our Embraer 190 fleet. Such changes will likely become effective in May 2019.

 

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We connect city pairs with lower passenger traffic through our three hubs. Thereby, we build density on our flights and may serve these destinations with a higher frequency. When passenger demand for a particular city pair is sufficient, we provide point-to-point service, which reduces travel time and inconvenience for passengers. We believe that this mixed model allows us to efficiently allocate our resources among high and low-traffic destinations.

For our international connections at our three hubs, we utilize a morning bank, an evening bank and, for some of our hubs, a midday bank of flights, with flights timed to arrive to the corresponding hub at approximately the same time and to depart a short time later. These banks give us the opportunity to provide more frequent service to many destinations, allow some passengers more convenient connections and increase the flexibility of scheduling flights throughout our route network.

The following table shows the distribution of our passenger revenue generated in each of the different regions for the periods indicated measured by destination:

 

     Year Ended December 31,  

Region

   2018     2017     2016  

Domestic Colombia

     23.9     23.1     25.0

Domestic Ecuador

     1.8     1.9     1.5

Domestic Peru

     1.9     2.4     2.4

Central America & Caribbean (non-regional)

     7.7     8.0     7.9

Intra Home Markets (1)

     10.0     10.4     9.9

Europe

     13.4     12.2     12.0

North America (2)

     27.1     26.0     25.3

South America

     14.0     15.8     15.8

Regional Central America

     0.2     0.3     0.2

Total

     100.0     100.0     100.0

 

(1)

International traffic between our home markets (Colombia, Ecuador, Peru, El Salvador, Costa Rica, Nicaragua, Honduras, Guatemala, Belize, excluding Central American & Caribbean (non-regional)).

(2)

North America includes Mexico.

The following table sets forth the information regarding the number of revenue passengers we carried for the periods indicated measured by destination:

 

     Year Ended December 31,  

Region

   2018     2017     2016  

Domestic Colombia

     14,834,728        50.2     14,362,599        50.3     15,281,303        53.5

Domestic Ecuador

     816,336        2.8     755,934        2.6     595,983        2.1

Domestic Peru

     1,229,285        4.2     1,286,546        4.5     1,264,867        4.4

Central America & Caribbean (non-regional)

     2,465,490        8.3     2,614,717        9.2     2,422,244        8.5

Intra Home Markets (1)

     2,470,950        8.4     2,393,106        8.4     2,162,228        7.6

Europe

     1,000,977        3.4     872,231        3.1     791,152        2.8

North America (2)

     4,375,928        14.8     3,896,495        13.6     3,697,845        12.9

South America

     2,097,985        7.1     2,130,340        7.5     2,128,781        7.4

Regional Central America

     258,097        0.9     262,481        0.9     233,953        0.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     29,549,776        100.0     28,574,449        100.0     28,578,356        100.0

 

(1)

International traffic between our home markets (Colombia, Ecuador, Peru, El Salvador, Costa Rica, Nicaragua, Honduras, Guatemala, Belize, excluding Central American & Caribbean (non-regional)).

(2)

North America includes Mexico.

 

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The following table shows our ASKs (in millions) in each of the different regions for the periods indicated.

 

     Year Ended December 31,  

Region

   2018     2017     2016  

Domestic Colombia

     7,859        14.9     7,546        15.6     8,304        17.6

Domestic Ecuador

     594        1.1     564        1.2     511        1.1

Domestic Peru

     923        1.8     1,023        2.1     1,064        2.3

Central America & Caribbean (non-regional)

     3,208        6.1     2,985        6.2     2,999        6.4

Intra Home Markets (1)

     5,149        9.8     5,146        10.6     4,933        10.5

Europe

     9,780        18.6     8,439        17.4     7,559        16.0

North America (2)

     16,226        30.8     13,916        28.8     13,506        28.6

South America

     8,801        16.7     8,697        18.0     8,199        17.4

Regional Central America

     82        0.2     85        0.2     70        0.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     52,622        100.0     48,401        100.0     47,145        100.0

 

(1)

International traffic between our home markets (Colombia, Ecuador, Peru, El Salvador, Costa Rica, Nicaragua, Honduras, Guatemala, Belize, excluding Central American & Caribbean (non-regional)).

(2)

North America includes Mexico.

Network and schedule from Bogotá hub

As of December 31, 2018, through our Bogotá hub, we operated approximately 3,138 weekly scheduled flights to 24 different destinations in Colombia, ten in North America, eleven in South America, ten in Central America and the Caribbean and four in Europe. Unlike for our international operations, we utilize a “rolling hub” system in our domestic operations whereby our inbound and outbound connecting flights operate throughout the day, instead of during designated time banks. Our domestic terminal at the El Dorado International Airport terminal allows us to more efficiently manage our large volumes of domestic traffic.

Through our Bogotá hub, we currently provide scheduled service to the following cities in Colombia:

 

       Number of Passengers Carried (3)  
     Departures
scheduled
per week (2)
     Year Ended December 31,  

Domestic Destinations (1)

   2018      2017      2016  

Armenia

     82        229,860        334,070        390,990  

Barrancabermeja

     26        122,701        125,418        133,526  

Barranquilla

     232        1,421,219        1,291,897        1,383,366  

Bucaramanga

     162        882,871        831,978        888,196  

Cali

     303        2,106,370        2,065,140        2,163,027  

Cartagena

     251        1,668,621        1,573,527        1,638,395  

Corozal

     14        12,379        0        0  

Cucuta

     122        691,330        631,783        667,736  

El Yopal

     26        82,241        73,370        87,957  

Florencia

     14        34,327        30,130        30,433  

Ibagué

     48        105,957        116,850        121,264  

Leticia

     14        96,576        94,034        89,216  

Manizales

     52        99,400        169,370        202,429  

Medellín

     274        2,194,483        2,155,783        2,161,512  

Montería

     56        320,568        311,463        320,449  

Neiva

     42        172,112        222,239        232,855  

Pasto

     56        250,874        216,920        233,744  

Pereira

     164        899,882        830,508        895,487  

Popayán

     28        81,500        100,808        102,547  

Riohacha

     28        165,306        146,311        144,265  

San Andrés

     56        405,730        367,292        373,433  

Santa Marta

     152        821,673        749,741        751,790  

Valledupar

     45        262,385        237,110        258,734  

Villavicencio

     28        71,488        50,832        59,623  

 

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(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried on flights to or from Bogotá.

We currently provide international scheduled service from our Bogotá hub to the following cities:

 

       Number of Passengers Carried (3)  
     Departures
scheduled
per week (2)
     Year Ended December 31,  

International Destinations (1)

   2018      2017      2016  

Aruba (Oranjestad)

     28        150,077        112,396        89,576  

Barcelona

     14        156,952        159,340        159,088  

Boston

     12        47,213        23,602        —    

Buenos Aires

     14        162,190        159,673        119,644  

Cancún

     28        192,610        177,562        149,653  

Chicago

     8        3,513        0        0  

Curaçao (Willemstad)

     22        90,638        68,885        57,801  

Cuzco

     14        66,506        53,029        11,551  

Fort Lauderdale

     14        96,888        87,184        85,733  

Guatemala City

     14        51,619        43,928        54,777  

Guayaquil

     42        258,117        235,775        197,905  

Havana

     14        67,177        62,419        65,385  

La Paz

     14        72,961        72,453        72,322  

Lima

     56        524,222        518,648        503,891  

London

     14        157,619        153,221        143,781  
       Number of Passengers Carried (3)  

International Destinations (1)

   Departures
scheduled
per week (2)
     Year Ended December 31,  
   2018      2017      2016  

Los Angeles

     14        159,828        112,586        83,188  

Madrid

     42        434,536        365,505        325,447  

Mexico City

     42        330,159        264,445        288,917  

Miami

     56        379,380        319,953        321,260  

Montevideo

     14        74,783        39,933        —    

Munich

     10        13,466        0        0  

New York

     42        337,73        287,547        268,228  

Orlando

     14        104,928        91,814        90,996  

Panama City

     42        234,764        256,260        264,820  

Punta Cana

     26        211,714        151,942        130,226  

Quito

     58        342,262        326,510        296,641  

Rio de Janeiro

     14        132,385        135,919        81,676  

San José

     41        210,411        199,591        136,865  

San Juan

     14        68,463        57,147        50,436  

San Salvador

     38        167,010        177,478        168,746  

Santa Cruz

     14        8,059        0        0  

Santiago

     42        322,383        290,863        277,014  

Santo Domingo

     14        93,657        89,717        84,798  

São Paulo

     4        220,742        254,038        283,412  

Washington

     14        76,899        74,573        70,413  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried on flights to or from Bogotá.

 

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Network and schedule from San Salvador hub

Our San Salvador hub connects, principally, passengers from different destinations in North America, Central America and South America. As of December 31, 2018, through our San Salvador hub, we operated approximately 616 weekly scheduled flights to 14 destinations in North America, six in South America, nine in Central America and the Caribbean and currently provide scheduled service to the following destinations:

 

    

 

     Number of Passengers Carried (3) (4)  

Destinations (1)

   Departures
scheduled
per week (2)
     Year Ended December 31,  
   2018      2017      2016  

Belize City

     12        26,977        36,890        36,088  

Boston

     8        17,249        0        0  

Cali

     14        40,035        56,347        48,481  

Cancún

     18        95,042        93,835        85,209  

Cartagena

     8        4,727        0        0  

Chicago

     8        28,146        54,609        53,376  

Dallas

     14        49,964        35,911        37,721  

Guatemala City

     42        215,158        259,929        238,437  

Guayaquil

     14        59,470        49,918        48,703  

Havana

     12        75,778        63,744        50,605  

Houston

     14        49,488        48,721        60,644  

Lima

     14        216,608        220,116        205,731  

Los Angeles

     42        347,614        378,512        345,775  

Managua

     34        142,659        198,712        181,481  

Mexico City

     28        127,873        127,500        123,966  

Miami

     14        54,236        75,506        78,152  

New York

     28        194,157        192,305        185,598  

Newark

     14        68,106        7,328        —    

Orlando

     8        16,798        0        0  

Panama City

     14        49,219        56,664        77,398  

Quito

     14        70,159        61,139        51,861  

Roatán

     14        32,292        32,780        26,866  

San Francisco

     28        154,925        134,335        127,931  

San José

     62        301,608        323,075        282,520  

San Pedro Sula

     42        142,067        153,551        160,424  

Tegucigalpa

     42        113,450        127,031        132,615  

Toronto

     14        88,730        83,387        77,953  

Washington

     40        246,220        227,303        213,274  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried on flights to or from San Salvador.

(4)

During 2018, we carried 51,546 passengers between San Salvador and Medellin, in Colombia, but we ended the operation of this route on October 2018. During 2017 and 2016, we carried on this route 69,726 and 62,477 passengers, respectively.

Network and schedule from Lima hub

Our Lima hub connects passengers from different destinations in South America to destinations in North America, Central America and Europe, through our other two hubs. As of December 31, 2018, through our Lima hub, we operated approximately 553 weekly scheduled flights to three destinations in Peru, four in North America, 15 in South America and four in Central America and the Caribbean and currently provide scheduled service to the following cities in Peru:

 

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            Number of Passengers Carried (3)  

Domestic Destinations (1)(4)(5)

   Departures
scheduled
per week (2)
     Year Ended December 31,  
   2018      2017      2016  

Cuzco

     109        562,264        481,474        441,483  

Juliaca

     27        188,844        172,943        174,804  

Trujillo

     28        138,782        161,060        160,089  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried on flights to or from Lima.

(4)

During 2018, we carried 144,838 passengers between Lima and Arequipa, in Perú, but we ended the operation of this route on November 2018. During 2017 and 2016, we carried on this route 186,181 and 178,690, respectively. During 2018, we carried 16,360 passengers between Lima and Iquitos, in Perú, but we ended the operation of this route on April 2018. During 2017 and 2016, we carried on this route 81,237 and 91,400, respectively.

(5)

During 2018, we carried 56,784 passengers between Lima and Piura, in Perú, but we ended the operation of this route on May 2018. During 2017 and 2016, we carried on this route 141,741 and 154,803, respectively.

We currently provide scheduled service from our Lima hub to the following cities internationally:

 

            Number of Passengers Carried (3)  

International Destinations (1)

   Departures
scheduled
per week (2)
     Year Ended December 31,  
   2018      2017      2016  

Asunción

     14        84,357        65,518        54,191  

Buenos Aires

     28        254,731        273,882        277,286  

Cali

     14        37,993        45,823        54,020  

Cancún

     14        96,699        42,313        31,867  

Guayaquil

     14        81,521        77,629        66,854  

Havana

     12        75,510        61,579        53,445  

La Paz

     14        76,137        73,768        70,953  

Medellín

     13        57,356        48,147        62,444  
     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

International Destinations (1)

   Year Ended December 31,  
   2018      2017      2016  

Mendoza

     14        49,945        0        0  

Mexico City

     14        76,167        73,567        74,145  

Miami

     14        155,566        156,623        147,160  

Montevideo

     14        94,053        82,098        86,978  

Orlando

     14        26,906        0        0  

Porto Alegre

     14        82,831        82,541        72,586  

Punta Cana

     14        95,593        78,107        65,712  

Quito

     14        89,593        82,704        74,788  

Rio de Janeiro

     14        92,732        97,913        92,826  

Santa Cruz

     14        82,855        81,034        74,152  

Santiago

     28        133,949        122,186        138,034  

São Paulo

     14        149,351        153,080        136,414  

San José

     14        80,116        78,009        75,321  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried on flights to or from Lima.

 

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Network and schedule from San José

As of December 31, 2018, through our network in San José, we operated approximately 159 weekly scheduled flights to two destination in South America, and three in Central America and the Caribbean. Our San José network connects, principally, passengers from different destinations in South America and Central America and currently provides scheduled service to the following destinations:

 

     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)(4)(5)  

Destinations (1)

   Year Ended December 31,  
   2018      2017      2016  

Guatemala City

     28        95,130        129,178        101,511  

Panama City

     14        74,732        114,510        107,187  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried to or from San José.

(4)

During 2017, we carried 18,941 passengers on this route. In 2018, we carried 1,103 passengers between San José and Mexico City but we ended the operation on this route in January 2018.

(5)

During 2018, we carried 10,816 passengers between San José and Tegucigalpa, in Nicaragua, but we ended the operation in July 2018. During 2017 and 2016, we carried 20,718 and 21,532, respectively, on this route.

Domestic network and schedule in Ecuador

We operate approximately 160 weekly scheduled domestic flights to six destinations in Ecuador, through our subsidiary Avianca Ecuador. We currently provide scheduled domestic service between the following cities in Ecuador:

 

     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)(4)  

Domestic (1)

   Year Ended December 31,  
   2018      2017      2016  

Quito—Baltra

     14        55,673        46,660        27,836  

Quito—Guayaquil

     74        397,084        363,594        278,499  
     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

Domestic (1)

   Year Ended December 31,  
   2018      2017      2016  

Quito—Manta

     24        109,999        106,375        82,132  

Quito—El Coca

     10        40,067        45,526        36,094  

Guayaquil—Baltra

     20        127,391        113,368        104,607  

Guayaquil—San Cristobal

     18        83,389        79,498        66,157  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018. These numbers do not include flights served by Isleña.

(3)

These numbers reflect the number of revenue passengers carried between such destinations.

Regional operation and schedule in Central America

We operate approximately 504 weekly scheduled domestic flights to 15 destinations in Central America, through a group of airlines composed by Sansa (Costa Rica) and Isleña (Honduras). Through our regional operation in Central America, we currently provide scheduled domestic service between the following cities in Central America:

 

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     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

Domestic (1)(4)(5)(6)

   Year Ended December 31,  
   2018      2017      2016  

Costa Esmeralda (Rivas) — Liberia

     14        3,621        4,290        2,913  

Golfito—Puerto Jimenez

     8        1,029        1,533        2,183  

Liberia – Tambor

     13        2,998        3,632        1,476  

Liberia—Nosara

     8        2,864        1,531        0  

San José—Drake Bay

     36        5,088        6,328        6,525  

San José—Golfito

     41        15,044        16,632        13,585  

San José—La Fortuna

     16        1,594        1,433        1,705  

San José—Liberia

     54        20,583        20,811        17,571  

San José—Nosara

     17        2,996        1,761        —    

San José—Puerto Jimenez

     83        25,898        14,556        17,898  

San José—Puerto Limón

     22        7,142        7,489        4,715  

San José—Quepos

     29        7,846        18,710        18,786  

San José—San Isidro

     7        1,511        2,598        1,387  

San José—Tamarindo

     32        10,303        9,750        8,794  

San José—Tambor

     88        28,855        23,861        22,544  

San José—Tortuquero

     19        5,233        4,348        3,745  

Tamarindo —Liberia

     5        2,314        3,280        3,577  

Tortuquero—La Fortuna

     7        2,041        1,897         

Tortuquero—Puerto Limón

     5        1,691        894        2,294  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018. These numbers do not include flights served by Isleña.

(3)

These numbers reflect the number of revenue passengers carried between such destinations.

(4)

During During 2018, we carried 7,779 passengers between San José and Palmar Sur, in Costa Rica, but we ended the operation on this route in August 2018. During 2017 and 2016, we carried 4,635 and 3,901 passengers, respectively, on this route.

(5)

During 2018, we carried 21,432 passengers between San Pedro Sula and Roatán, in Costa Rica, but we ended the operation on this route in October 2018. During 2017 and 2016, we carried 25,748 and 23,340 passengers, respectively, on this route.

(6)

During 2018, we carried 40,896 passengers between San Pedro Sula and Tegucigalpa, in Honduras, but we ended the operation on this route in October 2018. During 2017 and 2016, we carried 49,328 and 49,977 passengers, respectively, on this route.

Point-to-Point Service

In addition to the different destinations served through our three hubs, we provide domestic and international point-to-point service between different destinations, including North, Central and South America as well as Europe.

 

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Domestic. We currently provide domestic point-to-point scheduled service between the following cities:

 

     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

Domestic (1)(4)(5)

   Year Ended December 31,  
   2018      2017      2016  

Cali—Barranquilla

     28        124,806        118,111        164,716  

Cali—Cartagena

     42        128,816        125,095        168,044  

Cali—Pasto

     14        41,429        38,724        37,907  

Cali—San Andrés

     14        19,090        18,161        —    

Cali—San Marta

     28        22,144        5,983        —    

Cali—Tumaco

     28        75,650        76,688        80,191  

Cartagena—Pereira

     6        27,356        24,670        28,299  

Cuzco—Puerto Maldonado

     14        74,656        60,900        62,121  

Medellín—Barranquilla

     42        184,653        207,173        265,602  

Medellín—Bucaramanga

     11        40,745        43,226        60,854  

Medellín—Cali

     112        399,784        412,532        504,652  

Medellín—Cartagena

     89        311,161        350,129        420,763  

Medellín—Cucuta

     13        35,792        50,630        62,828  

Medellín—Montería

     14        41,227        35,154        —    

Medellín—San Andrés

     8        12,032        8,520        —    

Medellín—Santa Marta

     18        66,667        84,457        116,491  

 

(1)

Reflects destinations served as of December 31, 2018.

(2)

Departures and arrivals for the week ended December 31, 2018.

(3)

These numbers reflect the number of revenue passengers carried between such destinations.

(4)

We operated the route between Cuzco and Arequipa, in Perú, from June to November 2018 and transported 32,580 passengers.

(5)

We operated the route between Cuzco and Juliaca, in Perú, from June to November 2018 and transported 12,464 passengers.

International . We currently provide international point-to-point scheduled service between the following cities:

 

     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

International (1)

   Year Ended December 31,  
   2018      2017      2016  

Barranquilla—Miami

     14        77,307        69,892        72,128  

Cali—Guayaquil

     14        59,168        42,270        32,264  

Cali—Madrid

     12        168,749        142,858        114,157  

Cali—Miami

     14        91,677        77,791        80,676  

Cartagena—Miami

     14        78,572        75,198        73,044  

Cartagena—New York

     6        20,943        23,910        28,068  

Guatemala City—Chicago

     14        10,829        0        0  

Guatemala City—Flores

     28        65,121        65,286        54,354  
     Departures
scheduled
per week (2)
     Number of Passengers Carried (3)  

International (1)

   Year Ended December 31,  
   2018      2017      2016  

Guatemala City—Los Angeles

     28        109,405        94,457        94,657  

Guatemala City—Managua

     6        158,725        26,996        23,552  

Guatemala City—Miami

     14        30,447        40,197        25,775  

Guatemala City—New York

     14        15,332        0        0  

Guatemala City—Orlando

     6        11,692        0        0  

Guatemala City—San Pedro Sula

     14        24,751        22,788        22,926  

Guatemala City—Tegucigalpa

     14        24,639        25,216        24,958