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

AVH

Avianca News

As filed with the Securities and Exchange Commission on June 10, 2020

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

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

For the fiscal year ended December 31, 2019

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

☐	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)

Arias, Fábrega & Fábrega, P.H. ARIFA, Floors 9 and 10, West Boulevard, Santa María Business District

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	Trading symbol	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 preferred share	AVH	N/A*

*	The New York Stock Exchange filed Form 25 with the U.S. Securities and Exchange Commission on May 27, 2020 in order to delist the American Depositary Shares.

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, 2019:

Common Shares — 660,800,003

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

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.

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


		Page

PRESENTATION OF FINANCIAL AND OTHER INFORMATION			5

MARKET DATA			6

CERTAIN TERMS			7

FORWARD LOOKING STATEMENTS			9

PART I			10

Item 1.	Identity of Directors, Senior Management and Advisers		10

Item 2.	Offer Statistics and Expected Timetable		10

Item 3.	Key Information		10

Item 4.	Information on the Company		40

Item 4A.	Unresolved Staff Comments		76

Item 5.	Operating and Financial Review and Prospects		76

Item 6.	Directors, Senior Management and Employees		98

Item 7.	Major Shareholders and Related Party Transactions		106

Item 8.	Financial Information		112

Item 9.	The Offer and Listing		113

Item 10.	Additional Information		117

Item 11.	Quantitative and Qualitative Disclosures About Market Risk		132

Item 12.	Description of Securities Other than Equity Securities		133

PART II			134

Item 13.	Defaults, Dividends Arrearages and Delinquencies		134

Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		134

Item 15.	Controls and Procedures		135

Item 16.	Reserved		136

Item 16A.	Audit Committee Financial Expert		136

Item 16B.	Code of Ethics		136

Item 16C.	Principal Accountant Fees and Services		136

Item 16D.	Exemptions from the Listing Standards for Audit Committees		137

Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		137

Item 16F.	Change in Registrant’s Certifying Accountant		137

Item 16G.	Corporate Governance		137

Item 16H.	Mine Safety Disclosure		138

PART III			138

Item 17.	Financial Statements		139

Item 18.	Financial Statements		139

Item 19.	Exhibits		139

EXPLANATORY NOTE

On May 10, 2020, Avianca Holdings S.A. and certain of its affiliated entities filed voluntary petitions for chapter 11 relief under title 11 of the United States Code (11 U.S.C. § 101, et. seq.) with the United States Bankruptcy Court for the Southern District of New York, which cases are being jointly administered under Case No. 20-11133 (MG). We refer to these proceedings in this annual report as our “Chapter 11 proceedings.” LifeMiles, our loyalty program, is administered by a separate company and is not part of our Chapter 11 proceedings. As of the date of this annual report, our subsidiary Avianca Peru S.A. has initiated a voluntary dissolution and liquidation process.

The information in this annual report is presented as of December 31, 2019, unless expressly stated otherwise, and is subject to and qualified in its entirety by our Chapter 11 proceedings and developments related thereto.

RELIANCE ON SEC ORDER TO EXTEND FILING DEADLINE

As disclosed in our report on Form 6-K furnished to the U.S. Securities and Exchange Commission (the “SEC”) on April 23, 2020, we have relied on the SEC’s order dated March 25, 2020 (Release No. 34-88465) regarding an extension to file certain reports due to circumstances relating to the spread of a new strain of coronavirus (“COVID-19”).

The airline industry has been among the sectors of the global economy most affected by the spread of COVID-19 and related government measures, which have resulted in unprecedented challenges for us. Our management has since the second half of March 2020 been focused primarily on addressing the unprecedented challenges that the COVID-19 pandemic has created for our business and employees. Consequently, this situation resulted in a delay in our completion of this annual report on Form 20-F.

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, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017, 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 as of May 1, 2018. Our consolidated financial statements as of and for the years ended December 31, 2019 and 2018 have been audited by KPMG S.A.S., independent auditors, as stated in their report included in this annual report. Our consolidated financial statements as of and for the year ended December 31, 2017, included in this annual report, have been audited by Ernst & Young Audit S.A.S., independent auditors.

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 U.S. 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 Colombian pesos into U.S. dollars are the rates as of December 31, 2019 published by the Colombian Central Bank (Banco de la República) (“Colombian Central Bank”), as reported by the Colombian Financial Superintendency (Superintendencia Financiera de Colombia) (“SFC”).

As of December 31, 2019, the exchange rate between the Colombian peso and the U.S. dollar certified by the SFC was COP 3,277.14 per $1.00. As of May 31, 2020, the exchange rate between the Colombian peso and the U.S. dollar certified by the SFC was COP 3,718.82 per $1.00, which represents a depreciation of 13.5% of the Colombian peso against the U.S. dollar in the first five months of 2020. See “Item 10. Additional Information—D. Exchange Controls—Exchange Rates.”

Certain Non-IFRS Financial Measures

This annual report includes certain references to the non-IFRS measures of Adjusted EBITDA and Adjusted EBITDA margin.

We calculate Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) as consolidated net profit for the year plus the sum of income tax expense, depreciation and amortization and impairment, less interest expense, interest income, derivative instruments and foreign exchange, net. We calculate Adjusted EBITDA margin as Adjusted EBITDA divided by total operating revenue. We present Adjusted EBITDA and Adjusted EBITDA Margin because we believe these are useful indicators of our operating performance and are useful in comparing our operating performance with other companies. However, Adjusted EBITDA and Adjusted EBITDA Margin are not measures under IFRS and should not be considered in isolation, as a substitute for net profit determined in accordance with IFRS or as a measure of our profitability. Accordingly, you are cautioned not to place undue reliance on this information and should note that Adjusted EBITDA and Adjusted EBITDA margin, as calculated by us, may differ materially from similarly titled measures reported by other companies, including our competitors. See “Item 3. Key Information—A. Selected Financial Data” for a reconciliation of Adjusted EBITDA to net profit.

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 rounded figures but on the basis of 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 derives from a variety of sources, including the Colombian Civil Aviation Authority (Unidad Administrativa Especial de Aeronáutica Civil) (“CCAA”), the Civil Aviation Authority of El Salvador (Autoridad de Aviación Civil) (“AAC”), the Civil Aviation Authority of Costa Rica (Dirección General de Aviación Civil), the Peruvian Civil Aviation Authority (Dirección General de Aviación Civil) (“Peruvian DGAC”), the Ecuadorian Civil Aviation Authority (Dirección General de Aviación Civil) (“Ecuadorian DGAC”), the International Air Transport Association (“IATA”), the Latin American and Caribbean Air Transport Association (“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, other sources 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 in this annual report 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.

iii

CERTAIN TERMS

This annual report contains the following terms relating to us and to our business and operating performance, several of which are commonly used in the airline industry:

“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 between 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 named Líneas Aéreas Costarricenses, S.A.

“Avianca Ecuador” means Avianca Ecuador S.A., formerly named Aerolíneas Galápagos S.A. – Aerogal.

“Avianca Holdings” means Avianca Holdings S.A.

“Avianca Leasing” means Avianca Leasing, LLC.

“Avianca Peru” means Avianca Peru S.A., formerly named Trans American Airlines S.A. As of the date of this annual report, Avianca Peru has initiated a voluntary dissolution and liquidation process. For more information, see “Item 4. Information on the Company—B. Business Overview—Recent Developments—Dissolution and Liquidation of Avianca Peru.”

“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 as of the date of this annual report 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 Mr. Germán Efromovich.

“CASK” represents operating expenses divided by ASKs.

“CASK excluding fuel” represents operating expenses less fuel expenses divided by ASKs.

“Code share alliance” means our code share agreements with other airlines with which 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 the need to offer extra flights and makes connections simpler by allowing single bookings across multiple planes.

“Copa” means Compañía Panameña de Aviación, 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 ASKs.

“ECA” means export credit agency.

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

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

“IFRS” means the International Financial Reporting Standards and applicable accounting requirements set by the International Accounting Standards Board or any successor thereto, 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 is 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 2.3.17—Amended and Restated Joint Action Agreement” and “Exhibit 2.47—Share Rights Agreement.”

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

“Joint Business Agreement” means the agreement dated November 29, 2018 by and between certain members of the Avianca Holdings group, United, Copa 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 ASKs, unless stated otherwise.

“NICA” means Nicaraguense de Avíacíón S.A.

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

“Passenger operating revenue per available seat kilometer,” or PRASK, represents passenger operating revenue divided by ASKs.

“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 named 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 between Avianca Holdings, Kingsland, BRW and United.

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

“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 (i) 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 this exercise constituting “control” within the meaning of such term within any of United’s collective bargaining agreements or other material agreements, or (ii) United is otherwise prepared to exercise any or all of such rights.

“United Copa Transaction” means the three-way joint business arrangement between 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, as of the date of this annual report, remains subject to antitrust approval.

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

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

FORWARD LOOKING STATEMENTS

This annual report includes forward-looking statements, principally under the captions “Item 4. Information on the Company—B. Business Overview,” “Item 3. Key Information—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 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.

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

•

developments relating to our Chapter 11 proceedings and our ability to effectively implement a reorganization plan;

•

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

•

developments relating to the spread of COVID-19 and government measures to address it;

•

our ability to develop financing structures with the governments of the key markets in which we operate;

•

our level of debt and other fixed obligations and our ability to meet our payment obligations and to comply with the covenants set forth in our financing agreements;

•

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

•

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

•

our ability to successfully implement our 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;

•

threats or outbreaks of diseases or natural disasters affecting traveling behavior and imports or exports;

•

cyclical and seasonal fluctuations in our operating results;

•

defects or mechanical problems with our aircraft; and

•

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

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 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, 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 not guarantees of future performance. Considering these limitations, you should not place undue reliance on forward-looking statements contained in this annual report.

vii

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 consolidated financial and operating information as of the dates and for the periods indicated. The selected consolidated financial information derives from our audited consolidated financial statements. You should read this information together with our audited consolidated financial statements, and related notes thereto, included elsewhere in this annual report, “Presentation of Financial and Other Information” and “Item 5. Operating and Financial Review and Prospects.”


	As of December 31,
	2019		2018		2017		2016		2015
	(in $ millions)
Consolidated Balance Sheet Data
Assets
Current assets:
Cash and cash equivalents		342.5		273.1		509.0		375.8		479.4
Restricted cash		—		4.8		5.5		5.4		5.4
Short-term investments		55.4		59.8		—		—		—
Trade and other receivables net of expected credit losses		233.7		288.2		226.0		313.9		279.6
Accounts receivable from related parties		3.4		6.3		17.2		19.3		23.1
Current tax assets		198.7		231.9		114.4		—		—
Expendable spare parts and supplies, net of provision for obsolescence		88.3		90.4		97.2		82.4		68.8
Prepaid expenses		69.0		99.9		99.7		59.7		45.7
Deposits and other assets		39.2		29.9		202.0		160.1		130.7

		1,030.2		1,084.3		1,271.0		1,016.6		1,032.7
Assets held for sale		681.1		31.6		—		—		3.3

Total current assets		1,711.3		1,115.9		1,271.0		1,016.6		1,036.0

Non-current assets:
Available-for-sale securities		—		—		—		0.1		0.8
Deposits and other assets		54.1		115.6		116.4		174.0		246.5
Trade and other receivables net of expected credit losses		22.5		35.5		4.1		92.0		59.7
Non-current tax assets		—		—		136.3		—		—
Intangible assets and goodwill, net		505.5		513.8		426.6		412.9		413.8
Deferred tax assets		27.2		24.6		26.0		5.8		5.8
Property and equipment, net		4,953.3		5,313.3		4,881.0		4,649.9		4,599.3

Total non-current assets		5,562.6		6,002.8		5,590.4		5,443.7		5,325.9

Total assets		7,273.9		7,118.7		6,861.4		6,351.3		6,361.9


	As of December 31,
	2019			2018			2017			2016		2015
	(in $ millions)
Liabilities and equity
Current liabilities:
Short-term borrowings and current portion of long-term debt		872.0			626.7			572.1			406.7		412.9
Accounts payable		530.6			664.3			495.0			493.1		480.6
Accounts payable to related parties		3.7			2.8			7.2			9.1		9.4
Accrued expenses		87.6			108.7			186.7			138.8		118.2
Current tax liabilities		26.4			26.7			31.9			—		—
Provisions for legal claims		20.3			7.8			11.7			18.5		13.4
Provisions for return conditions		22.0			2.5			19.1			53.1		52.6
Employee benefits		148.7			125.1			38.7			39.6		32.9
Air traffic liability		337.4			424.6			454.0			521.2		433.6
Frequent flyer deferred revenue		187.9			186.4			85.2			—		—
Other liabilities		5.1			3.9			9.4			11.1		12.7

		2,241.7			2,179.5			1,911.0			1,691.2		1,566.3

Liabilities associated with the assets held for sale		490.5			—			—			—		—

Total current liabilities		2,732.2			2,179.5			1,911.0			1,691.2		1,566.3

Non-current liabilities:
Long-term debt		3,984.3			3,380.8			3,180.0			2,867.5		3,060.1
Accounts payable		11.9			7.1			5.1			2.7		3.6
Provisions for return conditions		122.4			127.7			144.1			120.8		109.2
Employee benefits		118.3			110.1			135.6			115.6		127.7
Deferred tax liabilities		18.5			18.4			25.8			20.4		13.5
Frequent flyer deferred revenue		229.7			234.3			104.8			98.1		93.5
Other liabilities non-current		51.5			68.2			15.3			14.7		15.3

Total non-current liabilities		4,536.6			3,946.6			3,610.7			3,239.8		3,429.9

Total liabilities		7,268.8			6,126.1			5,521.7			4,931.0		4,989.2

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 (losses) earnings		(543.1	)		386.1			588.0			565.1		553.7
Other comprehensive loss		(78.1	)		(44.1	)		(0.8	)		6.9		(28.1	)

Total equity attributable to the Company		207.3			1,170.5			1,415.7			1,400.5		1,354.1
Non-controlling interest		(202.2	)		(177.9	)		(76.0	)		19.8		18.6

Total equity		5.1			992.6			1,339.7			1,420.3		1,372.7

Total liabilities and equity		7,273.9			7,118.7			6,861.4			6,351.3		6,361.9


							For the year ended December 31,
	2019			2018			2017			2016			2015
	(in $ millions, except earnings and dividends per share / ADS data)
Consolidated Income Statement Data
Operating revenue:
Passenger		3,904.8			4,074.4			3,550.2			3,285.2			3,458.0
Cargo and other		716.7			816.4			891.5			853.1			903.3

Total operating revenue		4,621.5			4,890.8			4,441.7			4,138.3			4,361.3

Operating expenses:
Flight operations		75.7			153.6			92.5			58.4			58.1
Aircraft fuel		1,204.1			1,213.4			923.5			785.3			1,006.8
Ground operations		478.0			474.8			450.2			426.2			412.4
Rentals		11.8			267.7			278.8			314.5			317.5
Passenger services		176.4			188.7			166.9			151.7			149.3
Maintenance and repairs		257.6			206.5			280.5			260.7			309.7
Air traffic		279.0			269.6			242.6			219.0			203.0
Selling expenses		500.2			530.9			515.1			545.3			612.8
Fees and other expenses		411.6			203.3			177.9			187.6			176.2
Salaries, wages and benefits		717.3			760.8			706.8			661.7			666.1
Depreciation and amortization		593.4			350.5			313.4			269.5			230.7
Impairment		470.7			38.9			—			—			—

Total operating expenses		5,175.8			4,658.7			4,148.0			3,879.9			4,142.5

Operating (loss) profit		(554.3	)		232.1			293.6			258.5			218.8
Interest expense		(299.9	)		(212.3	)		(183.3	)		(172.6	)		(169.4	)
Interest income		9.0			10.1			13.5			13.1			19.0
Derivative instruments		(2.1	)		(0.3	)		(2.5	)		3.3			0.6
Foreign exchange, net		(24.2	)		(9.2	)		(20.2	)		(23.9	)		(177.5	)
Equity method profit		1.5			0.9			1.0			—			—
Profit (loss) before income tax		(870.0	)		21.4			102.1			78.3			(108.5	)
Total income tax expense		(24.0	)		(20.2	)		(20.1	)		(34.1	)		(31.0	)
Net (loss) profit for the year		(894.0	)		1.1			82.0			44.2			(139.5	)
Earnings and dividends per share / ADS:
Net (loss) profit attributable to equity holders of the parent		(913.7	)		(24.8	)		48.2			17.0			(155.4	)
Net profit attributable to non-controlling interest		19.7			25.9			33.8			27.2			15.9
Basic and diluted (loss) earnings per share (common and preferred)		(0.92	)		(0.025	)		0.05			0.04			(0.14	)
Basic and diluted (loss) earnings per ADS		(7.3	)		(0.20	)		0.40			0.32			(1.12	)
Common and preferred share dividends per share (COP/$)		50 / 0.02			98.6 / 0.04			77.0 / 0.03			50 / 0.02			198.5 / 0.07
Common shares at period end		660,800,003			660,800,003			660,800,003			660.800,003			60,800,003
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			660,800
Weighted average of preferred shares used in computing earnings per share (thousands)		336,187			336,187			336,187			336,187			336,187


	As of December 31,
	2019			2018			2017			2016			2015
	(in $ millions)
Cash Flow Data
Net (loss) profit for the period		(894.0	)		1.1			82.0			44.2			(139.5	)
Net cash provided by operating activities		448.3			703.1			527.3			568.0			363.0
Net cash (used in) investing activities		(8.5	)		(493.8	)		(206.0	)		(118.4	)		(330.5	)
Net cash (used in) provided by financing activities		(365.1	)		(426.2	)		(195.6	)		(550.5	)		18.1
Cash and cash equivalents at end of the period		342.5			273.1			509.0			375.8			479.4

	For the year ended December 31,
	2019			2018			2017			2016			2015
	(in $ millions)
Other Financial Data
Adjusted EBITDA⁽¹⁾		511.3			622.4			608.0			459.7			387.5
Total operating revenue		4,621.5			4,890.8			4,441.7			4,138.3			4,361.3
Operating margin⁽²⁾		(12.0	)%		4.7	%		6.6	%		6.2	%		5.0	%
Adjusted EBITDA margin⁽³⁾		11.1	%		12.7	%		13.7	%		20.4	%		17.6	%

(1)

We calculate Adjusted EBITDA as consolidated net profit for the year plus the sum of income tax expense, depreciation and amortization and impairment, less interest expense, interest income, derivative instruments and foreign exchange, net. Our calculation of Adjusted EBITDA may not be comparable to other companies’ similarly titled measures.

(2)	We calculate operating margin as operating (loss) profit divided by total operating revenue.

(3)	We calculate Adjusted EBITDA margin as Adjusted EBITDA divided by total operating revenue.

The following table presents a reconciliation of our net profit to Adjusted EBITDA for the specified periods:


	2019			2018			2017			2016			2015
Net (loss) profit for the year		(894.0	)		1.1			82.0			44.2			(139.5	)
+ Income tax expense		24.0			20.2			20.1			(34.1	)		(31.0	)
+ Depreciation and amortization		593.4			350.5			313.4			269.5			230.7
+ Impairment		470.7			38.9			—			—			—
(-) Interest expense		(299.9	)		(212.3	)		(183.3	)		(172.6	)		(169.4	)
(-) Interest income		9.0			10.1			13.5			13.1			19.0
(-) Derivative instruments		(2.2	)		(0.3	)		(2.5	)		3.3			0.6
(-) Foreign exchange, net		(24.2	)		(9.2	)		(20.2	)		(23.9	)		(177.5	)
Adjusted EBITDA		511.3			622.4			608.0			459.7			387.5


	As of and for the year ended December 31,
	2019		2018		2017		2016		2015
	(as indicated below)
Other data⁽¹⁾⁽²⁾
Total passengers carried (in thousands)		30,538		30,628		29,459		29,480		28,290
Revenue passengers carried (in thousands)		29,580		29,674		28,574		28,578		27,378
RPKs (in millions)		44,460		44,267		40,243		38,233		35,478


	As of and for the year ended December 31,
	2019			2018			2017			2016			2015
	(as indicated below)
ASK (in millions)		54,410			53,310			48,401			47,145			44,513
Load factor		81.7	%		83.0	%		83.1	%		81.1	%		79.7	%
Block hours		585,804			588,902			562,431			571,820			547,859
Aircraft utilization		10.1			9.7			9.9			10.3			10.1
Average one-way passenger fare ($)		132.0			137.3			124.2			115.0			126.3
Yield		8.8			9.2			8.8			8.6			9.7
PRASK		7.2			7.6			7.3			7.0			7.8
RASK		8.5			9.2			9.2			8.8			9.8


CASK	9.5		8.7		8.6		8.2		9.3
CASK excluding fuel	7.3		6.5		6.7		6.6		7.0
RTK (in millions)	1,578		1,409		1,420		1,291		1,259
ATK (in millions)	2,732		2,460		2,489		2,346		2,152
Gallons of fuel consumed (in thousands)	538,990		518,248		483,512		481,803		461,268
Average price of jet fuel into plane (net of hedge) ($/gallon)	2.23		2.34		1.91		1.63		2.18
Average stage length (kilometers)⁽³⁾	1,202		1,129		1,069		1,019		1,002
On-time domestic performance⁽⁴⁾	75.9	%	67.1	%	69.9	%	77.4	%	83.5	%
On-time international performance⁽⁵⁾	82.9	%	77.2	%	81.1	%	83.1	%	85.7	%
Completion rate⁽⁶⁾	98.4	%	97.3	%	95.2	%	98.1	%	98.5	%
Technical dispatch reliability⁽⁷⁾	99.6	%	99.5	%	99.5	%	99.5	%	99.5	%
Departures⁽⁸⁾	280,466		293,307		291,013		304,827		299,192
Average daily departures	768		804		797		835		820
Airports served at period end	76		78		106		106		104
Routes served at period end	139		134		171		170		179
Direct sales as % of total sales⁽⁹⁾	35.9	%	33.8	%	33.4	%	33.7	%	34.1	%

Revenue per full-time employee plus cooperative members ($ thousands)	221		224		176		196		206
Full-time employees and cooperative members at period end	16,707		18,338		18,641		20,449		20,485
Other full-time employees (2019 includes SAI, Aerounión and LatinCo; 2018 includes La Costeña and Getcom)	4,158		2,901		5,907		—		—
Total employees (headcount)	20,865		21,861		25,306		21,061		21,145

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

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

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

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

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

(8)	Includes passenger and cargo operations.

(9)	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 (“ADSs”) representing our preferred shares involves a high degree of risk. You should carefully consider the risks described below, as well as other information included in this annual report, 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 believe as of the date of this annual report may materially affect us.

For purposes of this section, when we state that a risk, uncertainty or problem may, could, would or will have an “adverse effect” on us or “adversely affect” us, we mean that the risk, uncertainty or problem could have an adverse

effect on our ability to emerge from Chapter 11 proceedings and implement a reorganization plan, as well as on our business, financial condition, results of operations, cash flow, prospects, reputation and/or the trading price of the ADSs, except as otherwise indicated. You should view similar expressions in this section as having similar meanings.

Risks Relating to Our Chapter 11 Proceedings

We are subject to the risks and uncertainties associated with our Chapter 11 proceedings.

As a consequence of our filing Chapter 11 petitions, our operations and our ability to develop and execute our business plan, as well as our continuation as a going concern, will be subject to the risks and uncertainties associated with bankruptcy. These risks include our ability to:

•

confirm and consummate a plan of reorganization with respect to our Chapter 11 proceedings;

•

obtain sufficient financing, including for working capital whether from debtor-in-possession financing or otherwise, and emerge from bankruptcy and execute our business plan post-emergence, as well as comply with the terms and conditions of that financing;

•

maintain our relationships with our creditors, suppliers, service providers, customers, directors, officers and employees; and

•

maintain contracts that are critical to our operations on reasonably acceptable terms and conditions.

We will also be subject to risks relating to, among others:

•

the high costs of bankruptcy proceedings and related fees;

•

the ability of third parties to seek and obtain court approval to (i) terminate contracts and other agreements with us, (ii) shorten the exclusivity period for us to propose and confirm a Chapter 11 plan or to appoint a Chapter 11 trustee or (iii) convert the Chapter 11 proceedings to Chapter 7 liquidation proceedings; and

•

the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans.

Any delays in our Chapter 11 proceedings increase the risks of our inability to reorganize our business and emerge from bankruptcy and may increase our costs associated with the reorganization process.

Because of the many risks and uncertainties associated with a voluntary filing for relief under Chapter 11 and the related proceedings, we cannot accurately predict or quantify the ultimate impact that events that occur during our Chapter 11 proceedings may have on us and there is no certainty as to our ability to continue as a going concern.

Additionally, our Chapter 11 proceedings may require us to seek debtor-in-possession financing to fund operations. If we are unable to obtain such financing on favorable terms or at all, our chances of successfully reorganizing our business may be seriously jeopardized and the likelihood that we instead will be required to liquidate our assets may be enhanced. Furthermore, we cannot predict the ultimate amount of all settlement terms for the liabilities that will be subject to our plan of reorganization. Even once a plan of reorganization is approved and implemented, we may be adversely affected by the possible reluctance of prospective lenders and other counterparties to do business with a company that has recently emerged from Chapter 11 proceedings.

We may not be able to obtain confirmation of a Chapter 11 plan of reorganization.

To emerge successfully from bankruptcy court protection as a viable entity, we must meet certain statutory requirements with respect to adequacy of disclosure regarding a plan of reorganization, solicit and obtain the requisite acceptances of our plan, demonstrate the feasibility of our plan to the bankruptcy court by a preponderance of the evidence and fulfill other statutory conditions for confirmation of our plan, which have not occurred to date. The confirmation process can be subject to numerous unanticipated potential delays. We cannot assure you that a plan of reorganization will be approved by the bankruptcy court.

The success of any reorganization will depend on approval by the bankruptcy court and the willingness of our creditors to agree to the exchange or modification of their claims as will be outlined in a plan of reorganization, and there can be no guarantee of success with respect to any plan of reorganization. We may receive objections to confirmation of any plan of reorganization from various stakeholders in our Chapter 11 proceedings. We cannot predict the impact that any objection to or third party motion during our Chapter 11 proceedings may have on the bankruptcy court’s decision to confirm a plan of reorganization or our ability to complete a plan of reorganization.

If a plan of reorganization is not confirmed by the bankruptcy court, it is unclear whether we would be able to reorganize our business and what, if any, distributions holders of claims against us, including holders of the ADSs, would ultimately receive with respect to their claims. There can be no assurance as to whether or when we will successfully reorganize and emerge from our Chapter 11 proceedings. If no plan of reorganization can be confirmed, or the bankruptcy court finds that it would be in the best interest of creditors, the bankruptcy court may convert our Chapter 11 proceedings to cases under Chapter 7 of the bankruptcy code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the bankruptcy code.

The pursuit of our Chapter 11 proceedings have consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may adversely affect us, and we may face increased levels of employee attrition.

It is impossible to predict with certainty the amount of time that we could spend in our Chapter 11 proceedings or to assure parties in interest that a plan of reorganization will be confirmed. Our Chapter 11 proceedings may involve additional expense and our management will be required to spend a significant amount of time and effort focusing on the proceedings. This diversion of attention may adversely affect us, particularly if the Chapter 11 proceedings are protracted.

During the pendency of the Chapter 11 proceedings, our employees will face considerable distraction and uncertainty, and we may experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could impair our ability to execute our strategy and implement operational initiatives, thereby adversely affecting us.

We have substantial liquidity needs and may not be able to obtain sufficient liquidity to confirm a plan of reorganization and exit our Chapter 11 proceedings successfully.

Although we have taken multiple measures to reduce our expenses and have reduced the scale of our operations significantly, mainly as a result of developments relating to the spread of COVID-19, our business remains capital intensive. In addition to the cash requirements necessary to fund our ongoing operations, we have incurred significant professional fees and other costs in connection with our reorganization and expect that we will continue to incur significant professional fees and costs throughout our Chapter 11 proceedings. There are no assurances that our liquidity is sufficient to allow us to satisfy our obligations related to our Chapter 11 proceedings, to proceed with the confirmation of a Chapter 11 plan of reorganization and to emerge successfully from our Chapter 11 proceedings.

We can provide no assurance that we will be able to secure additional interim financing or exit financing sufficient to meet our liquidity needs. Our liquidity, including our ability to meet our ongoing operational obligations, is dependent upon, among other things: (i) our ability to comply with the terms and conditions of the cash management order entered by the bankruptcy court in connection with our Chapter 11 proceedings, (ii) our ability to maintain adequate cash on hand, (iii) our ability to generate cash flow from operations, which depends largely on factors beyond our control relating to developments deriving from the spread of COVID-19, (iv) our ability to confirm and consummate a Chapter 11 plan of reorganization and (v) the cost, duration and outcome of the Chapter 11 proceedings.

Any Chapter 11 plan of reorganization that we may implement will be based in large part upon assumptions and analyses developed by us. If these assumptions and analyses prove to be incorrect, our plan may be unsuccessful in its execution.

Any plan of reorganization we may implement could affect our capital structure and operation of our business and will reflect assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we consider appropriate under the circumstances. Whether actual future results and developments will be consistent with our expectations and assumptions depends on a number of factors, including but not limited to: (i) our ability to change substantially our capital structure, (ii) our ability to obtain adequate liquidity and access financing sources, (iii) our ability to maintain customers’ confidence in our viability as a going concern, (iv) our ability to retain key employees and (v) the overall strength and stability of general macroeconomic conditions. In light of the many uncertainties and risks deriving from developments relating to the spread of COVID-19, these factors and their effect on us are highly unpredictable.

In addition, any Chapter 11 plan of reorganization will rely upon financial projections that are necessarily speculative, and it is likely that one or more of the assumptions and estimates that are the basis of these financial forecasts will not be accurate. In our case, the forecasts will be even more speculative than normal because of the many uncertainties we face relating to macroeconomic conditions in the countries in which we operate, depressed demand for air travel and severe travel restrictions imposed by governments, all as a result of developments relating to the spread of COVID-19. Accordingly, we expect that our actual financial condition and results of operations will differ, perhaps materially, from what we have anticipated. Consequently, there can be no assurance that the results or developments contemplated by any plan of reorganization we may implement will occur or, even if they do occur, that they will have the anticipated effects on us or our business or operations. The failure of any such results or developments to materialize as anticipated could materially and adversely affect the successful execution of any plan of reorganization.

Even if a Chapter 11 plan of reorganization is consummated, we may not be able to achieve our stated goals and continue as a going concern.

Even if a Chapter 11 plan of reorganization is consummated, we will continue to face a number of risks, including further depressed demand for air travel and challenging economic conditions as a result of developments relating to the spread of COVID-19 or otherwise. Accordingly, we cannot guarantee that a Chapter 11 plan of reorganization will achieve our stated goals and permit us to effectively implement our strategy.

Furthermore, even if our debts are reduced or discharged through a plan of reorganization, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of our Chapter 11 proceedings. Our access to additional financing is, and for the foreseeable future will likely continue to be, limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms.

Our Chapter 11 proceedings may adversely affect our ability to maintain important relationships with creditors, customers, suppliers, employees and other personnel and counterparties, which could materially and adversely affect us.

Our Chapter 11 proceedings may adversely affect our commercial relationships and our ability to negotiate favorable terms with important stakeholders and counterparties. Further, public perception of our continued viability may also adversely affect our relationships with customers and their loyalty to us. Strains in any of these relationships could materially and adversely affect us.

Risks Relating to Our Business

Developments relating to the outbreak of COVID-19 have already materially and adversely affected, and may further materially and adversely affect, us.

In December 2019, cases of COVID-19 were first reported in Wuhan, China, and the virus has now spread globally. The World Health Organization declared COVID-19 a pandemic and, in March 2020, governments around the world, including those of the United States, Colombia and most Latin American countries, declared states of emergency in their respective jurisdictions and implemented measures to halt the spread of the virus, including enhanced screenings, quarantine requirements and severe travel restrictions.

Following orders by the governments of Colombia and of other countries in which we operate, we have temporarily ceased international passenger operations to and from Colombia, ceased all Colombian domestic passenger flight operations and cancelled all passenger flights to and within Peru, El Salvador and Ecuador. As a result of these measures, substantially all of our passenger flights have been cancelled and our corresponding fleet has been grounded.

The spread of COVID-19 and the government measures taken to address it have already had a material and adverse effect on the airline industry and on us and have resulted in unprecedented revenue and demand drop as well as overall macroeconomic uncertainty. We cannot foresee or quantify the extent of the impact of COVID-19 on our operational and financial performance, which will depend on developments relating to the spread of the outbreak, the duration and extent of quarantine measures and travel restrictions and the impact on overall demand for air travel, all of which are highly uncertain and cannot be predicted.

For information on the measures we have taken in response to developments relating to the spread of COVID-19, see “Item 4. Information on the Company—B. Business Overview—Recent Developments—Developments Relating to COVID-19.”

BRW has pledged its common shares of Avianca Holdings to secure its obligations under the United Loan Agreement. BRW is in breach of certain provisions of the United Loan and United has commenced the exercise of remedies against BRW and its holding company, BRW Holding.

On November 9, 2018, under the terms of the United Loan Agreement, BRW pledged to Wilmington Trust, as collateral agent for the benefit of United, 78.1% of our common shares (the “BRW Pledged Shares”), among other assets, as security for BRW’s obligations under the United Loan Agreement. In addition, on November 9, 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.

Following defaults by BRW under the United Loan Agreement, United accelerated the United Loan Agreement and, on May 24, 2019, commenced the exercise of remedies against BRW and BRW Holding. Pursuant to the terms of the United Loan Agreement, United appointed Kingsland as the Independent Third Party entitled to exercise voting control over BRW and, as a result, BRW Holding (and, indirectly, Synergy) lost the right to direct the manner in which BRW votes the BRW Pledged Shares. Through its ownership of our common shares and its authority as manager of BRW (with the right to direct the voting of the BRW Pledged Shares), Kingsland assumed voting control over Avianca Holdings. Subsequently, on May 24, 2019, certain members of our board of directors, including José Efromovich and Germán Efromovich, were replaced.

While economic ownership of the BRW Pledged Shares has not been transferred, future enforcement actions may include Kingsland and/or United taking steps to enforce the share pledge and ultimately foreclose on the BRW Pledged Shares, resulting in a sale of Avianca Holdings to a third party. Unless such sale or transfer is made to United or Kingsland, this change of control could constitute an event of default under several of our financing agreements, including material bilateral and multi-lender credit facilities, our senior notes and all of our ECA financings covering a substantial portion of our aircraft fleet, unless a waiver is obtained from the relevant creditors. While we have secured waivers of such change of control events of default relating to certain possible purchasers of our equity from certain of our creditors, there are a number of different definitions of change of control in our financing agreements, and any future determination of whether a change of control has occurred may be a complex assessment and may not be without doubt. In addition, if United forecloses on the BRW Pledged Shares and Avianca Holdings is sold, this may, in certain circumstances, result in the right of Advent International (“Advent”) (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, which would represent a material obligation.

As of the date of this annual report, creditor claims regarding defaults under our payment obligations and other covenants are subject to developments relating to our Chapter 11 proceedings.

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 such shares. We cannot

assure you that, as a consequence of these arrangements, our current controlling shareholders will keep their majority stake and/or exclusive voting control in Avianca Holdings. Finally, we cannot assure you that BRW Holding will not regain voting control of the common shares of BRW.

In addition, any change in our or our subsidiaries’ control structure may jeopardize our designated carrier status that permits us to operate in certain countries, which could have a material adverse effect on us. Any change in our control structure may cause corresponding changes in relation to management and control decisions and could alter our shareholders’ objectives in a manner that is not favorable to holders of the ADSs.

If BRW Holding (and, indirectly, Synergy) prevails in its claim against Kingsland and United, and/or repays the amounts due under the United Loan Agreement, it could regain control of our common shares.

On May 28, 2019, Kingsland filed a complaint against BRW and BRW Holding seeking, among other things, to foreclose on the collateral under the United Loan Agreement. On July 29, 2019, BRW and BRW Holding filed a response to such complaint together with a counterclaim seeking, among other things, to dismiss Kingsland’s petitions and to recover its voting rights in Avianca Holdings, including the right to direct the voting of the BRW Pledged Shares. BRW also filed for an injunction impeding the stakeholder loan by United and Kingsland, which injunction was denied. Neither we nor our subsidiaries are party to these claims.

The outcome of the claim between Kingsland and BRW and BRW Holding is, as of the date of this annual report, uncertain. If BRW and BRW Holding were to prevail in their requests, BRW Holding (and, indirectly, Synergy) could regain control of our common shares, including the right to direct the manner in which BRW votes the BRW Pledged Shares. Likewise, BRW Holding could, at any time, repay the amounts due under the United Loan Agreement and recover the ownership of our common shares and its voting rights.

If BRW Holding (and, indirectly, Synergy) recovers its rights to our common shares, it would become our controlling shareholder, with effective voting control, and would likely make significant changes to our board of directors and management. This voting control would give it the power to control certain actions that require shareholder approval under our articles of association, including approval of mergers and other business combinations and changes to our articles of association. This voting control could cause transactions to occur that might not be beneficial holders of the ADSs and could prevent transactions that would be beneficial to holders of the ADSs. In addition, BRW Holding would not be precluded from causing our direct parent company, Synergy, from selling the controlling interest in us to a third party. This could trigger a change of control that could ultimately constitute a default under certain of our financing facilities which could materially and adversely affect us.

The United Copa Transaction is subject to approvals, consents and clearances from regulatory authorities in multiple jurisdictions in North, Central and South America and could be subject to conditions that could prevent or materially affect its consummation and, if approved, we may not extract its full anticipated benefits.

In November 2018, Avianca entered into the United Copa Transaction to enhance our passenger and cargo services between the United States and 19 countries in Latin America. Under the expected partnership terms, we plan to share revenue, integrate services and coordinate pricing and schedules with United and Copa for service in these regions to align frequent flyer programs, coordinate flight schedules and improve airport facilities. There can be no assurances, however, that the United Copa Transaction will be consummated, as it remains, as of the date of this annual report, subject to regulatory approvals, consents and clearances in multiple jurisdictions, which will likely be delayed as a result of developments relating to the COVID-19 outbreak, or that, if consummated, unexpected transaction costs will not arise or that the full expected benefits of the transaction will materialize.

We have experienced recent ratings downgrades.

Major rating agencies, including Fitch Ratings (“Fitch”) and Standard & Poor’s Financial Services LLC (“S&P”), have recently downgraded our credit ratings, suggesting the likelihood that we will be able to repay our existing debt obligations has diminished. In June 2019, Fitch downgraded our credit rating from “B” to “B-” and reduced its outlook from stable to negative; in July 2019, Fitch further downgraded our credit rating to “RD” (restricted default) and removed the negative outlook; in December 2019, Fitch upgraded our credit rating to “CCC+”; and, on April 2, 2020, amid developments relating to the spread of COVID-19, Fitch downgraded our credit rating to “C,” followed by a subsequent downgrade in May 2020, following our filing for Chapter 11 proceedings, to “D.” In July 2019, S&P downgraded our credit rating from “CCC+” to “SD” (selective default); in December 2019, S&P upgraded our credit rating to “B-” with a stable outlook; and, in March 20, 2020, amid

developments relating to the spread of COVID-19, S&P downgraded our credit rating to “CCC,” followed by subsequent downgrades in May 2020 to “CCC-” and, following our filing for Chapter 11 proceedings, to “D.” A ratings downgrade may make it difficult for us to refinance our debt and may increase our interest expenses, which could adversely affect us.

We have significant indebtedness, fixed financing and other costs and our debt and lease financing agreements contain restrictive covenants and events of default that impose significant operating and financial restrictions on us.

As of December 31, 2019, we had $5,346.8 million of total debt outstanding and our interest expense in 2019 was $263.3 million. In addition, as of December 31, 2019, we had purchase agreements to acquire 110 aircraft to be delivered between 2020 and 2028. In January 2020, we amended certain of these purchase agreements to postpone aircraft deliveries initially scheduled for between 2020 and 2024 for delivery between 2025 and 2029. We expect to incur additional indebtedness in connection with these purchase obligations.

Our leverage may impair our ability to obtain additional financing for working capital, capital expenditures, acquisitions or other important needs or to do so on acceptable terms. In addition, we may be required to direct 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. Our leverage may also increase the possibility of an event of default under the financial and operating covenants contained in our debt instruments and limit 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 that are less leveraged.

Additionally, our debt and lease financing agreements contain restrictive covenants and events of default that impose significant operating and financial restrictions on us, including limitations on our ability to incur additional debt, create liens and make certain investments. As of the date of this annual report, creditor claims regarding defaults under our payment obligations and other covenants are subject to developments relating to our Chapter 11 proceedings.

We are subject to litigation that could materially and adversely affect us.

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 or on an exceptional basis. These proceedings may relate to civil, tax, labor, social security, regulatory or environmental matters and involve our customers, employees, 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 any 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 implementing our strategies and business plans, or that involve substantial amounts that have not been adequately provisioned, may materially and adversely affect us.

For more information on the material proceedings to which we are a party, see note 32 to our audited consolidated financial statements as of and for the year ended December 31, 2019, included elsewhere in this annual report.

Any violation or alleged violation of anti-corruption, anti-bribery, anti-money laundering and sanctions laws could adversely affect us.

We are subject to several anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977 (“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. 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 or applicable law, for which we may be ultimately held responsible. Any allegations or investigation relating to such violations may harm our reputation and adversely affect us.

Through our internal processes, we discovered a business practice whereby company employees, which may include members of our senior management, as well as certain members of our board of directors, provided “things of value,” which we currently believe to have been limited to free and discounted airline tickets and upgrades, to government employees in certain countries. We commenced an internal investigation and retained outside counsel and a forensic investigatory firm to determine whether this practice may have violated the FCPA or other potentially applicable anti-corruption laws. Based on our internal investigation to date, we have improved our policies and implemented additional controls designed to screen the recipients of tickets and to restrict the issuance of free or discounted tickets to government employees. On August 13, 2019, we voluntarily disclosed this investigation to both the U.S. Department of Justice and the SEC, and we are cooperating with both agencies. We also disclosed this investigation to the SFC and the Colombian Office of the Attorney General, and we are cooperating with them. In January 2020, our primary aircraft supplier Airbus entered into a settlement with authorities in France, the United Kingdom and the United States regarding corrupt business practices. Airbus’ settlement with French authorities references a possible request by an Avianca “senior executive” in 2014 for an irregular commission payment, which was ultimately not made. As a result of this development, we have voluntarily initiated an internal investigation to analyze our commercial relationship with Airbus and to determine if we have been the victim of any improper or illegal acts. We have disclosed this internal investigation to the U.S. Department of Justice and the SEC, as well as the Superintendency of Industry and Commerce and the Colombian Office of the Attorney General. We are cooperating with all agencies. Our internal investigations are not complete and we cannot predict the outcome of these internal investigations or what potential actions may be taken by the U.S. Department of Justice, the SEC or local regulators or officials. If it is found that these business practices violated the FCPA or other similar laws applicable to us, or we were at any time not in compliance with any other laws governing the conduct of our business, we could be subject to criminal and civil remedies, including sanctions, monetary penalties and regulatory actions, which could materially and adversely affect us.

In 2019, we became aware that we were subject to U.S. jurisdiction for purposes of certain U.S. sanctions laws and regulations administered by the Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury as a result of the November 2018 transfer by Synergy of approximately 78% of our voting common shares to BRW, a Delaware limited liability company wholly owned by Synergy. We engaged outside counsel and identified that our regularly scheduled commercial passenger flights between cities in Central and South America and Havana, Cuba and related Cuba operations may have constituted inadvertent violations of U.S. sanctions laws and regulations, specifically, of the U.S. Cuban Assets Control Regulations (the “CACR”). In September, October and November 2019, we submitted to OFAC a voluntary self-disclosure addressing these potential inadvertent violations. We no longer operate any flights to Cuba, nor do we maintain commercial activities in Cuba or sell any passenger or cargo tickets or other bookings involving Cuba (including via our codeshare and interline partners). We remain in the process of reimbursing certain passengers whose travel to Havana was canceled as a result of these measures. Furthermore, we have revised our loyalty processes and implemented action plans to block calls, freeze members’ accounts and stop new members’ enrollment that may come from OFAC sanctioned countries, including Cuba. In addition, and as a part of a new development, any access made or intended from an IP from sanctioned countries will be blocked and a message will be displayed with terms similar to: “this services/page is not available in your country”. OFAC countries will not appear as options for “residence address” or “mailing address” upon enrollment of new members. We have also issued written cancellations of all our contracts involving Cuban counterparties.

If our new aircraft are not delivered or placed into service on time and on competitive terms, or if new aircraft do not perform as expected, we may be adversely affected.

We have entered into aircraft purchase agreements and our fleet plan depends on the timely delivery of these aircraft, which is subject to several uncertainties, including production restraints of our suppliers, unexpected safety or other operational problems that could cause aircraft to be grounded, as has happened with Boeing MAX aircraft operated by other airlines, and our ability to obtain necessary aircraft financing.

Even if our new aircraft are delivered on time, any difficulties or delays in obtaining necessary certifications from regulatory authorities, registration of the aircraft or parts and other buyer-furnished equipment (such as in-flight entertainment systems), or any non-compliance of the new aircraft and their components with agreed specifications and performance standards, may materially and adversely affect us. For example, due to an industry-wide issue in 2018 and 2019 relating to Rolls Royce engines used on the Boeing 787 fleet, we experienced periods of unavailability of our Boeing 787 aircraft pending engine maintenance by Rolls Royce, which caused us to incur unanticipated costs.

Further, we may experience difficulties in integrating 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. Any failure to integrate newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some of our existing leased aircraft, which may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs.

As of the date of this annual report, claims regarding defaults under our lease payment obligations and other

covenants are subject to developments relating to our Chapter 11 proceedings.

Our maintenance costs will increase as our fleet ages, and we would be adversely affected due to unplanned stoppages related to maintenance.

As of December 31, 2019, our operating fleet had an average age of 7.81 years; our jet passenger operating fleet had an average age of 7.33 years; our cargo fleet had an average age of 16.45 years; and our turboprop operating fleet had an average age of 5.60 years. If our fleet ages and is not replaced or the warranties covering our fleet expire and are not renewed, we expect our maintenance expenses to increase significantly, both on an absolute basis and as a percentage of our operating expenses. Any significant increase in maintenance and repair expenses would adversely affect us.

Unplanned stoppages or suspensions of operations associated with planned or unplanned maintenance due to mechanical issues, including, for example, any design defect or mechanical problem that would cause our aircraft to be grounded during repair, would adversely affect our operation. We cannot assure you that we would succeed in obtaining all aircraft and parts to solve any defect or mechanical problem, or that we would do so in a timely manner, or that we would succeed in solving any defect or mechanical problem, which could result in a suspension of the operations of certain of our aircraft, potentially for a prolonged period of time, and could adversely affect us.

We depend on our strategic alliances and our commercial partnerships, such as our Star Alliance membership, in many countries where we operate in order to carry out our strategy. We would be adversely affected if any of our strategic alliances or commercial relationships were to terminate.

In many of the jurisdictions where we operate, we have found it in our interest to maintain a number of alliances and other commercial partnerships. We depend on these alliances and commercial partnerships 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 partnerships, in particular with Star Alliance or its members, deteriorates, or are terminated, we would be adversely affected.

We are a party to codeshare agreements with various international air carriers, which provide that certain flight segments operated by us are held out as our codeshare partners’ flights, as the case may be, and that certain of our codeshare 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 these codeshare partners’ flights, as the case may be, and vice versa. We receive revenue from flights sold under these codeshare agreements. In addition, we believe that these 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 could also be adversely affected by the actions of one of our codeshare partners, for example, in the event of nonperformance of material obligations or misconduct, which could potentially result in us incurring liabilities, or poor delivery of services by one of our codeshare partners, which could adversely affect our brand and customer perceptions.

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 which LifeMiles has co-branded credit card and miles conversion agreements) for a significant portion of its gross billings. A decrease in miles sold to one of LifeMiles’ key business 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 one of these key partners to not participate in the LifeMiles program could adversely affect us.

Most agreements with LifeMiles’ business partners, other than Avianca, have terms of up to seven years and may be terminated or renewed under same or different terms when they expire. For example, co-branded credit card agreements with financial services companies typically have five to seven-year terms. Agreements with other business partners often have 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 materially and adversely affect LifeMiles and, consequently, us.

We do not exercise control or influence over the commercial policy of several of LifeMiles’ partners. Some partners 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 demand for and revenue generated by LifeMiles’. 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 program sector, which in turn may reduce the demand for miles, increase downward pressure on the average price of miles and adversely affect 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 its partners, LifeMiles and we may be adversely affected.

Any interruption, destruction or loss of data in our information technology systems, including at LifeMiles, due to cyberattacks could materially and adversely affect us.

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 unauthorized access to personal or sensitive 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, any of which may adversely affect us. We are not fully compliant with the latest PCI-DSS standards, and the banks processing our payment card transactions have imposed monthly fines until we come into full compliance. Until we come into full compliance, the banks may impose additional fines, increase processing fees, terminate our ability to accept payment card transactions or hold us liable for losses that may arise from any breach of payment card information stored by us.

Like other large multinational corporations, we have experienced cybersecurity incidents. These incidents have not had a material impact on our operations, but we cannot assure that we will not experience additional incidents that may materially and adversely affect us.

We rely on automated systems to operate our business, and any failure of these systems could adversely affect us.

We rely on automated systems and technology to operate our business, enhance customer service and reduce operating expenses. The performance and reliability of our automated systems and data center infrastructure 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 computerized airline reservation system, and website 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. We may be adversely affected if we fail to operate, replace or upgrade our automated systems or data center infrastructure.

In certain cases, we rely on third-party providers of automated systems and data center infrastructure, including for technical support. If these providers were to fail to adequately provide technical support for any one of our automated systems or if new or updated components were not integrated smoothly, we could experience service disruptions, which could result in the loss of important data. 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 failures in our automated systems could impact customer service and ticket sales. We cannot assure you that the security and disaster recovery measures and change control procedures we have implemented are adequate to prevent failures that could materially and adversely affect us.

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

LifeMiles derives most of its revenues 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 uses cash generated by the sale of miles to pay for redemption costs, and maintains 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 it and us.

LifeMiles’ main operating expenses relate to the purchase of rewards, particularly airline tickets, in order to satisfy the redemption of miles by 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 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 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 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 aircraft fleet. However, as a result of this strategy, we are increasingly reliant on a small group of suppliers—Airbus and Boeing—and are thus vulnerable to problems associated with these suppliers, including, among others, in relation to design defects, mechanical problems, contractual performance, adverse public perceptions and regulatory actions. Supplier concentration risks also extend to the engines that power our aircraft.

If any of Airbus or Boeing or the manufacturers of the engines that power aircraft manufactured by 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 alternative suppliers. If we have to lease or purchase aircraft from another supplier, we could lose the efficiency and other benefits we derive from our simplified aircraft fleet. We cannot assure you that any replacement aircraft would have the same operating advantages as the Airbus or Boeing aircraft that we operate 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. We may also be adversely affected by the failure or inability of Airbus or Boeing or the manufacturers of our engines to provide sufficient parts or related support services on a timely basis.

We would be materially and adversely affected 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 issues with some of our TRENT 1000 engines of our Boeing B787 fleet, which led us to preemptively ground and fix one of our Dreamliners. Operation of our aircraft could be suspended or restricted by regulatory authorities in the event of any actual or perceived mechanical or design problems. We would also be adversely affected 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 aircraft could result in accidents leading to the loss of life of passengers and third parties and damage to third-party property. In 2018 and 2019, the Boeing 737MAX suffered two fatal accidents within six months and the aircraft has been widely grounded around the world. We do not have any Boeing 737MAX aircraft in our fleet or on order. If any of the types of aircraft we operate are subject to grounding, we would be materially and adversely affected. Airlines that operate a more diversified fleet are better positioned than we are to manage these types of events.

In the context of our Chapter 11 proceedings, certain of our agreements with suppliers may be rejected.

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

We are highly dependent on our operations at our hubs in Bogotá and El Salvador, and will become increasingly dependent on our Bogotá hub as we streamline our network. Many of our routes operate through these hubs, which accounted for approximately 79% of our daily arrivals and departures in 2019 (with Bogotá accounting for 61%). 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 to continuing flights.

As our operations become increasingly focused around our Bogotá hub, we will have to address challenges related to El Dorado International Airport, which faces significant traffic congestion due to the lack of capacity in ground and air operations. The reduced number of terminal parking stands and the recurring adverse weather conditions affect airport capacity and, consequently, our operations.

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 where we operate. Limited parking positions and infrastructure challenges are among the risks we face in trying to improve our operations at our hub airports and at other airports where we operate. Airport-related challenges inconvenience passengers, reduce aircraft utilization and increase costs, all of which adversely affect us.

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 information technology systems or the information 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. 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 information technology systems we use to process our accounting transactions. Accordingly, adjustments may be required during the phase-in period.

We cannot assure you that information technology failures will not occur as a result of the ongoing implementation of new systems. Challenges 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 information technology failures could adversely affect 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 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 services, including for 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 agreements with suppliers and third-party contractors are subject to termination on short notice. In some cases, we would have to pay penalties for terminating contracts on short notice. Our suppliers and third-party contractors may also terminate agreements on short notice. Termination of these agreements or our inability to renew these agreements or to negotiate new agreements with other suppliers and third-party contractors at comparable rates could adversely affect us. Further, our reliance on suppliers and third-party contractors limits our control over the costs, efficiency, timeliness and quality of those supplies and services. We expect to remain dependent on suppliers and third-party contractors for the foreseeable future. In the context of our Chapter 11 proceedings, certain of our agreements with suppliers and third-party contractors may be rejected.

We may be materially and adversely affected in the event of an accident or major incident involving our aircraft or aircraft of the types we operate or if our aircraft are grounded for any reason.

An accident or major incident involving 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 lease agreements to carry liability insurance. We believe the coverage and conditions set forth in our liability insurance policies are in accordance with the practice for international airlines and comply with the requirements of the aviation authorities in the countries where we operate. However, the liability insurance coverage we maintain may not be adequate and we may be forced to bear substantial losses in the event of an accident or major incident. Our insurance premiums may also increase significantly. Moreover, any accident or major incident involving our aircraft, even if fully insured, or the aircraft of any major airline, especially if aircraft of the types we operate, could cause negative public perceptions about us, our aircraft or the air transportation generally, due to safety concerns or other problems, whether real or perceived, which would adversely affect us. Safety concerns relating to our aircraft may cause us to ground our aircraft and, because our fleet plan has been streamlined by reducing the number of aircraft and fleet types we operate, these groundings may affect us more than our competitors that operate a more diverse fleet.

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

We are required to comply with the drug trafficking laws of Colombia, the United States and the European Union, among other countries, and are subject to substantial government oversight in connection with the enforcement of these 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, which 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, we cannot assure you that the counterparties with whom we do business will not be subject to or will comply with these regulations, in which case such counterparty might face severe sanctions and be unable to perform under their agreements with us.

We cannot assure you that we will succeed in complying at all times with these laws. In the event, that we fail to comply with any U.S. or other foreign international drug trafficking laws, we may be subject to severe sanctions, fines, seizures of our aircraft or the cancellation of our flights, any of which could materially and adversely affect us.

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 operating personnel. In some of the countries in which we operate, there is a shortage of qualified pilots and maintenance technicians or other operating personnel we have faced turnover of skilled employees, many of whom have left us to work in countries where compensation is higher, requiring us to attract new skilled employees.

Should the turnover of skilled employees (particularly pilots and maintenance technicians) increase, our training expenses would increase. We cannot assure you that we will be able to recruit, train and retain the managers, pilots, maintenance technicians and other operating employees that we need to continue our operations or replace departing employees, which could adversely affect us.

Increases in labor benefits, union disputes, strikes and other labor-related disturbances may adversely affect us.

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 regarding salary and labor allowances and the conditions of collective bargaining agreements that, individually or in the aggregate, could adversely affect us. We have been affected by these types of instabilities in the past and we cannot assure you that these instabilities will not occur again.

Many of our employees are members of labor unions, and we may be adversely affected if we fail to maintain harmonious relationships with these labor unions, which could lead to strikes, work stoppages or other labor disruptions by employees. Given that the majority of our operations is in Colombia, we are highly and particularly sensitive to labor disruptions affecting the Colombian market.

In addition, our personnel costs may increase significantly as a result of our renegotiation of collective bargaining agreements. If we are not able to pass these increased costs onto our customers through inflation-based price increases, or if we breach any of the collective bargaining agreements we are party to, we may be materially and adversely affected.

See “Business—Employees—Collective Bargaining Agreements” for further information regarding our collective bargaining agreements and relations with employees.

If we are unable to attract customers to our website and make direct ticket sales, our revenue would be adversely affected.

Direct ticket sales through our website, which represented 23.9% of our passenger revenue in 2019 and, over recent years, have represented a growing proportion of our total sales, represent our lowest cost distribution channel. 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 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 mobile app and generally increase our online presence; however, we cannot guarantee these efforts and marketing campaigns will be effective, which would adversely affect us.

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

Our business strategy includes continually growing our stream of passenger related revenue from our portfolio of ancillary products and services, which represented 4.8%, 4.0% and 3.4% of our total passenger revenue in 2019, 2018 and 2017, respectively. 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, which could adversely affect us.

If we are unable to protect our intellectual property rights, specifically our trademarks and trade names, we could be adversely affected.

We own the rights to certain trademarks and trade names used in connection with our business, including “Avianca” and “LifeMiles.” We believe that our trademarks, trade names 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 where we operate. Any violation of our intellectual property rights or refusal to grant record of such rights in foreign jurisdictions may result in measures to protect these rights through litigation or otherwise, which could be expensive and time consuming. As of the date of this annual report, our intellectual property rights, including the Avianca brand, are pledged to creditors. If we fail to adequately protect our intellectual property rights, we could be adversely affected.

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, could materially and 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 this trend, it is possible that the airports we rely on will impose, or further increase, passenger taxes and airport charges. To the extent we are unable to pass these costs onto our customers in the form of increased fares, we would be adversely affected.

Certain airports that we serve 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 operate in a manner consistent with our business strategy. It is also possible that airports not currently subject to capacity constraints may become so. In addition, we must use our slots on a regular and timely basis and, in some cases, comply with certain on-time performance requirements, or risk having those slots re-allocated to other airlines. 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, especially our hubs, we may be materially and 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, and other airports may adopt similar restrictions, which may adversely affect our operations.

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 (“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. Our contributions to CAXDAC are segregated into a separate account that is restricted for the payments of retirement benefits to our employees. Amounts in the common CAXDAC fund used to pay 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 benefits 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. Our obligation to make contributions to CAXDAC will terminate once we transfer the full value of actuarial calculation, which, under Colombian law, should occur by the end of 2023.

Risks Relating to the Airline Industry

The outbreak or the threat of an outbreak of a contagious disease has already and may further materially and adversely affect 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, influenza and, most recently, COVID-19 can materially and adversely affect the airline industry and our business. First, the disease may affect the health of our crew and operations personnel, impairing normal flight operations. Second, aircraft use may be affected by passengers with contagious diseases or by government measures to avoid the spread of contagious diseases, and may be grounded until the health and safety of passengers and crew can be guaranteed. Third, the disease may adversely affect demand for air travel, adversely affecting passenger flow and, consequently, us.

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 our loyalty program LifeMiles also faces competition. 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, offer more attractive services or increase their route capacity in an effort to obtain greater market share.

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 support or tax waivers. This support could place us at a competitive disadvantage and adversely affect us.

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. 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 provide assurance that an increase in competition faced by LifeMiles will not have an adverse effect on LifeMiles or, consequently, us. 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, we could be adversely affected.

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

Low-cost carrier business models have gained momentum in the Latin American aviation market, particularly as challenging macroeconomic conditions in Latin America persist and affect consumer purchasing power. The successes of VivaAir Group and Wingo in Colombia, GOL Linhas Aéreas and Azul in Brazil, Interjet, Viva Aerobus and Volaris in Mexico, JetSMART in Chile and Flybondi in Argentina are evidence of this trend.

Low-cost carriers’ operations are typically characterized by point-to-point route networks focused 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 this 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 us and 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 airlines and consolidation in the industry.

The global airline industry has been shifting to increasing acceptance of liberalized and “open skies” air transport agreements between nations. “Open skies” agreements exist between the countries of the European Union, and between Europe and the United States. In Latin America, multilateral “open skies” agreements exist between Colombia, Ecuador, Peru and Bolivia and bilateral “open skies” agreements between each of these countries and the United States. These agreements serve to reduce (or, in the case of “open skies,” eliminate) restrictions on route rights, designated carriers, aircraft capacity or flight frequencies and promote competitive pricing.

We expect that governmental authorities will continue to liberalize 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 increase in the numbers of market participants. As a result of this liberalization, we could face substantial new competition, which may erode our pricing and market share and have a material adverse effect

on us. For example, it is likely that the Colombian government will eventually liberalize the current restrictions on international travel to and from our Bogotá hub by, among other things, granting new route rights and flights to competing airlines and generally promoting an increase in market participants on the routes we serve.

In addition, consolidation in the Latin American airline industry, including by means of joint business agreements between airlines and acquisitions, including, for example, Delta’s acquisition of 20% of LATAM Airlines Group (“LATAM”) in 2019, may allow our competitors to increase their scale, diversity and financial strength. 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, which could materially and adversely affect us.

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 23.3%, 26.0% and 22.3%, respectively, of our operating expenses in 2019, 2018 and 2017. 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. 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. We cannot predict the price and future availability of fuel with any degree of certainty, and significant increases in fuel prices may affect our operating results and otherwise harm our business.

We cannot assure you that fuel costs will not increase significantly and 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. In addition, when fuel prices decrease, we may be exposed to losses on our hedge contracts, which can partially offset savings in fuel expenses. 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 maintain two fuel sources in Bogotá. Since August 2018, 80% of our fuel is provided by Organización Terpel S.A. and Chevron provides 20% of our fuel.

Our aircraft fuel purchase agreements do not protect us against price increases or guarantee the availability of fuel and termination of our fuel purchase agreements would require 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, we would be adversely affected. Our fuel risk in Colombia is intensified to the extent that Ecopetrol S.A. (Colombia’s government-controlled oil company) experiences any disruption or slowdown in its fuel production or pumping capacity. In such event, we or our suppliers may be unable to obtain fuel or may be forced to pay significantly higher prices. 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, including relating to safety assessments by regulators such as the FAA, or any non-compliance on our part, may adversely affect us.

Our business is highly regulated and substantially depends upon the regulatory environment in the countries in which we operate. For example, price controls on fares may limit our ability to effectively apply customer segmentation profit maximization techniques, which use passenger demand forecasts and fare mix optimization, and adjust prices to reflect cost pressures. Government regulation may limit the scope of our operations and may impose significant costs on us. As of December 31, 2019, 79.0% of our total fleet was U.S.-registered. The U.S. Federal Aviation Administration (“FAA”) and the European Aviation Safety Agency (“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. Additional regulations applicable to our operations continue to be regularly implemented by various U.S. and European agencies, including the U.S. Transportation Safety Administration (“TSA”), the U.S. Drug Enforcement Agency and the EASA. We cannot predict or control any actions that the civil aviation and consumer protection authorities or other aviation regulators may take, which could include restricting our operations or imposing new and costly regulations.

Additionally, we may be affected by governmental safety assessments. For example, 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 countries in which we have hubs. The FAA periodically audits aviation regulatory authorities and each country is given an International Aviation Safety Assessment (“IASA”) rating. The IASA rating of each of Colombia, Peru, El Salvador and Ecuador is currently “Category 1,” which means that each such country complies with the International Civil Aviation Organization (“ICAO”) safety requirements. As a result, we may continue our service from our hubs in these countries to the United States and take part in reciprocal code-sharing arrangements with U.S. carriers. However, any of these ratings may be downgraded for a variety of safety and other reasons and we have no control over compliance by the civil aviation authorities of these or other countries with international safety standards. In the case of a downgrade, we will not be able to offer flights to any new destinations in the United States or certify 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. This could materially and adversely affect our service to the United States and, consequently, us.

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 if governmental authorities deny permission to us to provide service to domestic and international destinations, we 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, or suspension or revocation of our permission to operate in certain airports or destinations or the imposition of other sanctions, could have a material adverse effect on us. 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 routes, airports or operations may also materially and adversely affect us. 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.

Certain bilateral air transport agreements, including agreements with the United States, the United Kingdom and Brazil, require 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 certain bilateral agreements that include the substantial ownership and effective control requirement. Our route and landing rights in a number of important countries and, consequently, we may be adversely affected to the extent of such non-compliance. See “Item 4. Information on the Company—B. Business Overview—Regulation.”

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 air emissions, noise levels, discharges to surface and subsurface waters, safe drinking water and the management of hazardous substances, oils and waste materials. Any non-compliance may subject us to administrative and criminal sanctions, in addition to the obligation to repair or to pay damages caused to the environment and third parties.

The proliferation of national regulations and taxes on carbon dioxide emissions in the countries in which we operate, and compliance with environmental regulations generally, could increase our costs. Failure to comply with any environmental regulations and licensing requirements could adversely affect us, including by suspension or revocation of operating authorizations. 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.

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 a 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 comprising 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. Revenues 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 and, therefore, a relatively small change in the number of passengers, fare pricing or traffic mix could have a significant effect on our operating and financial results.

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 aircraft lease and financing payments, and (iii) have a limited ability to plan for, or react to, changes in our business, the industry 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 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. These delays could disrupt of our operating performance, leading to customer dissatisfaction due to delayed or cancelled flights and missed connections which could in turn adversely affect us.

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

Any terrorist attack or threat of attack, 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 materially and adversely affected the airline industry. Airline traffic in the United States fell dramatically and airlines experienced increased costs resulting from additional security measures that may become more rigorous. 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. Certain aviation insurance could become unaffordable, 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 adversely affect us.

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 operate.

Passenger demand is heavily cyclical and highly dependent on global and local economic growth, economic and political expectations and foreign exchange rate variations. A significant portion of our revenue derives from discretionary travel and leisure travel, which are especially sensitive to economic downturns. Additionally, any perceived downturn in the economic conditions in the Andean region or Central America could adversely affect our ability to obtain financing to meet our future capital needs in international capital markets. Changes in economic or other governmental policies, including relating to interest rates, exchange rates, exchange controls, inflation rates, taxation, banking, labor and pension funds, regulatory, legal or administrative practices, expropriation measures, political instability or other economic or political developments in the countries in which we operate could materially and adversely affect us. The governments of Colombia, Peru, Ecuador and Central America 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 these countries, including us. We cannot predict what policies the governments in these countries will adopt and consequently cannot assure you that future developments in government policies or in the economies of these countries will not adversely affect us.

Rates of inflation in the countries in which we operate have historically been 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 reduce consumers’ purchasing power or lead governments to institute certain anti-inflationary policies, such as increased interest rates. Inflationary pressures may adversely affect us.

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

Our performance is heavily dependent on economic and political conditions in Colombia, as our operations in Colombia represented 51% of our total revenue in 2019. Economic growth or contractions, 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, adversely affect us.

Colombia’s central government fiscal deficit and growing public debt could adversely affect the Colombian economy. Colombian’s fiscal deficit was 2.4% of gross domestic product (“GDP”) in 2019, 2.4% of GDP in 2018 and 2.3% of GDP in 2017. According to the projections published in December 2019 by the Ministry of Finance and Public Credit, the Colombian government expected a fiscal deficit of 2.4% of GDP for the year 2020. The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. President Iván Duque Márquez, who took office in August 2018, inherited high government spending levels, and measures to meet fiscal targets led to protests around the country in late 2019 and early 2020, paralyzing activities in the main cities in Colombia for days. We 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 adversely affect the Colombian economy and, consequently, us.

In March 2017, Fitch Ratings (“Fitch”) upgraded Colombia’s rating outlook 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 would meet the Colombian Central Bank’s target. Fitch reaffirmed the “stable” outlook in May 2017. In December 2017, S&P downgraded Colombia’s long-term foreign currency sovereign credit ratings from “BBB” to “BBB-.” In February 2018, Moody’s Corporation (“Moody’s”) changed Colombia’s rating outlook from stable to negative. In April 2020, amid developments relating to the spread of COVID-19 and the collapse of oil prices, S&P changed the outlook of Colombia’s credit rating to negative and Fitch downgraded Colombia’s credit rating from “BBB” to “BBB-” with a negative outlook.

Any further downgrade of Colombia’s credit rating could adversely affect the Colombian economy and us. In 2017 and 2019, tax reforms were implemented, which included raising the VAT rate from 16% to 19%, increasing the withholding income tax rate for foreign providers from 15% to 20% and introducing further taxation in the context of the indirect transfer of shares of Colombian entities.

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 there is currently no deposit requirement, we cannot predict or control actions by the Central Bank in respect of deposit requirements. 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 was COP 3,277.14 per $1.00, COP 3,249.75 per $1.00 and COP 2,984.00 per $1.00 as of December 31, 2019, 2018 and 2017. As of May 31, 2020, the exchange rate was COP 3,718.82 per $1.00, which represents a depreciation of 13.5% of the Colombian peso against the U.S. dollar in the first five months of 2020. 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.

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

El Salvador has a political history marked by long periods of civil unrest and military rule. From 1979 to 1991, El Salvador was involved in guerrilla activities, which ended with a peace agreement signed in January 1992. The Nationalist Republican Alliance Party (“ARENA”) controlled the presidency from 1989 to 2009, at which time the Farabundo Martí National Liberation Front (“FMLN”), a former guerrilla organization now turned into a political party, won the presidential elections with Mauricio Funes. Salvador Sánchez Cerén, also a member of the FMLN, was elected president by a narrow margin, beginning his term in June 2014. The FMLN ruled continuously for 10 years.

In June 2019, Nayib Armando Bukele Ortez, a former member of the FMLN until his removal, assumed the presidency. He is the first president since the end of the civil war who is not a member of ARENA or FMLN. He faces challenges relating to national security, primarily from gang-related crimes.

In February 2020, President Bukele initiated a political crisis when he instructed the military to march into parliament to demand a loan of $109 million to address national security.

El Salvador’s unemployment and poverty rates remain high. Despite reforms and initiatives, El Salvador ranks among the ten poorest countries in Latin America and suffers from deep income inequality. We cannot assure you that El Salvador will not face political, economic or social problems, and we may be seriously affected by these problems. El Salvador’s GDP grew 2.5%, 2.5% and 2.3% in 2019, 2018 and 2017, respectively, according to the Central Reserve Bank, which estimates that GDP growth will be 1.5% in 2020.

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

The Ecuadorian economy is heavily dependent on the oil industry and global fluctuations in oil prices. While Ecuador’s GDP grew (0.5)%, 1.4% and 2.4% in 2019, 2018 and 2017, it faces an extreme poverty level estimated at 8.9% in 2019, according to the Ecuadorian National Center of Statistics. Ecuadorian exports, denominated in dollars, have lost competitiveness due to the currency depreciation of other Latin American export economies, leaving Ecuador’s economy more dependent on internal demand, which is adversely affected by poverty levels and unemployment rates.

Lenin Moreno was elected president in April 2017, representing the first change in administration since January 2007.

President Moreno has presented initiatives with the goal of reducing sovereign debt by privatizing certain state-owned companies and seeking new financings to service existing debt. He has faced growing civil discontent and has been pushed to withdraw certain of his policies in order to prevent further civil uprising.

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 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. Further, crises in world financial markets, such as in 2008, as well as global economic challenges as of the date of this annual report deriving from the outbreak of the coronavirus and government measures to contain it, could affect investors’ views of securities issued by companies that operate in emerging markets. These developments could also make it more difficult for us and our subsidiaries to access the capital markets and finance our operations on acceptable terms, or at all.

Natural disasters in the countries in which we operate could disrupt our operations and adversely affect us.

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 sometimes result in severe flooding and mudslides. El Salvador and Peru have experienced significant earthquakes. 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 operations. Volcanic ash clouds not only affect airport operations, but also the route conditions of flights operating near the affected zone.

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 operations, 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 us. 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.

Fluctuations in foreign exchange rates and restrictions on currency exchange could adversely affect us.

The currency used by us is the U.S. dollar in terms of setting prices for our services and presenting our financial statements. We sell most of our services in U.S. dollars or prices 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 2019, 75.1% of our costs and expenses and 79.8% 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 Colombian peso and the U.S. dollar or other currencies in the countries in which we operate may adversely affect us. In particular, when our non-U.S. dollar-denominated revenue exceeds 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 these amounts will convert into less U.S. dollars. 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 expenses and liabilities are denominated in Colombian pesos. At times when the Colombian peso appreciates against the U.S. dollar, the value of these expenses and liabilities will increase in U.S. dollar terms, resulting in an increase in our non-operating expenses. Our $24.2 million currency exchange loss in 2019 was principally the result of exchange rate variations in the currencies of Colombia, Argentina and Brazil and we remain subject to exchange rate variations that may adversely affect us.

Variations in interest rates may adversely affect us.

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 (“LIBOR”). Any increase in inflation or other macroeconomic pressures may lead to increases in these rates. As of December 31, 2019, we had $925.4 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 us.

The U.K. Financial Conduct Authority announced in July 2017 that it intends to no longer compel banks to submit rates for the calculation of the London interbank offered rate, or LIBOR, after 2021. To mitigate any possible impact, various regulators have proposed alternative reference rates. As of December 31, 2019, we had $202.2 million of LIBOR-indexed variable rate leases terminating after 2021. We cannot predict the effect of any discontinuation or replacement of the LIBOR at this time and, consequently, we cannot assure you that these changes will not have an adverse effect on us. In the context of our Chapter 11 proceedings, we will evaluate possible amendments to certain LIBOR-indexed financing agreements.

Risks Relating to the ADSs and our Preferred Shares

Because our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on holders of the ADSs or our preferred shares, trading in the ADSs or our preferred shares during the pendency of our Chapter 11 proceedings is highly speculative and poses substantial risks.

Our post-bankruptcy capital structure will be set pursuant to a reorganization plan that requires approval by the bankruptcy court. The reorganization of our capital structure may include exchanges of new equity securities for existing equity securities or of debt securities for equity securities, which would dilute any value of our existing equity securities, or may provide for all existing equity interests in us to be extinguished. In this case, amounts invested by holders of the ADSs or our preferred shares will not be recoverable and these securities will have no value.

As a result of our Chapter 11 proceedings, the New York Stock Exchange (the “NYSE”) applied to the SEC on May 27, 2020 in order to delist the ADSs. As of the date of this annual report, the ADSs are traded in the over-the-counter market, which is a less liquid market. There can be no assurance that the ADSs will continue to trade in the over-the-counter market or that any public market for the ADSs will exist in the future, whether broker-dealers will continue to provide public quotes of the ADSs, whether the trading volume of the ADSs will be sufficient to provide for an efficient trading market, whether quotes for the ADSs may be blocked in the future or that we will be able to relist the ADSs on a securities exchange.

Trading prices of the ADSs or our preferred shares bear no relationship to the actual recovery, if any, by their holders in the context of our Chapter 11 proceedings. Due to these and other risks described in this annual report, trading in the ADSs or our preferred shares during the pendency of our Chapter 11 proceedings poses substantial risks and we urge extreme caution with respect to existing and future investments in these securities.

BRW, Kingsland 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 and holders of the ADSs.

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

•

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

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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;

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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;

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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;

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any action or omission which would cause Avianca Holdings 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);

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commencement of any bankruptcy or insolvency proceeding; and

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dissolution or liquidation of a material subsidiary of Avianca Holdings.

In addition, pursuant to the Share Rights Agreement, if United notifies the other parties thereto that (i) 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 will 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 the ADSs.

Furthermore, we 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 an ADS holder. 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 the ADSs (see “—Risks Relating to our Business—BRW has pledged its common shares of Avianca Holdings to secure its obligations under the United Loan Agreement. BRW is in breach of certain provisions of the United Loan and if United has commenced the exercise of remedies against BRW and its holding company, BRW Holding.”

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

Our controlling shareholders beneficially own almost all of our outstanding common shares. As a result, our controlling shareholders have the ability to determine the outcome of substantially all matters submitted for a vote to our shareholders and thus exercise control over our business policies and affairs, including the composition of our board of directors and, as a result, any determinations of our board with respect to our business direction and policy, including the appointment and removal of our executive officers, determinations with respect to mergers, acquisitions and other transactions, including those that may result in a change of control, sales and dispositions of our assets and the amount of debt financing that we incur.

Our controlling shareholders 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 these actions or from causing different actions to be taken. We cannot assure you that our controlling shareholders will act in a manner consistent with your best interests. Since May 24, 2019, one of our common shareholders, Kingsland, has been appointed as the managing member of our other common shareholder, BRW, as a result of which Kingsland currently exercises voting control over almost all of our common stock.

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, 2019, BRW, our controlling shareholder, owned 78.1% of our voting common shares, representing 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 the ADSs could drop significantly if our controlling shareholder (or other large holders of our shares) were to dispose of a significant amount of our shares or the ADSs (including the sale of the BRW 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.

In the context of enforcement actions by United, potential transfers of BRW Pledged Shares to United and one or more third parties could result in a change of control. 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 materially and adversely affect us.

Holders of the ADSs have more limited rights than holders of our preferred shares and may encounter difficulties in exercising certain rights.

Holders of the ADSs may encounter difficulties in exercising certain 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, 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 the ADSs may not receive voting materials in time to instruct the depositary to vote the preferred shares underlying the ADSs. Also, the depositary and its agents are not responsible for failing to carry out voting instructions of the holders of the 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 the 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.

The 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 the 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, may constitute an exchange control violation and/or may result in a fine.

Our shareholders and the ADS holders are limited in their ability to receive cash dividends.

Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. Our bylaws 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 is a dividend policy that provides for the payment of dividends of at least 15% of our annual consolidated net income, our 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. The distribution of 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 assure you 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 our 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 without first offering them to our existing preferred shareholders. We may sell common or preferred shares to persons other than our existing preferred shareholders at a lower price than that of the preferred shares traded as ADSs in the over-the-counter market and, as a result, you may experience substantial dilution of your interest in us.

We are a “controlled company” within the meaning of the NYSE corporate governance standards 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 NYSE 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 NYSE, including the requirements that a majority of the board of directors comprise independent directors, we have a nominating/corporate governance committee that entirely comprises independent directors with a written charter, and we have a compensation committee that entirely comprises independent directors with a written charter.

Accordingly, we do not provide the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NYSE.

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 the ADSs may find it difficult to enforce civil liabilities against us or our directors, officers and controlling shareholders.

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 shareholders reside outside of the United States, except for two members of our board of directors. In addition, substantially all our assets are located outside of the United States. As a result, it may be difficult for holders of the 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 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.

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.

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

Preferred shares represented by the ADSs are quoted in Colombian pesos on the Colombian Stock Exchange. Dividends and other distributions regarding our 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 an insolvency, 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 the ADSs may be limited if we become subject to an insolvency, bankruptcy, liquidation or similar proceeding in Panama.

Our ability to pay dividends may be limited if any of our operating subsidiaries becomes subject to insolvency, bankruptcy, liquidation or similar proceedings in their home jurisdictions.

Our ability to pay dividends may be limited if any of our operating subsidiaries becomes subject to insolvency, bankruptcy, liquidation or similar proceedings under the applicable laws of Colombia, the Bahamas, El Salvador, Costa Rica or Peru, as the case may be. These laws establish the events under which a company, its creditors or authorities may request a company’s admission to proceedings to reach an agreement with 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. Applicable law may limit our ability in these cases to pay dividends.

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 debt and pay dividends to holders of the ADSs depends on the generation of cash flow by our subsidiaries and their ability to make such cash available to us through dividends, debt repayment or otherwise.

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 provide funds to us, we may not be able to repay our debt or pay dividends to our shareholders, including holders of the ADSs. In 2020, our management proposed that dividends not be distributed considering our net loss in 2019, which proposal was approved at our annual shareholders’ meeting on March 27, 2020.

Item 4.

Information on the Company

A.	History and Development of the Company

Avianca Holdings

We are a holding company incorporated in Panama following the combination of Avianca and Taca in October 2009.

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. 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 ADSs representing our preferred shares on the NYSE. In April 2014, we issued $250 million in aggregate principal amount of additional 8.375% senior notes due 2020.

In November 2018, in anticipation of the United Copa Transaction, Synergy, then our controlling shareholder, transferred 489,200,000 of our common shares (corresponding to 74.0% of our total outstanding common shares and 48.9% of our total outstanding 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 our ultimate ownership structure. 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 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. BRW then transferred one common share to United.

Under the terms of the United Loan Agreement, BRW pledged to Wilmington Trust, as collateral agent for the benefit of United, 78.1% of our common shares, among other assets, as security for BRW’s obligations under the United Loan Agreement. In addition, on November 9, 2018, Kingsland pledged to Wilmington Trust, as collateral agent for the benefit of United, all of the common shares that it owns in us (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.

Following defaults by BRW under the United Loan Agreement, United accelerated the United Loan Agreement and, in May 2019, commenced the exercise of remedies against BRW and BRW Holding. Pursuant to the terms of the United Loan Agreement, United appointed Kingsland as the Independent Third Party entitled to exercise voting control over BRW and, as a result, BRW Holding (and, indirectly, Synergy) lost the right to direct the manner in which BRW votes the pledged shares. Through its ownership of our common shares and its authority as manager of BRW (with the right to direct the voting of the pledged shares), Kingsland assumed voting control over us. Subsequently, in May 2019, certain members of our board of directors, including José Efromovich and Germán Efromovich, were replaced by our current directors.

Avianca

Avianca is the second largest airline company in Latin America and the second oldest in the world and, in 2019, turned 100 years and is the longest continuously operating airline in the world.

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, Aerovías Nacionales de Colombia S.A. (“Avianca”), was incorporated in connection with the merger of SCADTA and SACO (Servicio Aéreo Colombiano). In 1963, Avianca acquired SAM S.A. (Sociedad Aeronáutica de Medellín), 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 (“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 Ecuador, formerly known as Aerogal, which 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. In the 1930s and 1940s, Taca expanded throughout Central America, including Costa Rica, El Salvador, Guatemala, Nicaragua and Panama. By the 1950s, its operations had 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 Trans American Airlines S.A., and added a hub in Lima, Peru.

Recent Acquisitions, Divestments and Strategic Alliances

Joint Venture with CAE International Holdings Limited and Subsequent Sale

In January 2019, we entered into an agreement to sell to CAE International Holdings Limited (“CAE Holdings”) and to Avianca-CAE Flight Training El Salvador S.A. de C.V. (“CAE El Salvador”), a worldwide leader in training for the civil aviation, defense, security and healthcare markets, our participation in Avianca-CAE Flight Training S.A.S. (renamed CAE Colombia Flight Training S.A.S. after the sale) (“Avianca CAE”), previously a joint venture with CAE Holdings for pilot training with flight simulators, which included the sale of certain of our assets in different jurisdictions and of all of our shares owned in Avianca CAE, as part of an exclusive 15-year commercial training services 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.

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

In April 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, for up to $11.7 million and variable earn-out consideration of up to $3.8 million. We consummated this sale in May 2019.

B.	Business Overview

We are the market leader in terms of passengers carried in the Colombian domestic market (the third largest domestic market in Latin America), and held a consolidated market share of 50.3% in 2019 according to the Curaçao Civil Aviation Authority (“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. 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. In 2019, we generated revenue and Adjusted EBITDA of $4,621.5 million and $511.3 million, respectively.

We operate an extensive route network from our strategically located hubs in Colombia and El Salvador and our focus markets of Guatemala and Ecuador. We offer passenger and cargo service through approximately 5,379 weekly scheduled flights to more than 76 destinations in over 27 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 2019, 2018 and 2017, we transported approximately 30.5 million, 30.6 million and 29.5 million passengers, respectively, and 602 thousand, 563 thousand and 566 thousand metric tons of cargo, respectively.

As of December 31, 2019, we operated a modern fleet of 156 aircraft (130 jet passenger aircraft, 15 turboprop passenger aircraft and 11 cargo aircraft), mainly from the Airbus family. Our fleet modernization initiatives increased our jet passenger fleet’s capacity and made our jet passenger operative fleet one of the youngest among Latin American airlines, with an average aircraft age of 7.33 years as of December 31, 2019. 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 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 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). In 2015, we sold a 30.0% stake in LifeMiles to Advent International. From 2011 to 2019, our LifeMiles loyalty program experienced a compound annual membership growth of 10.3%, increasing from approximately 4.4 million members as of December 31, 2011 to approximately 9.7 million members as of December 31, 2019. LifeMiles 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 which LifeMiles offers co-branded credit cards, we are the exclusive airline co-brand card partner. LifeMiles also maintains relationships with premier hotels, indirectly with major car rental companies, popular restaurants and other commercial establishments such as gas stations, supermarkets and leading apparel brands. As of December 31, 2019, LifeMiles had 586 active commercial partners.

In the recent past and under previous management, we incurred substantial leverage to increase our capacity, which ultimately outpaced demand in Colombia and our other principal markets, resulting in an unsustainable level of debt service. This situation culminated in the first half of 2019 in defaults under the United Loan Agreement by Synergy, which triggered cross-defaults under certain of our indebtedness and ratings downgrades in mid-May 2019 and July 2019. Additionally, the shutdown of Oceanair Linhas Aéreas S.A. (“Oceanair”), a Brazilian airline that had a license to use the trademark “Avianca,” and Avian Lineas Aereas S.A., an Argentinian airline that had a license to use the trademark “Avianca,” each of which is unaffiliated with us, also adversely affected our brand.

Upon default by our shareholder BRW under the United Loan, United enforced its remedies and exercised voting rights to implement new management. In July 2019, our new board of directors adopted a transformation plan, which we refer to as our “Avianca 2021” strategic plan, focused on profitability, operational efficiency, re-prioritized capital expenditures, strengthened balance sheet and divestment of non-core assets, and supported by our four key strengths: our strategically located Bogotá hub, our LifeMiles loyalty program, our respected brand with outstanding customer service and our membership in the Star Alliance network.

Our first objective, our board of directors appointed a new executive management team led by Mr. Anko van der Werff, as chief executive officer, and Mr. Adrian Neuhauser, as chief financial officer. Our board of directors redirected our strategy to focus on Bogotá as our primary strategic hub, as well as to focus on our overall

profitability and cost-efficiency, deleveraging our balance sheet and revising our aircraft fleet plans. As part of this strategy, we expect to continue our growth at a measured pace while reducing overall complexity in our fleet, network and corporate operations. We plan to address overcapacity through aircraft sales, which we expect will provide us with additional liquidity.

Our Avianca 2021 strategic plan also included our reprofiling plan, which comprised the extension of our capital markets debt, the incurrence of $375 million in additional convertible debt financings by our stakeholders and other financing parties and deferrals or other consents or waivers from creditors holding approximately $2,924 billion in debt, which refinancing plan we completed in January 2020.

Our Avianca 2021 strategic plan focuses on our key strengths, which we believe include our Bogotá hub, our LifeMiles loyalty program, our respected brand with outstanding customer service, our key strategic partners, including Kingsland and United, our membership in the Star Alliance network and, subject to regulatory approval, our joint business agreement with United and Copa (the “Joint Business Plan”). Through the Joint Business Plan, we, United and Copa, each members of the Star Alliance, plan to integrate our complementary networks and expect to offer our customers a broad portfolio of benefits. In addition to the United States, the Joint Business Plan is expected to cover certain operations in the following Latin American countries: Argentina, Belize, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guyana, French Guyana, Guatemala, Honduras, Nicaragua, Panama, Paraguay, Peru, Surinam, Uruguay and Venezuela.

We believe that the ownership and management changes described above, together with our ongoing implementation of our Avianca 2021 strategic plan, will be key components of our path to success. With our new independent directors and persons with significant airline industry experience, our new board of directors brings an enhanced level of corporate governance, which, along with our new executive leadership, will work to implement our strategic vision of right-sizing our operations and becoming a highly-focused and profitable airline.

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 (50.3% market share in 2019, according to data from CCAA) and also in the market for international passenger service within the Andean region and Central America, a region with approximately 164 million inhabitants as of December 31, 2019, 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.

A strong brand associated with a superior customer experience

We believe that our customers in our core Latin American markets associate the Avianca brand with superior customer service. 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 2019, we were recognized by TripAdvisor Travelers’ Choice Awards for Airlines as “Best passenger comfort in Latin America.” Kayak Awards elected us the best airline for “Best Comfort” and “Best Entertainment on Board” in Latin America. APEX Passenger Choice Awards elected us the “Best Regional Airline in South America” and “Airline with the Best Food and Drink” in the region. In addition, APEX recognized us as a five-star airline.

Our Bogotá hub-focused operations

Our Bogotá hub, in which we are the market leader with a customer share of 50.3% in 2019, is the core of our operations and provides coverage of Colombia’s large domestic market, which represented 49% of our total revenue in 2019. Through our membership in Star Alliance, the largest airline network in the world as of December 31, 2019 in terms of member airlines, daily flights, destinations and covered countries, our Bogotá hub supports our broad international network connecting South America, Central America, the Caribbean, North America and Europe. 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 while our Bogotá hub provides us with efficiency and streamlined operations. Upon regulatory approval, we expect our joint business agreement with United and Copa will offer our customers a broad portfolio of benefits.

World-class loyalty business

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. Our LifeMiles program has enhanced loyalty to Avianca with approximately 9.7 million members as of December 31, 2019. With 13 Freddie Awards, LifeMiles is one of the most awarded programs in the Americas since 2013 and is the only Latin American program to have won a Freddie Award since 2012. LifeMiles’ 586 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 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. As of December 31, 2019, approximately 700,000 co-branded credit cards were active. 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.” As of December 31, 2019, we held a 70.0% ownership stake in LifeMiles.

Strong corporate governance and experienced management

Following our changes in management, our corporate governance has been enhanced with a stronger board of directors representing decades of industry experience and experience in complementary fields. In mid-2019, our board of directors appointed our chief executive officer and chief financial officer, which bring proven track records and decades of experience in the airline industry and corporate finance, to establish our Avianca 2021 Plan and lead us to the next century of our operations.

Our Strategies

Our goal is to position our superior customer service and leverage our leadership position to take advantage of opportunities for profitability in the Latin American aviation market. 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 and we seek to create a culture that delivers an exceptional experience to our customers. 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 customer service strategy is based on engaging, training and rewarding dedicated personnel, implementing the latest technological platforms to improve our personnel’s productivity, providing high-quality operations and enhancing 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 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 increase our revenue through the consolidation of our operations and improvement of our revenue management practices. 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 by

increasing aircraft utilization through interchangeability of aircraft, optimizing crew planning and using our regional hubs more efficiently. As part of our Avianca 2021 Plan, we are focusing on our core airline operations and streamlining our network and our fleet plan. We have phased out certain aircraft and renegotiated our purchase agreements with aircraft suppliers as part of our focus on profitability above growth initiatives. We have also launched our regional airline “Regional Express Americas” and deployed our short-haul ATR aircraft 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. As of December 31, 2019, Regional Express Americas operated nine ATRs, mainly in the Colombian domestic market.

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 hub, 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 profitable growth opportunities. We align any growth initiatives in response to the prevailing macroeconomic environment, demand and other factors related to the primary markets we serve in order to maintain our profitability. In 2019, we cancelled 19 underperforming international routes and all domestic routes except the Cuzco-Lima route. These changes are examples of our strategy to optimize our network, reduce low-performance flights and prioritize our 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 profitable 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 and is subject to regulatory approval as well as potential acquisitions and strategic opportunities that would complement our operations. We expect that the Joint Business Agreement 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.

Expand our LifeMiles loyalty business 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 LifeMiles’ revenue growth by increasing the number of active members, increasing the accrual and redemption of miles per active member and strengthening the network of commercial partners that allow their customers to earn LifeMiles, including by developing new co-branded products and partnerships and similar initiatives with hotel chains, car rental companies, financial institutions, retail stores and other airlines. As we expand our commercial 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.

Recent Developments

Fleet Plan Optimization

In January 2020, we reached agreements with Airbus and BOC Aviation to optimize our fleet plan as part of our implementation of the Avianca 2021 Plan. We reduced our firm commitments with Airbus to 88 A320neo (from 108) for delivery in 2025 through 2028 (20 per year) and the remaining eight aircraft in 2029. We cancelled or deferred A320neo family deliveries in 2020 through 2024. We also entered into 12-year leases for up to 12 A320neo aircraft with BOC Aviation for deliveries after 2023. Additionally, in December 2019, we reached a mutually beneficial agreement with Boeing with regards to outstanding 787-9 deliveries and changed the delivery date for two aircraft from 2021 to 2024.

Additional Financing Facilities

In December 2019, we received a $250 million convertible secured stakeholder facility loan by United and an affiliate of Kingsland (the “Stakeholder Loan”).

In January 2020, we closed additional secured financing facilities for $125 million, which comprised (i) $50 million in aggregate principal amount of convertible loans, on substantially the same economic terms as

the Stakeholder Loan, from a group of Latin American investors, and (ii) $75 million in aggregate principal amount of commitments for senior secured convertible loans and bonds, which serve as a bridge financing to completion of a contemplated convertible bond offering to preferred shareholders (the “Incremental Bonds”), including (x) a commitment of $50 million from an investment vehicle managed by Citadel Advisors LLC for senior secured convertible notes and (y) a commitment of $25 million for senior secured convertible loans from another group of Latin American investors, on substantially the same economic terms as the Stakeholder Loan.

These additional financing facilities are secured mainly by pledges in the equity interests in group entities.

The lenders under the Stakeholder Loan and the additional financing facilities (i) are also subject to an intercreditor agreement governing the enforcement of the collateral securing financing and (ii) have been granted customary registration rights regarding the equity interests into which their financings are convertible.

Developments Relating to COVID-19

In December 2019, cases of COVID-19 were reported in Wuhan, China, and the virus has now spread globally. The World Health Organization declared COVID-19 a pandemic and, in March 2020, the U.S. and Colombian governments declared a state of emergency and implemented measures to halt the spread of the virus, including enhanced screenings, quarantine requirements and severe travel restrictions. The spread of COVID-19 and government measures to address it have already had a material and adverse effect on the airline industry and us and have resulted in unprecedented revenue, demand and overall macroeconomic uncertainty.

On March 13, 2020, we announced a temporary reduction of 30-40% in our capacity in order to manage the impact of reduced demand for air travel. Following the Colombian federal government’s announcement that it would close Colombian international airspace to passenger travel effective March 23, on March 19, we announced a further reduction in our capacity to cease international passenger operations for an initial period of 30 days and to cancel flights to and within Peru, El Salvador and Ecuador until the end of April. Following the Colombian federal government’s announcement that it would close Colombian airspace to passenger travel effective March 25, on March 24, we announced that we were temporarily ceasing all Colombian domestic flight operations. We have maintained our cargo, freight, charter and courier operations.

In addition to reducing capacity, in order to mitigate the effects of these developments, we implemented additional cost savings and liquidity preservation measures, including a suspension on hiring of new employees, implementation of voluntary unpaid leave of absence, which more than 14,000 employees have taken, and temporary deferral of labor contracts, non-essential expenses, capital expenditures, payments on long-term leases and payments of principal on certain financing obligations, as well as negotiations with key suppliers, strategic lenders and other creditors.

For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—The outbreak or the threat of an outbreak of a contagious disease has already and may further materially and adversely affect the airline industry.”

Chapter 11 Proceedings

On May 10, 2020, Avianca Holdings S.A. and certain of its affiliated entities filed voluntary petitions for chapter 11 relief under title 11 of the United States Code (11 U.S.C. § 101, et. seq.) with the United States Bankruptcy Court for the Southern District of New York, which cases are being jointly administered under Case No. 20-11133 (MG). For information on the risks and uncertainties associated with our Chapter 11 proceedings, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Chapter 11 Proceedings.”

Ongoing Government Discussions

Like many airline companies around the world, as of the date of this annual report, we are seeking financial support from the governments of the countries in which we operate. We have been and remain engaged in discussions with the government of Colombia, as well as those of our other key markets, regarding financing structures that would provide critical additional liquidity to support us during our Chapter 11 proceedings and play a vital role in ensuring that we emerge from our court-supervised reorganization as a competitive and successful carrier.

Going Concern and Financial Reporting in Reorganization

We have significant indebtedness. Our level of indebtedness has adversely affected and continues to adversely affect our financial condition. As a result of our financial condition, the defaults under our debt and other agreements, the risks and uncertainties surrounding our Chapter 11 proceedings and the impact on us of developments relating to the spread of COVID-19, substantial doubt exists regarding our ability to continue as a going concern. Accordingly, the audit report issued by our independent registered public accounting firm regarding our financial statements as of and for the year ended December 31, 2019 contains an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern.

Our audited consolidated financial statements included in this annual report have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities and commitments in the normal course of business. As such, our audited consolidated financial statements included in this annual report do not include any adjustments that might result from the outcome of our Chapter 11 proceedings. If we cannot continue as a going concern, adjustments to the carrying values and classification of our assets and liabilities and the reported amounts of income and expenses could be required and could be material.

Listing and Trading of the ADSs

As a result of our Chapter 11 proceedings, the NYSE applied to the SEC on May 27, 2020 in order to delist the ADSs. As of the date of this annual report, the ADSs are traded in the over-the-counter market.

Additionally, the Colombian Stock Exchange notified us that (i) as of May 26, 2020, our preferred shares would trade on the Colombian Stock Exchange by means of auction, (ii) our preferred shares continue to be ineligible for repo transactions and are inadmissible as collateral for margin calls in other types of transactions and (iii) as of May 11, 2020, no futures or options contracts in respect of our preferred shares may be entered into.

For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to the ADSs and our Preferred Shares—Because our post-bankruptcy capital structure is yet to be determined, and any changes to our capital structure may have a material adverse effect on holders of the ADSs or our preferred shares, trading in the ADSs or our preferred shares during the pendency of our Chapter 11 proceedings is highly speculative and poses substantial risks.”

Dissolution and Liquidation of Avianca Peru

On May 18, 2020, we announced to the market that, following a general shareholders’ meeting of Avianca Peru, the board of directors of Avianca Peru agreed to terminatee its operations and begin a voluntary dissolution and liquidation process under local Peruvian law in order to preserve and protect our businesses in the face of the COVID-19 crisis. In the future, we expect to continue to serve routes to and from Peru through our airlines in Colombia, El Salvador and Ecuador, once government flight restrictions permit us to do so.

Sources of Revenue

Our principal product is scheduled passenger air transportation. We target business travelers, which in 2019 represented 30% of our domestic and Latin American traffic. 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, as well as 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 comprise 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 third party carriers through our Avianca Services division, as well as service charges and ticket penalties. We also generate revenue from aircraft and property leases, marketing rebates, duty-free sales and charter flights.

Passenger Revenue

Our passenger revenue primarily comprises ticket sales, including revenue from redemption of miles under our LifeMiles loyalty program and ancillary revenue, which includes additional charges that are billed to passengers, such as fees for excess baggage, date, destination and name changes and special services relating to empty seats, unaccompanied minors and lounge passes.

Our passenger revenue represented 84.5%, 83.3% and 79.9% of our total revenue in 2019, 2018 and 2017, respectively.

Domestic Passenger Revenue

Domestic passenger revenue accounted for 51.2%, 49.1% and 53.5% of our total passenger revenue in 2019, 2018 and 2017, respectively. For accounting purposes, we consider flights to be domestic or international flights based on origin, not destination.

Colombia

Our Colombian domestic passenger revenue accounted for 89.1%, 86.5% and 84.2% of our total domestic passenger revenue in 2019, 2018 and 2017, respectively. In Colombia, in 2019, approximately 79% of our domestic passengers flew from or to Bogotá, 9% passed through Bogotá in transit to other points on our domestic route network and 12% were point-to-point travelers that did not travel to or through Bogotá. Bogotá is an important business center with a population of approximately 7.6 million, as are Medellín, Cali and Barranquilla with populations of approximately 2.5 million, 2.2 million and 1.2 million, respectively, as of December 31, 2019.

Peru

Our Peruvian domestic passenger revenue accounted for 3.6%, 6.9% and 8.8% of our total domestic passenger revenue for 2019, 2018 and 2017, respectively. As of April 2019, we repositioned our network strategy, reducing the services offered by our local subsidiary Avianca Peru within Peru’s domestic market. Pursuant to this strategy, we maintained only our route between Lima’s Jorge Chávez International Airport and the Alejandro Velasco Astete International Airport in Cusco, which is a popular tourist destination. Daily flights between Cusco and Bogotá were not affected by these plans. These network changes accompanied our strategy to prioritize profitability of our network and routes by reducing low-performance flights, ensuring that our network is optimized and redistributing the capacity released to meet the demand of customers within our key markets. As of the date of this annual report, Avianca Peru has initiated a voluntary dissolution and liquidation process. In the future, we expect to continue to serve routes to and from Peru through our airlines in Colombia, El Salvador and Ecuador, once government flight restrictions permit us to do so.

Ecuador

Our Ecuadorian domestic passenger revenue accounted for 7.3%, 6.7% and 7.0% of our total domestic passenger revenue in 2019, 2018 and 2017, respectively. As of December 31, 2019, we operated approximately 22 daily domestic flights on six routes.

International Passenger Revenue

We operate international routes through our airlines Avianca (Colombia), Taca International (El Salvador), Avianca Costa Rica S.A., Avianca Ecuador S.A. and Avianca Peru S.A. Two of our subsidiaries, Aviateca S.A. (Guatemala) and Taca de Honduras, operate their international routes through charter flights and wet leases with other of our subsidiaries.

International passenger revenue accounted for 48.8%, 50.9% and 46.5% of our total passenger revenue in 2019, 2018 and 2017, respectively.

Regional Operations in Central America

We operate regional routes in Central America through our regional airlines: Isleña de Inversiones S.A. de C.V.—Isleña (Honduras) and Aviateca S.A. (Guatemala). Passenger revenue from our regional operations in Central America accounted for 0.5%, 1.2% and 1.6% of our total passenger revenue in 2019, 2018 and 2017, respectively. In May 2019, we sold Aerotaxis La Costeña S.A. (Nicaragua) and Servicios Aéreos Nacionales S.A. (Costa Rica).

Route Network and Schedules

We operate 705 daily scheduled flights to 83 destinations in North America, Central America, South America and Europe. Our network combines strategically located hubs in Bogotá and San Salvador, 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 additional destinations worldwide through code-share arrangements with Aeroméxico, All Nippon Airways, Air China, Air India, Air Canada, Azul, Copa, Etihad, EVA Airways, GOL Linheas Aéreas, Iberia, Lufthansa, Silver Airways, Singapore Airlines, Turkish Airlines and United Airlines. Our membership in Star Alliance since 2012 increased the reach of our frequent flyer program, granting our clients access to more than 1,300 airports in 195 countries with 19,000 daily flights and more

than 1,000 VIP lounges throughout the world, as well as mileage accruals and redemptions with Star Alliance’s 26 carrier members. As part of our network streamlining and focus on profitability, in 2019, we cancelled 19 of our international routes and nine of our domestic routes.

We connect city pairs with lower passenger traffic through our hubs, which allows us to build density on our flights and 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 international connections at our hubs, we operate a morning bank, an evening bank and a midday bank of flights, with flights timed to arrive at the corresponding hub at approximately the same time and to depart a short time later. These banks allow us 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 sets forth the distribution of our passenger revenue generated in each region for the periods indicated (considering destination):


	Year ended December 31,
Region	2019			2018			2017
Domestic Colombia		23.0	%		23.9	%		23.1	%
Domestic Ecuador		1.9	%		1.8	%		1.9	%
Domestic Peru		0.9	%		1.9	%		2.4	%
Central America & Caribbean (non-regional)		7.7	%		7.7	%		8.0	%
Intra home markets⁽¹⁾		10.0	%		10.0	%		10.4	%
Europe		13.9	%		13.4	%		12.2	%
North America⁽²⁾		29.0	%		27.1	%		26.0	%
South America		13.5	%		14.0	%		15.8	%
Regional Central America		0.0	%		0.2	%		0.3	%
Total		100.0	%		100.0	%		100.0	%

The following table sets forth information regarding the number of revenue passengers we carried in each region for the periods indicated (considering destination):


	Year ended December 31,
	2019				2018				2017
Domestic Colombia		15,508,518	52.4	%		14,834,728	50.0	%		14,362,599	50.3	%
Domestic Ecuador		771,831	2.6	%		816,336	2.8	%		755,934	2.6	%
Domestic Peru		565,691	1.9	%		1,229,285	4.1	%		1,286,546	4.5	%
Central America & Caribbean (non-regional)		2,470,858	8.4	%		2,465,490	8.3	%		2,614,717	9.2	%
Intra home markets⁽¹⁾		2,490,331	8.4	%		2,470,950	8.3	%		2,393,106	8.4	%
Europe		1,068,212	3.6	%		1,000,977	3.4	%		872,231	3.1	%
North America⁽²⁾		4,576,741	15.5	%		4,375,928	14.7	%		3,896,495	13.6	%
South America		2,038,280	6.9	%		2,097,985	7.5	%		2,130,340	7.5	%
Regional Central America		89,563	0.3	%		258,097	0.9	%		262,481	0.9	%

Total		29,580,025	100.0	%		29,673,665	100.0	%		28,574,449	100.0	%

The following table sets forth ASKs (in millions) in each region for the periods indicated (considering destination):


	Year ended December 31,
Region	2019				2018				2017
Domestic Colombia		8,285	15.2	%		7,859	14.7	%		7,546	15.6	%
Domestic Ecuador		599	1.1	%		594	1.1	%		564	1.2	%
Domestic Peru		406	0.7	%		923	1.7	%		1,023	2.1	%
Central America & Caribbean (non-regional)		3,163	5.8	%		3,208	6.0	%		2,985	6.2	%
Intra home markets⁽¹⁾		5,275	9.7	%		5,149	9.7	%		5,146	10.6	%
Europe		10,554	19.4	%		9,780	18.3	%		8,439	17.4	%
North America⁽²⁾		17,179	31.6	%		16,226	30.4	%		13,916	28.8	%
South America		8,923	16.4	%		9,488	17.8	%		8,697	18.0	%
Regional Central America		25	0.0	%		82	0.2	%		85	0.2	%

Total		54,410	100.0	%		53,310	100.0	%		48,401	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 Schedules

Bogotá Hub

As of December 31, 2019, we operated approximately 3,279 weekly scheduled flights through our Bogotá hub to 25 destinations in Colombia, eight in North America, 12 in South America, 10 in Central America and the Caribbean and four in Europe. Unlike in 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.

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, 2019, we operated approximately 628 weekly scheduled flights through our San Salvador hub to 11 destinations in North America, four in South America and nine in Central America and the Caribbean.

San José

As of December 31, 2019, we operated approximately 139 weekly scheduled flights through our network in San José to two destinations 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.

Ecuador

We operate approximately 357 weekly scheduled flights through our network in Ecuador to six destinations in Ecuador, three in South America and one in Central America.

Regional Operations in Central America

We operate approximately 559 weekly scheduled regional flights to 15 destinations in Central America through Sansa Airlines (Costa Rica) and Isleña (Honduras).

Point-to-Point Service

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

Cargo and Courier Operations

In addition to our passenger transportation operations, we generate revenue from our cargo and courier transportation operations, primarily from the air transportation of goods, on an airport to airport basis, and other complementary services. In addition, we also generate cargo and courier revenues by domestic and international shipments of small parcels, on a door-to-door basis and with defined transit time commitments.

Cargo

Our cargo business operates on most of the route network of our passenger business as we are able to efficiently use the belly capacity of our passenger fleet. In addition, we strengthen our destination offering through 92 interline agreements with other airlines and we rely on freighter-only operations. We carry cargo for a variety of customers, including other international air carriers, freight-forwarding companies, export oriented companies and individual consumers. Our cargo business is operated by both Avianca Cargo and DEPRISA. In 2019, Avianca Cargo represented the largest cargo carrier in gross tons in Colombia, with 39.3% of market share according to Aeronautica Civil of Colombia. Additionally, Avianca Cargo ranked in the top three carriers of international freight in/out of Miami, with a 13.5% market share as stated in Miami International Airport’s Statistics.

Our international cargo operations are headquartered in Bogotá, and we also have significant cargo operations in Medellín and Miami. The United States accounts for the majority of our cargo traffic to and from Latin America. In Latin America, our cargo operations focus on Colombia, Ecuador, Peru, Brazil, Mexico, Argentina and Chile. We operate in/out of Europe through our passenger schedule services to Madrid, Barcelona, London and Munich and through our freighter service to Brussels. We also offer other destinations around the world through our block space, special prorate and commercial agreements.

Cargo flows are unidirectional. This characteristic is a key determinant in the structure of our cargo operations and especially relevant in markets featuring structural imbalances between inbound and outbound flows or during specific periods of disequilibrium. Lack of demand in one particular direction may force us to rely on different markets in order to maximize loads on return flights. In recent years, we believe we have successfully diversified our cargo business origins and destinations, creating a larger network that permits us to decrease regional dependence and maximize asset utilization.

In 2019, our cargo capacity in terms of ATKs increased 11.3% and our RTKs increased 12.1% as compared to 2018. This resulted in a 0.4 percentage point increase in our cargo load factor, from 57.3% in 2018 to 57.7% in 2019. According to IATA, the load factor in 2019 in the international and the total market was 51.8% and 46.7%, respectively. Our performance reflects our strategy of belly maximization and freighter schedule optimization.

The following table sets forth certain of our cargo operating statistics for domestic and international routes for the periods indicated:


	Year ended December 31,⁽¹⁾
	2019			2018			2017
Total ATKs (millions)		2,739			2,460			2,489
Total RTKs (millions)		1,579			1,409			1,420
Weight of cargo carried (thousands of tons)		602			563			566
Total cargo yield (cargo revenue/RTKs, in $)		0.32			0.39			0.34
Total cargo load factor		57.7	%		57.3	%		57.0	%

Courier

In addition to our cargo operations, we also offer domestic and international courier services. Under our DEPRISA brand, which is widely recognized throughout Colombia, we are committed to providing optimal logistics solutions in domestic and international delivery of documents, packages and other merchandise. DEPRISA is a significant player in the courier market with more than 225 sales branches in Colombia and more than 50 abroad, with 1,200 domestic destinations and 220 international destinations (as a result of Avianca Cargo’s alliance with UPS). DEPRISA offers a wide portfolio of products and superior delivery times, with premium service offering delivery in less than 24 hours and standard services ranging from 24 to 72 hours.

DEPRISA offers Avianca third-party logistics services complementary to transportation, such as storage, inventory control and global distribution of uniforms to employees.

Our courier revenue represented 1.3%, 1.3% and 1.4% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively.

LifeMiles Loyalty Business

We believe that our strong loyalty business enhances customer loyalty and brand recognition and is one of our key strengths in improving our profitability.

LifeMiles contributes to the strength of our primary business in key commercial markets and supports yields through miles-based voluntary up-sell incentives. LifeMiles generates revenue through the commercialization of miles, many of which we sell to banks. We have 25 co-branded credit card partner banks, and active mileage sales agreements with approximately 100 financial institutions.

LifeMiles’ expenses can be grouped into reward costs and overhead costs. Reward costs represent over 80% of LifeMiles’ cost base and the primary reward cost is airline tickets, in which LifeMiles is required to pay Avianca for tickets redeemed by LifeMiles’ members to fly on Avianca or any of its air partners. Other reward costs include hotel nights, rental cars, tours and merchandise via the LifeMiles rewards catalog and directly in our retail partners’ stores, among others. Overhead costs include, but are not limited to, investments in marketing, operational costs and information technology costs and salaries.

LifeMiles’ business model provides strong operating margins, positive working capital and minimal capital expenditure requirements, which provides a unique ability to gain scale quickly. This business model includes an attractive cash flow cycle, with cash inflows from the sale of miles well in advance of the cash outflows corresponding to the redemption of those miles, making it possible for LifeMiles to earn interest on its cash balance. In addition, LifeMiles’ unit costs are largely contracted with its main partners for extended periods, providing visibility and stability to a significant portion of its total costs and gross margins.

Since the program’s inception, LifeMiles members have generally demonstrated a willingness to pay higher average fares than those paid by non-members. We believe this is in part because of high customer satisfaction, increased passenger loyalty and because many of our business travelers, who frequently purchase more expensive, last-minute tickets, are typically also LifeMiles members. LifeMiles’ gross billings were $333 million, $354 million and $308 million in 2019, 2018 and 2017.

We believe that LifeMiles is a key strategic asset for us and plan to continue investing in its expansion and evaluating opportunities to further unlock its value.

The following table sets forth certain operating statistics for LifeMiles:


	Year ended December 31,
	2019		2018		2017
Gross billings (in millions of $)		333		354		308
Total members (in millions)		9.7		8.9		7.8
Active commercial partners (non-air)		586		515		335

The term of our agreement with LifeMiles is until 2040. This agreement includes, among other provisions, a 20-year exclusivity with LifeMiles as the provider and operator of the frequent flyer program of Avianca and a formula that complies with the applicable transfer pricing rules in each jurisdiction, to calculate (i) the price of miles sold from LifeMiles to Avianca (which, in turn, are used by Avianca to incentivize customer loyalty) and (ii) to determine the price paid by LifeMiles to Avianca for reward tickets (when a member of the LifeMiles program redeems miles for air services with Avianca).

Ancillary Services

We provide certain ancillary services that complement our passenger and cargo business and further diversify our sources of revenue. Revenue from ancillary services primarily comprises sales of LifeMiles program rewards to commercial partners and members of the program (net of the value of the underlying rewards which, when redeemed, are recognized as passenger revenue), air transport-related services such as maintenance, crew training and other airport services provided to third party carriers through our Avianca Services division, service charges, ticket penalties, aircraft and property leases, marketing rebates, duty-free sales and charter flights.

Revenue from ancillary services accounted for 3.2%, 4.0% and 7.7% of our total revenue for the years ended December 31, 2019, 2018 and 2017, respectively.

Seasonality

Our operating results fluctuate from quarter to quarter due to seasonality. This fluctuation is the result of high vacation and leisure demand occurring during the northern hemisphere’s summer season in the third quarter (principally in July and August) and during holidays in the fourth quarter (principally in December) and the southern hemisphere’s summer season in January. In addition, our first and second quarter results are influenced by whether Holy Week falls in March or April.

Strategic Partnerships, Alliances and Commercial Agreements

General

We have established strategic partnerships that allow us to improve our overall network, expand our international connectivity, offer more attractive benefits to our LifeMiles customers, enhance our brand and build customer loyalty and revenue. These strategic partnerships provide for commercial cooperation agreements, codeshare and interline arrangements, as well as marketing initiatives, loyalty program reciprocity or benefit sharing, enhanced service levels at airports and, potentially, equity or debt investments in us by our partners, or by us in our partners.

We are a member of Star Alliance, a global integrated airline network founded in 1997 and the largest and the most comprehensive airline alliance in the world. As of December 31, 2019, Star Alliance carriers served more than 1,300 airports in 195 countries with 19,000 daily flights. Additionally, our bilateral commercial alliances with other airlines enhance travel options for customers by providing better coverage to common destinations, additional mileage accrual and redemption opportunities and access to markets that we do not serve directly. These commercial alliances typically loyalty program reciprocity, code sharing of flight operations (whereby seats on one carrier’s selected flights can be marketed under the brand name of another carrier), coordination of passenger services, including ticketing, passenger check-in, baggage handling and passenger connection, and other resource-sharing activities.

We have interline agreements with approximately 80 airlines worldwide and 17 codeshare agreements to provide connections on the basis of a single ticket, paid in a single transaction and currency, usually with baggage checked through to final destinations and in some cases with boarding passes issued all the way through for all connecting flights. We have five intermodal agreements with Renfe trains in Spain, Great Western Railway in Britain, National Express intercity buses in Britain, OEBB trains in Austria and Deutsche Bahn coach and bus services in Germany.

These alliances enhance our network, providing more options, facilities and benefits to our customers and additional revenues to us.

United Copa Joint Business Arrangement

In November 2018, we entered into a three-way revenue-sharing joint business arrangement with United and Copa to effect 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 covers routes between the United States and Central and South America (excluding the Caribbean, Mexico and Brazil). The agreement allows us to share revenue, integrate services and coordinate pricing and schedules with United and Copa for service between the United States and Latin America. For more information, see “—A. History and Development of the Company—Recent Acquisitions, Divestments and Strategic Alliances.”

Pricing and Revenue Management

Our revenue management model is focused on effective pricing and yield management, which are closely linked to our route planning, and our sales and distribution methods.

We maintain revenue management policies and procedures that are intended to maximize total revenue, while keeping fares generally competitive with those of our major competitors. The fares and the number of seats we offer at each fare are determined by our proactive yield management system and are based on a continuous process of analysis and forecasting. Past booking history, load factors, seasonality, the effects of competition and current booking trends are used to forecast demand. Current fares and knowledge of upcoming events at destinations that will affect traffic volumes are also included in our forecasting model to arrive at optimal seat allocations for our fares on specific routes. We use a combination of approaches, taking into account yields and flight load factors, depending on the characteristics of the markets served, to design a strategy to achieve the maximum revenue by balancing the average fare charged against the corresponding effect on our load factors.

Our model of fare segmentation seeks to maximize revenue per seat through dynamic inventory adjustment depending on demand. By increasing price segmentation, we are able to ensure that we continue to attract and retain high-yield business traffic including last minute seat availability for late booking business travelers, which is integral to our revenue management, as well as leisure travelers who usually pay lower fares for tickets purchased in advance. We charge higher prices for tickets on higher-demand flights, tickets purchased on short notice and tickets for itineraries suggesting a passenger would be willing to pay a premium.

Sales and Distribution

We strive to maintain a sophisticated sales process and a multichannel strategy with extended customer reach. We sell our products through the following primary distribution channels: (i) our website, (ii) our mobile app, (iii) call centers, (iv) airport stations, (v) free-standing stores, (vi) direct agents and (vii) third parties such as travel agents, including through their websites. We strive to increase the share of more profitable corporate travel agencies and to increase e-commerce penetration, thereby bypassing more expensive distribution. Direct internet bookings by our customers represent our lowest cost distribution channel. In addition, 22.9% of all sales were generated by online channels in 2019, which creates significant cost savings for us. 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.

We intend to continue consolidating our global agreements with major corporations, aiming to become the preferred corporate carrier in Latin America, and continue working closely with tourism boards to drive growth for both leisure and corporate travelers.

Set forth below is key data with respect to our main sales distribution channels in 2019:

•

Ticket and ancillary sales through direct ticket offices (airport ticket offices and city ticket offices) in Colombia and abroad accounted for 6.1% of our sales.

•

Ticket and ancillary sales through our direct agents, which are third-party agents that work for us on an exclusive basis, accounted for 2.0% of our sales.

•

Ticket and ancillary sales through our linked call centers, which are located in Colombia and El Salvador and handle reservations and sales calls with a reliable 24/7 customer service model, accounted for 4.8% of our sales. These call centers are linked to Getcom and are dedicated as a direct sales channel.

•

Ticket and ancillary sales through our website portals and mobile app accounted for 22.6% of our sales.

•

Ticket and ancillary sales through indirect channels accounted for 64.1% of our sales.

Aircraft

Long-term Fleet Plan

As part of our Avianca 2021 Plan, we are streamlining our fleet in order to increase efficiency and have renegotiated our aircraft purchase orders to align with our business strategy.

In December 2019, we amended our agreements with Airbus and Muisca Aviation Limited to reassign one A320neo aircraft and we amended our agreements with Boeing and Valderrama Aviation Limited to reassign two B787-9 aircraft and postpone delivery from 2021 to 2024.

The following table sets forth our firm contractual deliveries scheduled as of March 31, 2020 through 2029:


Aircraft Type	2020		2021		2022		2023		2024		2025		2026		2027		2028		2029		Total
Boeing 787-9		—		—		—		—		2		—		—		—		—		—		2
Airbus A320neo		—		—		—		—		—		20		20		20		20		8		88
A320neo (BOC)		—		—		—		2		8		—		—		—		—		—		10

Total		—		—		—		2		10		20		20		20		20		8		100

In the context of our Chapter 11 proceedings, certain of these agreements may be rejected.

General

As of December 31, 2019, we operated a fleet comprising 156 aircraft (145 passenger aircraft and 11 cargo aircraft), 99 of which were owned, 56 of which were subject to long-term leases and one under a short-term wet lease. For our freight operations, as of December 31, 2019, we operated two 767F-200S, six Airbus A330F and three A300F. As of December 31, 2019, the average age of our operating passenger fleet was 7.33 years.

The following table sets forth the composition of our operating fleet as of December 31, 2019:


	Number of aircraft
	Total		Owned and finance leases		Operating leases		Average age (years)		Seating capacity
Jets
Airbus A319		15		11		4		11.41		120
Airbus A319S		10		10		—		5.07		120
Airbus A320		44		28		16		9.81		150
Airbus A320S		13		3		10		5.05		150
Airbus A320neo		10		3		7		1.27		153
Airbus A321		2		1		1		12.29		194
Airbus A321S		11		6		5		5.14		194
Airbus A321neo		2		—		2		2.26		195
Airbus A330		10		3		7		8.25		252
Boeing B787		13		8		5		3.76		250

	Number of aircraft
	Total		Owned and finance leases		Operating leases		Average age (years)		Seating capacity
Turboprop
ATR72		15		15		—		5.60		68
Cargo


Airbus A330F	6	6	—	6.20	60 tons
Airbus A300F	3	3	—	26.19	40 tons
Boeing 767-200	2	2	—	32.59	40 tons

Total	156	99	57

The following table sets forth the scheduled expirations of our aircraft leases as of December 31, 2019:


Aircraft Type	2020		2021		2022		2023		2024		2025		2026		2027		2028		2029		2030		2031		Total
Airbus A319		2		—		—		2		—		—		—		—		—		—		—		—		4
Airbus A320		2		1		2		—		4		7		—		—		—		—		—		—		16
Airbus A320S		—		—		—		1		2		4		2		1		—		—		—		—		10
Airbus A320neo		—		—		—		—		—		—		2		—		2		—		—		3		7
Airbus A321		—		1		—		—		—		—		—		—		—		—		—		—		1
Airbus A321S		—		—		—		1		—		—		4		—		—		—		—		—		5
Airbus A321neo		—		—		—		—		—		—		—		—		—		2		—		—		2
Airbus A330		1		1		—		1		2		2		—		—		—		—		—		—		7
Boeing B787-8		—		—		1		1		2		—		1		—		—		—		—		—		5
Boeing B787-9		—		—		—		—		—		—		—		—		—		1		—		—		1

Total		5		3		3		6		10		13		9		1		2		3		—		3		58

Our operating aircraft are subject to long-term leases, require monthly lease payments and have purchase options at the end of the lease. In addition, we have one aircraft under a short-term wet lease. We are generally responsible for the maintenance, servicing, insurance, repair and overhaul of our leased aircraft. Under some of our lease agreements, we are required to make supplemental rent payments to aircraft leasing companies as deposits to guarantee the performance of overhaul work on aircraft under lease and are disbursed to cover overhaul costs. These funds are refunded to us to pay for scheduled overhauls. We record these payments as deposits and other assets under current and non-current assets in our consolidated financial statements. We are required to return leased aircraft in an agreed upon condition at the end of the leases. In certain lease agreements, we have agreed to make an end-of-lease adjustment. The rates to calculate this adjustment are set forth in the relevant lease agreement.

Of the 113 operating aircraft that we own or finance through financial debt, 88.5% are financed through commercial bank financing and some of these aircraft are supported by ECA financing and others under a private placement vehicle through guaranteed notes and loans. The average rate of these financings was 4.31% as of December 31, 2019.

Maintenance

General

Aircraft maintenance, repair and overhaul are critical to the safety and comfort of our customers and the optimization of our fleet utilization.

Our maintenance facilities are located in Bogotá, Rionegro, Guatemala City and Lima and can perform line maintenance, heavy maintenance (except in Guatemala City), components maintenance, non-destructive tests and specialized services, which include scheduled and unscheduled aircraft maintenance checks, including pre-flight, daily and overnight checks, “A-checks” and any diagnostics and routine repairs, as well as heavy airframe checks, including “C-checks” and structural checks.

We provide line maintenance services at most of our local stations. In addition, at our Rionegro facility, we provide heavy and components maintenance for other carriers through our Avianca Services business unit. Heavy maintenance comprises more complex inspections and “C-checks,” as well as aircraft servicing that cannot be completed overnight. Maintenance checks are performed as prescribed by aircraft manufacturers and approved and certified by international aviation authorities. These checks are based on the number of hours flown or the number of take-offs or calendar days.

All major engine repairs and overhauls are conducted by certified outside maintenance providers, including GE, Pratt & Whitney, IAI and Rolls Royce.

As of December 31, 2019, we employed 3,415 maintenance professionals, including administrative staff engineers, supervisors, technicians and inspectors. Each of our certified maintenance professionals is trained in maintenance procedures, completes our in-house training program and is licensed by the local authorities of the relevant country and, in many cases, by the FAA.

Maintenance Hangars

We have seven maintenance hangars, two of which are in Bogotá (one that can accommodate wide body planes such as a Boeing 767 and one that can accommodate narrow body planes), three of which are at the Rionegro Airport, one of which is in Guatemala and one in El Salvador used for line maintenance. We provide third party maintenance in each of these hangars.

Certifications

Our satellite repair station in Bogotá, our principal repair station in Rionegro, and our Aviateca repair stations in Guatemala City, Lima and El Salvador have certifications that allow us to perform maintenance on aircraft in these countries.

We are subject to approximately 250 annual audits by the aviation authorities in each of the countries in which we operate (including self-audits), in order to ensure that our maintenance procedures comply with the best practices and standards in the industry.

Operational Training Center

We use an operational training center located close to Bogotá’s El Dorado International Airport for pilots, flight attendants and technicians, as well as for administrative employees. The student population is approximately 600 per day. The operational training center has four full-flight simulators for A320, A320neo A330, B787 and two bays available for growth, one which is prepared to receive another A320 simulator in 2020. These simulators are operated by CAE, an independent third party that leases the space and services of the operational training center to us for approximately $323,000 per month. Upon the conclusion of the lease agreement’s term in 2037, we have the option to repurchase the operational training center, which we sold to CAE in 2017.

Fuel

Aircraft fuel prices comprise a variable and a fixed component. The variable component is set by the fuel refinery, reflects international price fluctuations for oil and exchange rates and is re-set monthly in the Colombian market. The fixed component is a spread charged by the fuel supplier and is usually a fixed cost per liter during the term of the contract.

Fuel costs represented 23.4%, 26.0% and 22.3% of our operating expenses in 2019, 2018 and 2017, respectively.

The following tables set forth certain information regarding our fuel consumption for the periods indicated:


	Year ended December 31,
	2019		2018		2017
Average price per gallon of jet fuel into plane (net of hedge) (in dollars)		2.23		2.34		1.91
Gallons consumed (in thousands)		534.0		518,248		483,512

	Year ended December 31,
	2019		2018		2017
Average price per gallon of jet fuel into plane (net of hedge) (in dollars)		2.23		2.34		1.91


Gallons consumed (in thousands)	495,237	447,946	452,987
ASKs (in millions)	54,410	53,310	48,401
Gallons per ASK (in thousands)	9.1	9.2	9.4

Except for ASKs, data in the table does not include regional operations in Central America or cargo operations.

Our fuel distributors in Bogotá are Puma Energy and Terpel. Terpel supplied us with 85.1%, 85.0% and 98.0% of our fuel needs in Colombia in 2019, 2018 and 2017, respectively, and 38.0%, 37.0% and 42.6% of our total fuel consumption. While Terpel is our primary fuel supplier in Colombia, there are three additional suppliers in certain Colombian regional airports, which distribute approximately 15% of the remaining volume in the country. We have a fuel supply agreement with Puma Energy for our fuel needs in El Salvador. We also have a fuel supply agreement with Repsol Marketing S.A.C., pursuant to which Repsol Marketing S.A.C. supplied us 96.5% of our fuel needs in Peru in 2019. Our fuel supply contracts have terms until October 31, 2020.

For information on the volatility of fuel prices, see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—Volatility in our fuel costs or disruptions in our fuel supply would materially and adversely affect our operating results” “Item 11. Quantitative and Qualitative Disclosures About Market Risk—Fuel.” In order to protect ourselves against volatile fuel prices, we have entered into derivative futures, forwards or options contracts in the past and may do so again. We also may negotiate customized hedging products with fuel distributors. As of December 31, 2019, we had hedges in place for approximately 2.5% of our projected consumption for 2020 through derivative instruments.

Marketing, Customer Experience and Advertising and Promotional Activities

The Avianca brand represents our forward-looking vision and we strive to be the preferred Latin American airline of our customers. In furtherance of this objective, we seek to continuously improve the quality of our marketing based on knowledge of travelers’ preferences and building on our relationships with our communication partners. Our brand vision is based on our key values of effort, innovation, connection and the importance of quality service and customer experience.

Beginning in May 2013, Avianca became the sole, unified brand for all of our commercial airline operations. We seek to enhance customer experience by delivering high quality professional service and connecting to our customers emotionally. Moreover, we have worked on improving our communication effectiveness and integration with sales activities, which enable us to drive demand and strengthen brand loyalty while maintaining a strong emotional bond built upon Latin American and Colombian heritage in our core markets and to expand it globally to other countries in which we operate.

We strive to achieve the highest marketing impact at the lowest cost through efficient and effective marketing and advertising strategies with activities that include television, print, radio, billboards and digital media (including social media), as well as targeted public relations events in the cities to which we fly. As corporate travelers constitute an important segment of our clientele, representing 24.9% of our revenue in 2019, we promote our services to these customers by conveying the reliability, convenience and consistency of our services and offering value-added services such as convention and conference travel arrangements. We also target large Colombian and multinational corporations that do business in Colombia by offering rewards that may be used towards the purchase of Avianca tickets, upgrades, excess baggage fees and other services. As travelers’ habits evolve and the technologies they use change, we continuously adjust our marketing and advertising techniques and tools. We invest in innovative digital marketing tools to efficiently reach current and prospective customers and maximize our sales and returns.

Some of our promotional activities include (i) low fare promotions for domestic and international travel, pursuant to which special rates are available during certain time frames, (ii) travel packages that consist of airfare, hotel, car rental and activities bundles, (iii) “ancillaries promotions” to increase average spending of passengers on additional services such as upgrades to business cabin, additional luggage and preferential seats and (iv) network and destination promotional activities, based on our or third party budgets to increase demand to specific destinations (with low fares, activities of interest, hotels and tour operator alliances).

We seek to improve customer experience, cut costs, optimize decision-making, increase earnings and transform daily operation processes and activities through our digital innovations. Our goal is to increase revenue through

increased ticket sales through digital channels and, in so doing, enhance customer loyalty and engagement. We expect that better digital marketing management and e-commerce practices will increase our ancillary sales and we hope that our digitization efforts will reduce sales costs by migrating sales from commissioned channels to non-commissioned digital platforms, and by partially replacing call center support with less costly support through our digital channels.

In 2019, we were chosen as the airline with the “Best Comfort for the Passenger in Latin America” in the TripAdvisor Travelers Smart Choice Awards for Airlines. We were also awarded by Kayak Awards for the Best Airlines in the categories “Best Comfort” and “Best In-flight Entertainment” in Latin America, besides being chosen as one of the two best in the category “Best Airline” and “Best Food” in the region. In January 2020, the Airline Passenger Experience Association (“APEX”) awarded us as one of 13 five-star major airlines in the world and the best overall airline in South America.

Competition

General

We face intense competition on our domestic and international routes from competing airlines, charter airlines and potential new entrants 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.

The airline industry 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 airline competitiveness. See “Item 3. Key information—D. Risk Factors—Risks Relating to the Airline Industry—We operate in a highly competitive industry and actions by our competitors could adversely affect us.”

Low-cost carrier business models have been gaining market share in Latin America in recent years, particularly as challenging regional macroeconomic conditions persist and effect consumer purchasing power. The success of VivaAir Group and Wingo in Colombia, GOL Linhas Aéreas and Azul in Brazil, Viva Aerobus and Volaris in Mexico, JetSMART in Chile and Flybondi in Argentina are evidence of this 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 this service. However, as low-cost carriers continue to penetrate our markets, downward pressure on the fares we charge 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. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—We expect to face increasing competition from low-cost carriers offering discounted fares.”

Commercial Airlines

Domestic Competition in Colombia

In the domestic Colombian passenger market, we compete primarily with LATAM, VivaAir, EasyFly, Satena and Wingo. We are the largest carrier with a share of 50.3% of the domestic Colombian passenger market in 2019, according to data provided by the CCAA.

According to the CCAA, in 2019, the market share of our largest competitor, LATAM, was approximately 21.1%; VivaAir had approximately 15.6%; Wingo had approximately 1.5%; Easyfly had approximately 7.0%; and Satena (a government-owned regional carrier) had approximately 4.3%.

Domestic Competition in Ecuador

In the domestic Ecuadorian passenger market, we compete primarily with LATAM and Tame Airlines. As of December 31, 2019, we operated six routes to six destinations and in 2019 we had 23.9% of market share, while LATAM had 40.2% and Tame Airlines had 34.8%.

International

In the international passenger market, we compete with a number of airlines (full-service and low-cost carriers), including Aeroméxico, Aerolíneas Argentinas, Air Canada, Air Europa, American Airlines, Copa Airlines, Delta Air Lines, Iberia, Interjet, JetSmart, Jet Blue Airways, LATAM, GOL Linhas Aéreas, Sky Airline, Spirit Airlines, United Airlines, Viva Air, Volaris and Wingo.

The global airline industry has been adapting to an increase in liberalized or “open skies” air transport agreements between nations. “Open skies” air transport agreements exist between the countries of the European Union and between Europe and the United States; in Latin America, multilateral “open skies” agreements exist between Colombia, Ecuador, Peru and Bolivia and bilateral “open skies” agreements between some of these countries and the United States. 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.

As a result of this continuing trend toward liberalized or “open skies” air transport agreements, a number of countries to which we fly have been negotiating to further liberalize or provide more flexibility to their agreements, which may change to the competitive environment. It is likely that the Colombian government will eventually liberalize restrictions on international travel to and from our Bogotá 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. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—We face increasing competition from other international airlines due to the continuing liberalization of restrictions traditionally affecting airlines and consolidation in the industry.”

Cargo and Courier

Our main cargo network hubs are located at El Dorado Airport in Bogotá and at Miami’s international airport. With respect to our international cargo operations, our main competitor is LATAM and other competitors include Atlas Air, Sky Lease, UPS, Cargolux, Amerijet and American Airlines.

With respect to our domestic Colombian cargo operations, our main competitor is LATAM Cargo, which has large cargo operations at El Dorado Airport and provides similar coverage as us. In 2019, we were market leaders in domestic Colombian operations with 40.5% market share, according to Aeronáutica Civil data from December 2019.

The Colombian courier market is highly competitive and dispersed, largely due to the presence of informal and urban messenger players such as Rappi, Mensajeros Urbanos and Cabify Express. Our main competitors in the domestic Colombian courier market are Servientrega, Coordinadora, TCC, Envia and 4/72. DEPRISA also competes with FedEx, UPS and DHL in the international courier market.

LifeMiles

LifeMiles’ direct competitors in Latin America are other loyalty programs in the travel, retail banking and retail sectors. Each of the airlines that have a significant presence in our core markets have frequent flyer programs that compete with LifeMiles, maintaining co-branded credit card portfolios with a variety of banks throughout Latin America that compete with LifeMiles co-branded credit cards. LifeMiles’ main competitors include the loyalty programs of Latin American-based Copa Airlines and LATAM and major U.S. airlines such as American Airlines, Delta Air Lines and United Airlines.

In addition to airlines, a few major Latin American banks and retailers have established separate entities to own and manage loyalty programs, which remain relatively fragmented in our core markets and most of which are single proprietary in-house programs.

Bank loyalty programs have been growing on the back of strong partnerships with commercial partners other than airlines, leveraging well-established relationships to boost proprietary rewards credit card products.

The formal retail sector in our core markets is relatively concentrated and most major players have well-established customer loyalty programs that are embedded within their retail operations. In Colombia, Exito, the country’s largest retailer, has the Puntos Colombia loyalty program in partnership with Bancolombia. Similar to proprietary rewards credit card programs, we expect LifeMiles to compete and simultaneously partner with Puntos Colombia generating gross billings through miles conversion. We have similar arrangements with Bonus in Peru and other proprietary retail loyalty programs and service providers in the region. We compete with other key retailers including Olímpica, La 14, D1 and Jerónimo Martins in Colombia, Falabella, InRetail and Cencosud in Peru and Walmart in Central America.

Additionally, there are a variety of advertising agencies and marketing services companies that provide white-label loyalty program operations to companies in the region. These white-label loyalty marketing companies typically charge markups on redemptions, customer service fees, systems delivery costs and other ancillary services. They normally do not own the loyalty point liability and do not generate revenue for points that expire. White-label loyalty program operators work in a part of the market with lower barriers to entry and are generally small.

Safety

We are committed to the safety of our customers and ground and flight operations employees. In 2019, we implemented safety performance indicators to improve decision-making processes based on data. As part of this initiative, our flight operations implemented a flight data analysis software based on cloud services, our ground operations implemented a ground risk management program and our maintenance operations implemented a maintenance risk management program.

The effectiveness and relevance of our safety management system has been evaluated and validated by different civil aviation authorities in Central and South America and by different industry organizations such as IATA and Bureau Veritas, assuring that our guidelines and procedures are in compliance with the requirements established by ICAO and within the best industry practices.

Our airlines that are part of IATA have been implementing the IOSA and ISAGO standards since 2003 and have continuously achieved recertification.

The FAA periodically audits the civil aviation authorities of other countries, and each country is given an IASA rating and an IOSA audit implemented for the industry by IATA. The IASA rating for Colombia, El Salvador, Costa Rica and Peru is Category 1, which is the highest rating and indicates a strong level of confidence in the safety regulation of each country’s respective civil aviation authority.

We are an active member of IATA’s Safety Group, IATA’s Accident Classification Group, ALTA/IATA’s Safety Group (regional), Star Alliance, Safety Committee and the Colombian Safety Group.

We continuously invest in the safety training of our employees and, as part of our implementation of an operational safety culture program, in 2019, we partnered with IATA to conduct a survey on our operational safety culture.

Security

We are subject to the security regulations of each of the countries in which we operate.

Our security director reports to our safety, security, risks and compliance general director and works within the framework of the security management system designed by IATA. Our director of aviation and corporate security works closely with all areas to ensure regulatory compliance in security matters, as well as with authorities to identify and neutralize internal drug trafficking and money laundering related schemes.

As part of our security measures, we have (i) adopted a code of conduct that is signed by all employees (ii) adopted a hiring process that includes background checks, home visits, psychological evaluations, integrity tests and polygraph tests; (iii) implemented periodic dissemination of corporate security policies and communications of security matters to personnel; (iv) restructured procedures related to baggage, passenger identification, screening of transit passengers and inspection of baggage on United States-bound flights; (v) increased the level of supervision and training for security coordinators, increased the training for interviewers and increased the presence of security personnel in areas such as catering and baggage; (vi) increased the use of inspection technicians under the supervision of security agents and, as often as possible, the Colombian anti-narcotics police, to conduct detailed inspections of aircraft before departing to the United States; (vii) improved the training of x-ray operators; and (viii) implemented a response procedure for security incidents on flights to the United States, including investigations, depositions sanctions and polygraph tests for specific cases, including the creation of an internal investigations office with personnel and support from the Colombian police and judicial authorities.

We work with Central American, South American, European and U.S. authorities to implement interdiction measures, which, in 2019, resulted in the seizure of 965.7 kilograms of illegal substances our security operating procedures are periodically subject to internal and external audits. For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—We may incur substantial compliance costs and face sanctions if we fail to comply with U.S. and other international drug trafficking laws.”

Airport Facilities

Our operations are focused out of our hubs at Bogotá’s El Dorado International Airport and El Salvador’s International Airport. In 2019, we operated from 76 airports in the Americas and Europe, including 26 airports in Colombia. We lease check-in space, gates, crew lounges, maintenance, warehouses, sales and VIP lounge space throughout our network.

Colombia: El Dorado International Airport

In April 2018, we fully migrated our domestic operations to El Dorado International Airport which, in 2019, operated 219,114 domestic flights and 94,360 international flights. In 2019, we operated an average of 331 domestic flights and 125 international flights per day, representing approximately 78% of our Colombian domestic flights and approximately 45% of our total international flights that either departed from or arrived at El Dorado International Airport.

El Dorado International Airport is undergoing a multi-phase expansion plan and implementing additional infrastructure and technology enhancements intended to improve schedule punctuality as well as passenger and baggage connecting times. The airport has two runways with a combined capacity of 40 departures and 34 arrivals per hour (weather permitting). Night operations are subject to reduced capacity due to noise abatement procedures. The airport is located at a high altitude (approximately 2,600 meters above sea level), which, together with temperature conditions, result in payload restrictions and require lower takeoff weight as a result of reduced aircraft performance.

We lease airport space for our check-in counters, ticket sales facilities, VIP lounges and back office operations from OPAIN.

El Salvador: El Salvador International Airport Monseñor Oscar Arnulfo Romero y Galdámez

El Salvador International Airport is located approximately 41 kilometers from the country’s capital San Salvador. Avianca carried nearly 2.5 million passengers in El Salvador in 2019, 44% of which connected to one of our 24 destinations offered from this hub.

This airport comprises a single passenger terminal with 14 boarding bridges and nine remote positions, one cargo terminal and separate maintenance facilities. The El Salvadorian government is evaluating a plan that would significantly increase the number of gates and add a second runway. We are actively participating in the logistics and efforts to modernize the current terminal and are proactively contributing expertise in the development of the master plans for the construction of a new terminal. We are also participating in the governmental project to transform the areas next to the airport into an aeronautical cluster.

The El Salvador International Airport is government-owned and operated by an autonomous port authority entity, Comisión Ejecutiva Portuaria Autónoma (“CEPA”). We have entered into an operations contract with CEPA regarding access fees, landing rights and allocation of terminal gates. We lease airport space for our check-in counters, offices, warehouses and maintenance operations.

Insurance

We maintain insurance policies covering damage to our property and third-party liability, among other liabilities, with reputable insurance companies. We have obtained the insurance coverage required by the terms of our leasing and financing agreements and believe our insurance coverage is consistent with airline industry standards and appropriate to protect us from material loss in light of the activities we conduct. In 2019, we paid $24.5 million in insurance premiums and had a total insured value of $9.5 billion.

We have also contracted liability insurance with respect to our directors and officers.

Intellectual Property

We believe the Avianca brand is a household name in Colombia. We have registered the trademark Avianca with the trademark office in Colombia as well as in other countries, including the United States. Avianca Holdings is the owner of the figurative trademark while Avianca remains the owner of the nominative trademark. Both the figurative and the nominative trademark Avianca are used to identify, from a commercial standpoint, all or operating airlines. As discussed below, as of the date of this annual report, our intellectual property rights, including the Avianca brand, are pledged to creditors.

To identify our Colombian courier services, we use the DEPRISA trademark under a license agreement with our Panamanian subsidiary company, International Trade Marks Agency Inc. To identify international courier services from the United States to Colombia, we use the Avianca Express trademark under a license agreement; we also have a franchise agreement by which we use this trademark to commercialize courier services from Spain to some Andean countries. We began using the Avianca Cargo trademark to identify international cargo services provided by our subsidiary company Tampa Cargo and by the different airlines of Grupo Taca. We use the LifeMiles trademark, a registered trademark of our subsidiary LifeMiles Ltd., to identify our loyalty program. In 2019, we terminated our trademark agreements with Oceanair (which operated as Avianca Brasil) and with Avian Lineas Aereas S.A. in Argentina. As of the date of this annual report, we do not license our trademarks to any third parties.

In 2019, we registered the Avianca Express trademark in Colombia and licensed this trademark to our subsidiary Regional Express Americas S.A.S. to identify our regional air passenger transportation services.

Our obligations under our senior secured notes due 2023 are secured by, among other things, security interests in, and pledges or mortgages over, the following intellectual property rights:

(A) the Avianca trademark and variations thereof owned by Avianca;

(B) the Aerogal, Air Galapagos, Air Guayaquil, Galapagos Air and related trademarks owned by Avianca Ecuador S.A.;

(D) the Flybox trademark owned by Latin Logistics, LLC; and

(E) the Tampa, Tampa Cargo, Cargo Link, Aerolineas Tampa trademarks owned by Tampa Cargo S.A.S.

For more information on our intellectual property, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Business—If we are unable to protect our intellectual property rights, specifically our trademarks and trade names, we could be adversely affected.”

Regulation

Colombia

Overview

Avianca is a sociedad anónima organized and existing under the laws of Colombia. It is qualified to hold property and transact business as a sociedad anónima and holds all licenses, certificates and permits from governmental authorities necessary for the conduct of its business as now conducted. All consents, licenses, approvals, registration and authorizations as may be required in connection with providing carrier services under applicable Colombian laws have been obtained and are in full force.

Tampa Cargo is a sociedad por acciones simplificada organized and existing under the laws of Colombia. It is qualified to hold property and transact business as a sociedad por acciones simplificada and holds all licenses, certificates and permits from governmental authorities necessary for the conduct of its business as now conducted. All consents, licenses, approvals, registration and authorizations as may be required in connection with providing carrier services under applicable Colombian laws have been obtained and are in full force. Regional Express Américas S.A.S. is a sociedad por acciones simplificada organized and existing under the laws of Colombia. It is qualified to hold property and transact business as a sociedad por acciones simplificada and holds all licenses, certificates and permits from governmental authorities necessary for the conduct of its business as now conducted. All consents, licenses, approvals, registration and authorizations as may be required in connection with providing carrier services under applicable Colombian laws have been obtained and are in full force.

The aeronautical policy of the Civil Aeronautical Regulatory Body of Colombia (Aeronáutica Civil de Colombia) applies to passengers and cargo flying in the open skies in both the domestic market and the international market. There are no governmental policies that materially restrict our airline services in Colombia.

Colombia is not a declared “open skies country” internationally except in certain of the countries of the American continent and with regards to air operations in certain international airports such as San Andrés and Cartagena. Colombia is subject to multilateral and/or bilateral air transport agreements that provide for the exchange of air traffic rights between Colombia and various other countries, among others.

Notwithstanding these agreements, we are subject to permits, laws, regulations and operational restrictions provided by each of the different aviation authorities of countries in which we operate, and the ongoing operational costs that local or regional authorities apply.

Authorizations and Licenses

The Colombian aviation market is heavily regulated by the Colombian Civil Aviation Authority (CCAA). For domestic and international aviation, airlines must present feasibility studies to obtain specific traffic rights. In Colombia, Avianca operates air transport services on international and domestic routes, Avianca Express is a domestic carrier of air transport services on secondary routes and Tampa Cargo is a carrier of commercial cargo air transport service. Under Colombian law, Avianca Costa Rica, Avianca Ecuador, Avianca Perú and Taca International Airlines are considered foreign airlines and thus have to meet the requirements established by their respective countries and the bilateral agreements between Colombia and these countries.

To provide commercial air transport service, it is necessary to own or lease at least five certified aircraft and have a paid-in minimum capital equal to 10,000 monthly legal minimum wages (approximately $2.5 million). To provide air transport services on secondary routes, it is necessary to own or lease at least three certified aircraft and have a paid-in minimum capital equal to 7,000 monthly legal minimum wages (approximately $1.7 million). To provide commercial cargo air transport service, it is necessary to own or lease at least two certified aircraft and have a paid-in minimum capital equal to 1,750 monthly legal minimum wages (approximately $0.5 million).

In the past, the CCAA established a mandatory fuel surcharge with minimum fares for each route. However, by means of Resolution 904 of February 28, 2012, the CCAA established (i) fuel surcharge freedom for national and foreign passengers or cargo carriers operating in Colombia, which are included in airfares, and (ii) tariff freedom for air transportation services. Airlines must inform all public tariffs, as well as their conditions, to CCAA at least one day after their publication, and promotional fares prior to their application. Since November 2006, all customers are charged an administrative fee in connection with the purchase of airline tickets (although this fee is at the discretion of the seller for internet sales).

Our airlines have private carriers status, which means they are not required under Colombian law to serve any particular route and are free to withdraw their services from any of the routes they currently serve, subject to domestic law, and, in the case of international service, subject to bilateral agreements. Our airlines are also free to determine the frequency of the services that they offer across their route network, without any minimum frequencies imposed by law or Colombian authorities.

Colombian law requires airlines providing commercial passenger service in Colombia to maintain an Operation and Air Transportation Certificate (Certificado de Operación y Transporte Aéreo) and Operational Specifications issued by the CCAA. The Operation and Air Transportation Certificate lists the airline’s routes, equipment used and capacity and frequency of flights. This certificate must be updated each time a carrier acquires new aircraft, or when routes or the frequency of service to a particular destination are modified. A public hearing before the director of the

CCAA and the members of the Commercial Aviation Projects Evaluating Group (Grupo Evaluador de Proyectos Aerocomerciales) of the CCAA is required to determine the necessity of modifying an airline’s Operation and Air Transportation Certificate, except in the Andean region. Colombian law also requires airlines providing commercial passenger service in Colombia to maintain for each aircraft an Airworthiness Certificate (Certificado de Aeronavegabilidad) issued by the CCAA.

Colombian law requires that aircraft operated by national carriers be registered with the Colombian National Aviation Registry (Registro Aeronáutico Nacional) kept by the CCAA, and that the aforementioned certify the air-worthiness of each aircraft in Avianca’s fleet.

Furthermore, Colombian airlines are subject to the authority of the Colombian Transportation and Ports Superintendency (Superintendencia de Puertos y Transportes), which is part of the Ministry of Transportation (Ministerio de Transporte). The Colombian Transportation and Ports Superintendency is in charge of the evaluation of the financial and managerial aspects of each airline, among other things.

Under Colombian commercial law, air transportation is considered a public service and, therefore, certain elements of the general conditions of carriage entered into by airlines and passengers are expressly covered under law and/or approved by the CCAA. For instance, if a carrier decides to include a new condition on its general conditions of carriage, it must request the approval of the CCAA. However, some elements cannot be modified, such as carrier liability with respect to domestic service, regulated by Article 1180 of the Colombian Commercial Code and the Convention for the Unification of Certain Rules for International Carriage by Air, signed in Montreal, Canada on May 28, 1999 (Montreal Convention) for International Service.

Passengers in Colombia are also entitled by law to compensation in cases of excessive delays, over-bookings and cancellations. Furthermore, local law establishes sanctions for more than one-hour delays and for flight cancellations, regardless of the compensatory measures that the airlines may adopt, which trigger the obligation to compensate passengers and increases the compensatory amounts.

The main airports in Bogotá, Cali, Cartagena, Barranquilla, Bucaramanga, Santa Marta and Medellín, among others, are privately operated through concessions. The government, however, has stated its intention to continue privatizing the operations of other airports in order to finance expansion projects and increase the efficiency of operations. Increased privatization may lead to increases in landing fees and facility rentals at such airports.

The Montreal Convention, as approved and adopted by Colombia by means of Law 701 of 2001, imposes duties upon Colombian airlines with respect to their international services. Under these rules, airlines are responsible for compliance with certain obligations regarding quality and passenger security, as well as for damages sustained in case of any death of, or bodily injury to, a passenger, which occurs on board, as well as for baggage loss or damage. This convention applies to international transportation between Colombia and the territory of another party to the convention, regardless of whether there is an interruption in the transportation or a trans-shipment, or whether, prior to arriving in, or departing from, Colombia, there is an agreed stop-over within the territory of another state. Under Article 17 of the convention, a carrier is liable for damages sustained in case of death or bodily injury of a passenger under the condition that the accident, which caused the death or injury, took place on board the aircraft or in the course of any of the operations of embarking or disembarking. Air carriers are responsible, even if not at fault, for proven damages up to 128,821 Special Drawing Rights (“SDRs”), which represent a mix of currencies established by the International Monetary Fund. For damages above 128,821 SDRs, the airline may avoid liability by showing that the accident that caused the injury or death was not due to its negligence or was the fault of a third party. In the case of cargo business, the liability of the carrier is absolutely limited to 22 SDRs/Kg. These provisions also cover baggage and delays.

Security

Chapters 160 and 175 of the Colombian Civil Aviation Regulations encompass all aspects of civil aviation security, including (i) implementation of certain security measures by carriers and airports, such as the requirement that all passenger luggage be screened for explosives, (ii) designation of restricted areas, (iii) systems of airport controls for identification of passengers, (iv) inspection of vehicles and (v) transportation of firearms, explosives and dangerous goods.

Environmental Regulation

We are subject to general environmental regulations of Colombia, such as Law 99 of 1993, as amended, and other laws, decrees and local resolutions which regulate the management, use and exploitation of natural resources and their contamination. Pursuant to these regulations, we prepared Environmental Management Programs (Programas de Manejo Ambiental) detailing the procedures to be followed in connection with any activity that has any environmental impact, including solid and liquid waste management, hazardous waste management and the management of effluents and noise, among others. Additionally, we must maintain certain permits and authorizations for the use and management of natural resources, such as a concession for the use of drinking water. If we fail to abide by the environmental regulations or administrative acts issued by the relevant environmental authorities, we may be subject to penalties or fines.

In addition, Colombian regulations (Reglamentos Aeronáuticos de Colombia, RAC) set forth a general environmental policy establishing that the CCAA must comply with Colombian environmental regulations, including the environmental license issued by Colombia’s National Authority of Environmental Licenses (ANLA), and must require the compliance of parties involved in the Colombian civil aviation industry. The RAC includes provisions and guidelines relating to noise and effluents that must be respected when providing aviation services. The RAC requires that noise levels be kept on or below the levels established under Colombian law. Compliance is evidenced by means of a certificate (certificado de homologación de ruido) that must be obtained for each aircraft from the CCAA or the competent authority of each country member of ICAO. If noise levels exceed the limits, the CCAA has the power and authority to sanction and penalize carriers with fines.

If the CCAA determines that our operations or facilities do not meet the RAC standards or otherwise fail to comply with Colombian environmental regulations, we could be subject to a fine. In December 2019, we confirmed the ISO 14.001:2015 certificate of our MRO hangar and support facilities at Rionegro, Colombia by the Colombian standardization body ICONTEC, as a duly accredited entity. In the coming years we expect to maintain these environmental quality certifications and increase the number of certified facilities. We have also prepared environmental management programs designed to ensure our compliance with environmental regulations, including the requirements of the RAC. While we do not believe that compliance with these or other environmental regulations that may be applicable to us will expose us to material expenditures, compliance could increase our costs and adversely affect our operations and financial results. In addition, failure to comply with these regulations could adversely affect us in a variety of other ways.

Currently, there is an operational restriction on overflight in Bogotá between 12 p.m. and 6 a.m. For this reason, the South and North runways of El Dorado International Airport are limited to takeoffs in the East – West direction and landings in the West – East direction. In addition, operations from the South runway of the El Dorado International Airport have limited overflights in Bogotá between 10:00 p.m. and 12:00 p.m., with certain exceptions, in order to protect flight operations.

In January 2017, Colombia established a carbon tax on fossil fuels, which affects, among others, the airline industry. The Colombian Tax Authority (Dirección de Impuestos y Aduanas Nacionales – DIAN) issued an interpretation indicating that fuel used for international flights constitutes an export, and therefore is not subject to the carbon tax.

In 2019, the period for monitoring and reporting of emissions of international flights under the Carbon Offsetting and Reduction Scheme for International Aviation by the members states of ICAO began, pursuant to which emission reports must comply with approved monitoring emissions plans.

Bilateral Agreements

Bilateral or multilateral agreements between countries regulate other aspects of our commercial cargo and passenger air transport relations, including the designation of carriers and aircraft capacity restrictions and requirements. They may also establish minimum safety, security, customs and environmental requirements for each designated carrier. These agreements can be modified upon the agreement of the relevant countries at any time prior to their expiration dates. We consider Colombia’s principal bilateral agreements to include those with the United States, the United Kingdom, Spain, the Andean Pact countries (Ecuador, Peru and Bolivia), Mexico, Brazil, El Salvador, Costa Rica, Guatemala, Germany, Cuba, Aruba, Curaçao and Argentina. The bilateral agreement with the United States was modified and, since the beginning of 2013, is an “open skies” agreement that allows foreign scheduled and charter air transportation of persons, property and mail via Colombia and intermediate points to the

United States and beyond. On December 14, 2018, the United States and the Colombian authorities agreed to permit “open skies” operations for cargo flights on the basis of comity and reciprocity. In the bilateral agreement with Spain, which was modified in June 2018, the authorities agreed to grant, for passenger and cargo flights, between Colombia and Spain third and fourth freedom rights, a free frequencies capacity and 37 frequencies with fifth freedom rights for each of the parties. In late 2019, Colombia and Chile agreed to extend their bilateral agreement up to fifth freedom rights for cargo operations within South America and to include seven new weekly frequencies to points beyond South America.

The CCAA allocates rights obtained pursuant to bilateral agreements to specific airlines. In 2019, the CCAA authorized Avianca S.A., among others, to operate from Bogotá to Asunción with Seven weekly frequencies, to Cuzco with seven weekly frequencies, to San José with 21 weekly frequencies, to Toronto with seven weekly frequencies, to Paris with four weekly frequencies and to Porto Alegre with seven weekly frequencies. If we do not use these rights within nine months (or 18 months if a nine-month extension is granted) from their effective date, they will expire.

Colombia has “open skies” agreements with the Andean Pact countries, El Salvador, Costa Rica and the United States, among others, pursuant to which there are no regulations on the numbers of flights. The bilateral agreement with Argentina provides for 37 weekly flights by each country’s designated carrier. At this time, the bilateral agreement with Brazil provides 70 weekly flights by each country’s designated carrier, 21 of them with fifth freedom air rights.

Colombia is party to a multilateral agreement known as Andean Community CAN, between Bolivia, Ecuador, Peru and Colombia, which, among other things, allows airlines from these countries to operate between them without limitation on international flights. No cabotage is allowed. Colombia is also party to an Air Transport Agreement and/or Memorandum of Understanding with the following countries: Germany, French Antilles, Saudi Arabia, Argentina, Aruba, Australia, Austria, Bahamas, Barbados, Belgium, Brazil, Cabo Verde, Canada, Chile, China, Korea, Costa Rica, Cuba, Curaçao, Denmark, Norway, Sweden, Ecuador, El Salvador, United Arab Emirates, Spain, Ethiopia, Finland, France, Greece, Guatemala, Holland, India, Iceland, Israel, Italy, Jamaica, Jordan, Kenya, Luxemburg, Morocco, Mexico, New Zealand, Panama, Paraguay, Portugal, Qatar, United Kingdom, United States, Dominican Republic, Rwanda, Seychelles, Singapore, Switzerland, South Africa, Surinam, Turkey, Uruguay, Latvia, Czech Republic, Cyprus, Poland, Kwait, Ghana, Antigua and Barbuda, Guyana, Zambia and Venezuela.

We believe that it is likely that the Colombian government will eventually liberalize the current restrictions on international travel to and from Colombia by, among other things, granting new route rights and flights to competing airlines and generally promoting increased numbers of market participants on routes we serve. As a result of this liberalization, we could face substantial new competition, which may erode our pricing and market share and have a material adverse effect on our financial position and results of operations. See “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—We face increasing competition from other international airlines due to the continuing liberalization of restrictions traditionally affecting airlines and consolidation in the industry.”

Ownership and Control

The Colombian State Council (Consejo de Estado—Sala de Consulta y Servicio Civil), in an opinion dated April 6, 2000, declared that article 1426 of the Commerce Code, which established a 40% limitation on foreign investment in Colombian airlines, was no longer applicable as it is considered to have been tacitly overturned by Decree 1068 of 2015 (Foreign Investment Statute), and stated that, from a Colombian law perspective, there are no restrictions on foreign investment in Colombian airlines. However, some of Colombia’s bilateral agreements do restrict foreign investment in Colombian airlines. For example, bilateral agreements entered into by Colombia with the United States, Canada, the United Kingdom, France, China and Germany contain requirements that each designated airline remain substantially owned and effectively controlled by a Colombian governmental entity or Colombian nationals. Nevertheless, United States, Canada and China granted a waiver to the Colombian airlines under certain conditions.

Currently, in those bilateral agreements it is established that each of the countries may deny, revoke or impose any conditions deemed necessary upon an airline’s operating permit in the event it determines that there is not sufficient evidence that a substantial proportion of ownership and effective control of the airline is held or exercised by Colombia or its nationals. These ownership and control restrictions have not been expressly defined in the bilateral agreements, in terms of percentage thresholds or otherwise, and therefore should be interpreted according to the Vienna Convention on the Law of Treaties.

Taking the above into account, certain aviation authorities have interpreted these ownership and control restrictions as follows:

•

The DOT policy on “substantial ownership and effective control” is to examine the relationships of the airline in depth and determine who actually controls the airline’s key decisions (examining composition of the board, management and control and special voting majorities, among other factors), rather than simply looking at the airline’s ownership; and

•

France, United Kingdom and Germany consider that the aeronautical authority of each party may revoke, suspend, or limit the authorizations granted to any airline where substantial ownership and effective control of that airline are not vested in Colombia, individuals of Colombian nationality, or both.

Agreements entered into by Colombia with countries such as Spain, the Netherlands, Portugal, Bolivia, Ecuador, Peru, Panama, Chile, the Dominican Republic, Cuba, and Costa Rica, among others, require that Colombian designated airlines are incorporated, have principal domicile, management, operation and offices within the Colombian territory and that its oversight and control is performed by the national aeronautical authority.

Although we believe Avianca is currently in compliance with such substantial ownership and effective control requirements, we cannot assure you that Colombians, directly or indirectly, will continue to own and control a majority of our capital stock indefinitely. If for any reason, Colombian citizens cease to have at least 51% of Avianca, or the national aeronautical authority ceases to exercise effective regulatory control, or if Avianca fails to continue to have its corporate domicile, administrative headquarters, and base of operations within Colombian territory, Avianca may no longer comply with the requirements of Colombia’s bilateral agreements and, as a result, its route and landing rights in a number of important countries may be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.

As an additional protection to ensure compliance with our principal bilateral agreements, the Amended and Restated Joint Action Agreement provides that, subject to certain exceptions, no holder of common shares shall, or shall permit any of its affiliates or owners to directly or indirectly transfer or otherwise dispose of its shares to a non-permitted holder. For this purpose, a non-permitted holder is (among other things) a person whose ownership of securities of the Company would violate applicable law or would cause the Company or any of its subsidiaries to no longer comply with local ownership restrictions or aviation bilateral treaties that govern the Company’s or its subsidiaries’ operations.

Even though it is possible that we may be able to obtain waivers of any future non-compliance with these requirements under our bilateral agreements, their mere existence may deter a non-Colombian entity from acquiring control of us as well as limit our future flexibility to sell additional shares or conduct a recapitalization.

El Salvador

Overview

Taca International is a sociedad anónima duly organized and validly existing under the laws of El Salvador. It is duly qualified to hold property and transact business as a sociedad anónima, and holds all licenses, certificates and permits from governmental authorities necessary for the conduct of its business as now conducted. All consents, licenses, approvals, registration and authorizations as may be required in connection with providing airline services under applicable Salvadorian laws have been obtained or affected and are in full force and effect.

By means of Legislative Decree No. 126 dated September 1972, Taca International was named as a national air carrier, for the effect of being considered as such in the countries where it provides or is willing to provide air transport services. Effective legal control and principal place of business is remains in El Salvador.

Any failure to maintain the required foreign and domestic governmental authorizations would adversely affect our operations. We are subject to national and international regulations that may vary frequently and are beyond of our control. These may result in an increase in costs and/or operational requirements and restrictions. Also, there is instability concerning governmental policies, due to a highly polarized political environment.

The government of El Salvador has declared an “open skies” policy when negotiating air transport agreements and traffic rights. The civil aviation law provides for an open skies regime and, as a result, is now open skies based on reciprocity. This new regime includes up to seventh air freedom rights for cargo operations.

Authorizations and Licenses

The civil aviation law of El Salvador requires that airlines authorized to operate national or international air transport services possess an operation certificate and an operating permit issued by the AAC. An operating permit sets forth the routes, rights and the frequency of the flights that are permitted to be flown. An operating permit is valid for five years and must be modified each time a carrier intends to add or cancel new routes or flight frequencies. In addition, a carrier is also required to present revised itineraries to the AAC each time it intends to change its schedules, the aircraft servicing its routes and flight and route frequencies. We have the required operating certificates and permits and are in compliance with all regulations requiring the presentation of revised itineraries.

The civil aviation law of El Salvador requires that carriers register their aircraft with the Salvadorian Civil Aviation Registry (“RAS”), which is maintained by the AAC, and that aircraft be subject to periodic inspection by the AAC. The AAC is responsible for certifying that each aircraft in a carrier’s fleet meets the safety standards required by the AAC’s aeronautical regulations. Each of our aircraft that flies to El Salvador is properly registered and certified with the AAC.

Safety Rating

El Salvador has FAA Category 1 status, which allows Salvadorian airlines to operate flights to and from the United States. Category 1 status signifies that a nation’s aeronautical regime fulfills all necessary standards of operational safety established by ICAO. Category 1 status is based upon the FAA’s review of various safety standards with respect to the regulations, licensing of personnel, condition of the aircraft, airline monitoring, pilot training, maintenance, repair and overhaul facilities and aeronautical organizations.

Bilateral and Open Skies Agreements

El Salvador is subject to multilateral and/or bilateral air transport agreements that provide for the exchange of air traffic rights between El Salvador and various other countries. Until recently, El Salvador has been actively negotiating these agreements. Operations to countries where there is no air transport agreement have been negotiated under reciprocity, such as with Costa Rica and Peru.

El Salvador is party to a multilateral agreement known as CA-4 with Guatemala, Honduras and Nicaragua, which allows airlines from these countries to operate between them as if they were domestic flights. No cabotage is allowed. El Salvador is also party to air transport agreements or memoranda of understanding with the following countries: Spain, Mexico, United Kingdom, Cuba, China (Taiwan), Ecuador, the United Arab Emirates, Turkey, Chile, Colombia, Canada (agreement already ratified by El Salvador, pending to be ratified and published by Canada), United States, Panamá and Qatar, as well as of the Caribbean States Association (Asociación de Estados del Caribe).

Peru

Overview

Peruvian law requires that all airlines organized in Peru that provide commercial services to and from Peru hold an operations permit valid for a maximum period of four years and an Air Services Operator Certificate (“ASEC”), issued by the Peruvian DGAC without an expiration term (it can, however, be revoked by the Peruvian DGAC under certain circumstances). Both must be modified each time a carrier modifies the characteristics of its service or operation. An operations permit specifies a carrier’s designated routes, the equipment it may use, its permitted capacity and its flight frequencies.

Peruvian law requires that carriers register their aircraft or aircraft utilization agreements in the Public Aircraft Registry of the Registry Office of the National Superintendency of Public Registrar (“SUNARP”). The Peruvian DGAC is responsible for issuing a conformity certification of airworthiness for each aircraft in a carrier’s fleet, which is valid for two years and must be renewed thereafter. Additionally, the Peruvian DGAC approves all technical aspects of a carrier’s operation and any modifications or changes. We have the required operations permit and ASEC as required by the Peruvian DGAC and our aircraft which fly in Peru are properly registered with the SUNARP and have all other permits required by Peruvian law.

Safety

Peru has FAA Category 1 status, which allows Peruvian airlines to operate flights to and from the United States.

Bilateral and Open Skies Agreements

Peru has entered into 64 bilateral agreements and other memoranda of understanding, several of which are open sky agreements, which allow Peruvian airlines to fly to the United States and various countries in South America, Central America, Europe, Africa and Asia.

Foreign Ownership

Peruvian law requires that “national airline services” can only be provided by Peruvian natural persons and legal entities.

A Peruvian legal entity is an entity that complies with the following requirements:

•

the entity has its principal domicile in Peru;

•

a majority plus one of the directors, managers and persons who control the entity’s management must be Peruvian nationals or must be permanently domiciled in Peru;

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the legal entity’s property must substantially be Peruvian; and

•

at least 51% of the entity’s stock must be under the control of stockholders that are Peruvian nationals who are permanently domiciled in Peru during the first six months of operations, thereafter the participation can be modified up to 70% for the foreigner’s participation.

In addition, Peruvian law further requires that a Peruvian legal entity:

•

must be organized in accordance with Peruvian law; and

•

must indicate that its legal purpose is providing airline service.

Antitrust Regulation and Competition

The National Institution of Competition Defense and Intellectual Property (“INDECOPI”) does not restrict or penalize dominant market positions or monopolies, but regulates behaviors that might constitute an abuse of these positions in detriment of competitors. It regulates anticompetitive practices between airlines, the registry of tariffs and the modification, cancellation or suspension of operations. INDECOPI also has authority to regulate protection of passenger rights.

A business concentration is subject to the prior control procedure of INDECOPI when (i) the total sum of the annual sales value or gross income of the companies involved in the business concentration within Peru, reached a value of approximately $149, 235,294.11 or more during the preceding tax year in which the operation is reported; (ii) the value of annual sales or gross receipts in Peru of at least two of the companies involved in the concentration reached a value equal to or greater than approximately $22,764,705.88 each during the fiscal year preceding the fiscal year in which the transaction is reported.

Noise Regulations

Peru has adopted noise regulations applicable to the airline industry. These regulations provide that no person can operate an aircraft to or from an airport in Peru that does not comply with the applicable noise regulations. Our aircraft which fly in Peru comply with applicable noise regulations.

Ecuador

Overview

Avianca Ecuador, formerly known as Aerogal, is a private carrier organized under the laws of Ecuador. In 2017, the aviation authority of Ecuador approved the name change and both the AOCR and the operation permit were updated to replace Aerogal with Avianca Ecuador S.A.

Authorizations and Licenses

The aviation market in Ecuador is heavily regulated by the Ecuadorian DGAC. For domestic aviation, airlines must present feasibility studies to secure specific route rights, and no airline may serve city pairs without an Airline Operation Certificate (“AOC”). In Ecuador, there is a surcharge for fuel on ticket prices and an administrative fee in connection with purchases of airline tickets.

Avianca Ecuador’s status as a private carrier means that it is not required under Ecuadorian law to serve any particular route and is free to withdraw service from any of the routes it serves as it sees fit, subject to bilateral agreements in the case of international service. Avianca Ecuador is also free to determine the frequency of the services it offers across its route network without any minimum frequencies imposed by the Ecuadorian authorities, but the number of frequencies must be set forth on the respective permit.

Ecuadorian law requires airlines providing commercial passenger service in Ecuador to maintain an AOC issued by the Ecuadorian DGAC. The AOC lists the airline’s routes, equipment used, capacity and frequency of flights. The AOC must be updated each time a carrier acquires new aircraft, or when routes or the frequency of service to a particular destination are modified.

Ecuadorian law also requires that aircraft operated by us be registered with the Ecuadorian National Aviation Registry (Registro Aeronautico Nacional) kept by the Ecuadorian DGAC, and that the Ecuadorian DGAC certify the air-worthiness of each aircraft in our fleet.

Furthermore, Ecuadorian airlines are subject to the authority of the Ecuadorian Civil Aviation Counsel (“CNAC”). The CNAC is in charge of granting operations permits for routes and frequencies and evaluating the financial, technical and managerial aspects of each airline, among other things.

Under Ecuadorian commercial law, certain of the standard terms and conditions of air transportation agreements entered into by airlines and passengers are covered by law. Passengers in Ecuador, for example, are entitled by law to compensation in cases of delays in excess of four hours, over-bookings and cancellations.

The Montreal Convention was approved and adopted by Ecuador by means of Law 701 of 2001. For information on the main terms of the Montreal Convention, see “—Colombia.”

Security

Parts 107 and 108 of the Ecuadorian regulaciones técnicas de la DAC (“RDAC”) regulate all aspects of civil aviation security, including, (i) implementation of certain security measures by airlines and airports, such as the requirement that all passenger luggage be screened for explosives, (ii) designation of restricted areas, (iii) systems of airport controls for identification of passengers, (iv) inspection of vehicles and (v) the transportation of explosives and dangerous goods. In addition, RDAC 1544 regulates civil aviation security.

Environmental Regulation

We are subject to the general environmental regulations of Ecuador and other laws, decrees and local resolutions which regulate the management of natural resources and their contamination. Pursuant to these regulations, we prepared Environmental Management Programas (Programs de Manejo Ambiental), detailing the procedures to be followed in connection with any activity that has any environmental impact, including solid and liquid waste management, hazardous waste management and the management of effluents and noise. If we fail to abide by applicable environmental regulations, we may be subject to penalties or fines.

In addition, the RDAC contains a general environmental policy establishing that the Ecuadorian DGAC must comply with Ecuadorian environmental regulations and must require the compliance of parties involved in the Ecuadorian civil aviation industry. The RDAC includes provisions and guidelines relating to noise and effluents that must be followed in the provision of aviation services. The RDAC requires that noise levels be kept below levels established under Ecuadorian law. Compliance is evidenced by means of a certificate (Certificado de Homologación de Ruido) that must be obtained for each aircraft from the Ecuadorian DGAC or the competent authority of each country member of ICAO. If noise levels exceed the limits, the Ecuadorian DGAC has the power and authority to impose fines on us.

In December 2019, our ISO 14.001:2015 certificate for our maintenance and support facilities at Quito and Guayaquil in Ecuador was confirmed by the Colombian standardization body ICONTEC. We expect to maintain

these environmental quality certifications and increase the number of certified facilities. We have also prepared environmental management programs designed to ensure our compliance with environmental regulations. While we do not believe that compliance with these or other environmental regulations that may be applicable to us will expose us to material expenditures, compliance could increase our expenses and adversely affect our operations and financial results. If the Ecuadorian DGAC determines that our operations or facilities do not meet the RDAC standards or otherwise fail to comply with Ecuadorian environmental regulations, we could be subject to fines.

In 2019, the period for monitoring and reporting of emissions of international flights under in the Carbon Offsetting and Reduction Scheme for International Aviation by the members states of ICAO began, pursuant to which emission reports must comply with approved monitoring emissions plans.

Bilateral Agreements

In December 2017, the President of Ecuador issued Decree No. 256 adopting an open skies policy in Ecuador on international flights.

Bilateral agreements between countries regulate our commercial cargo and passenger air transport relations, including the designation of carriers and aircraft capacity restrictions and requirements. They may also establish minimum safety, security, customs and environmental requirements for each designated carrier. These agreements can be modified upon the agreement of the relevant countries at any time prior to their expiration dates. Ecuador’s principal bilateral agreements include those with the United States, Spain, the Andean Pact countries (Colombia, Peru and Bolivia), Venezuela, Brazil, the Netherlands, Argentina, Panama, Mexico and Chile. The bilateral agreement with the United States, which granted 120 weekly flights to Ecuadorian carriers and 120 weekly flights to U.S. carriers, was modified on June 4, 2010. The following routes were added: (i) from Ecuador via 15 intermediate points to Miami, Orlando, Washington, New York, Chicago, Los Angeles and four additional points in the United States and beyond Madrid, Montreal and Toronto; and five additional points in Europe via code share; (ii) as of July 1, 2011, five additional points in the United States that were selected by Ecuador and five additional points in the United States that were selected by Ecuador for code share only; and (iii) as of July 1, 2012, five additional points in the United States that were selected by Ecuador for code share only. There is an “open skies” policy for all cargo services. The bilateral agreement with Spain, which was modified in October 2006, grants 21 weekly flights. The following routes are to be determined: from Ecuador via points in Colombia, Venezuela and points in the Caribbean to Madrid and/or Barcelona, and points in France, Italy and Germany in both directions.

Since 2016, Ecuador and United States have been negotiating an open skies agreement, which, as of the date of this annual report, has not been signed.

The Ecuadorian CNAC allocates rights obtained pursuant to bilateral agreements to specific airlines. The Ecuadorian CNAC authorized us to operate international flights, including flights within the Andean Pact Operation Permit. We have authorization to operate routes from Quito or Guayaquil to Bogotá, from Quito or Guayaquil to Lima with the following points from Santa Cruz, La Paz and Bogotá, and flights to Panama and Aruba through Bogotá. Ecuador has “open skies” agreements with the Andean Pact countries pursuant to which there are no restrictions on the numbers of flights to such destinations. Ecuador has an open skies policy by law.

Ownership and Control

The Ecuadorian Civil Aviation Law was changed in 2001 eliminating a 40% limitation on foreign investment in Ecuadorian airlines. From an Ecuadorian law perspective, there are no restrictions on foreign investment in Ecuadorian airlines. However, certain of Ecuador’s bilateral agreements do restrict foreign involvement in Ecuadorian airlines. For example, bilateral agreements entered into by Ecuador with the United States, Spain, the United Kingdom, France, Germany and Switzerland contain requirements that each designated airline remain substantially owned and effectively controlled by an Ecuadorian governmental entity or Ecuadorian nationals.

These bilateral agreements establish that each of the countries may deny, revoke or impose any conditions deemed necessary upon an airline’s operating permit in the event it determines that there is not sufficient evidence that a substantial proportion of ownership and effective control of the airline is held or exercised by Ecuador or its nationals. These ownership and control restrictions have not been expressly defined in the bilateral agreements, in terms of percentage thresholds or otherwise, and therefore are interpreted according to the Vienna Convention on the Law of Treaties.

Agreements entered into by Ecuador with Bolivia, Colombia, Peru and United Kingdom, among others, require that our relevant operating subsidiaries be incorporated and have their principal domicile, management, operation, technical maintenance operations and offices within the Ecuadorian territory.

U.S. Regulation of Airline Flights

The provision of foreign air transportation (i.e., the transportation of persons, property or mail by aircraft as a common carrier between a place in the United States and a place outside the United States) by non-U.S. airlines is subject to several U.S. laws and regulations and falls under the jurisdiction of a number of federal agencies. In order for a non-U.S. airline to provide scheduled or charter service to the United States, it must have economic route authority from the DOT (in the form of a foreign air carrier permit or exemption authority), safety authority from the FAA (in the form of operations specifications) and a Transportation Security Administration (“TSA”) approved model security program addressing aviation security. Additionally, non-U.S. airlines serving the United States are subject to extensive aviation consumer protection regulations of the DOT under its statutory authority to prohibit unfair and deceptive practices and unfair methods of competition in air transportation or the sale of air transportation, as well as various civil rights requirements of the DOT, including access to air travel for persons with disabilities and anti-discrimination laws. Moreover, non-U.S. airlines are subject to ongoing aviation security directives imposed by the TSA, and border security, customs, immigration and agriculture inspection requirements administered by U.S. Customs and Border Protection (“CBP”) and the Animal Plant and Health Inspection Service (“APHIS”). Both TSA and CBP are agencies within the U.S. Department of Homeland Security, while APHIS is within the U.S. Department of Agriculture (“DOA”). Each of the DOT, FAA, TSA, CBP and DOA have authority to investigate and institute proceedings to enforce their regulations and assess civil penalties and/or suspend or revoke permits, licenses or authorizations for violations of those regulations. Our carriers serving the United States, including Avianca (Colombia), Tampa Cargo (Colombia), Taca International (El Salvador), Avianca Costa Rica (Costa Rica) and Avianca Peru (Peru), hold various permits, licenses and authorizations issued by the foregoing federal agencies, and the modification, suspension or revocation of the could have a material adverse effect on us.

Authorizations, Licenses and Other Requirements

DOT

The DOT primarily regulates economic matters pertaining to air services, including the provision of foreign air transportation by non-U.S. airlines. Our carriers serving the United States hold all required economic route authorities from the DOT, allowing each such carrier to engage in foreign air transportation from points behind its homeland via its homeland and intermediate points to a point or points in the United States and beyond, to the full extent permitted under the “open skies” bilateral air services agreement between each carrier’s homeland government and the government of the United States. These authorities are held either in the form of a foreign air carrier permit or exemption authority.

Avianca, Taca, Avianca Costa Rica and Avianca Peru also hold exemption authority from the DOT permitting them to jointly use the trade name “Avianca” and use the “AV” designator code in their services in foreign air transportation to and from the United States.

Foreign air carrier permits are issued for an indefinite duration and, before they become effective, are subject to presidential review for U.S. foreign policy and national security considerations. Exemption authority is issued for a shorter duration, typically between one and two years, and is not subject to presidential review. Exemptions must periodically be renewed upon submission of a renewal application, and may be amended, modified or suspended by the DOT at any time without having to first give the airline notice and a hearing. In contrast the DOT generally may not amend, suspend or revoke a foreign air carrier permit without providing the subject carrier the opportunity for a hearing. Exemptions and foreign air carrier permits carry a number of conditions, including compliance with DOT, FAA, TSA and other federal government agency regulations.

A number of our carriers serving the United States also participate in code-sharing operations on such flights, wherein a carrier’s designator code is used to identify a flight operated by another carrier. For example, a number of scheduled flights that our carriers operate to and from the United States display the “UA” designator code of United Airlines and, as noted above, Taca, Avianca Costa Rica and Avianca Peru, when operating scheduled flights to and from the United States, display the “AV” designator code of Avianca. To engage in code-sharing on flights to and

from the United States, the operating carrier must hold a DOT statement of authorization issued under 14 C.F.R. Part 212, with such approval subject to various conditions. Our carriers that display the code of another carrier on flights operated to and from the United States hold all required DOT statements of authorization to engage in such arrangements. We believe the operations of our carriers serving the United States are in material compliance with DOT requirements.

FAA

The FAA primarily regulates aviation safety matters, including aircraft maintenance and operations, equipment, aircraft noise, ground facilities, dispatch, communications, personnel, training, weather observation, air traffic control and other matters affecting air safety. Our carriers serving the United States hold operations specifications issued by the FAA pursuant to 14 C.F.R. Part 129. The FAA can amend, suspend or revoke those specifications, including in cases where the carrier fails to comply with FAA regulations.

Additionally, under the FAA’s International Aviation Safety Assessments (“IASA”) program, the FAA periodically assesses another country’s oversight of its air carriers that operate, or seek to operate, into the United States, or engage in code-sharing with a U.S. carrier, to determine whether the oversight complies with safety standards established by the ICAO and, if so, assigns the country a Category 1 rating. Each of the homelands for our carriers that operate to and from the United States has been rated Category 1 by the FAA, except as listed below. As a result, carriers from Category 1 rated homelands may continue or expand their U.S. services without restriction and engage in reciprocal code-sharing arrangements with U.S. carriers.

On May 13, 2019, the FAA announced that it had downgraded Costa Rica to Category 2 status under the IASA program. Until such time as Costa Rica is restored to Category 1 status, Avianca Costa Rica will not be permitted to expand its operations to or from the United States beyond those in place at the time of the downgrade. Additionally, Guatemala does not hold any rating under the IASA program, as no Guatemalan carrier has operated to or from the United States for several years. As a consequence, Aviateca cannot operate flights to or from the United States until the FAA has completed an aviation safety assessment of, and assigned a Category 1 rating to, Guatemala under the IASA program. If the IASA rating of any of the homelands of our other carriers operating flights to or from the United States were to be downgraded, it could prohibit us from adding new aircraft and from increasing service to the United States and would lead United Airlines to suspend the placement of its code on flights operated by the carrier from the downgraded homeland country. We believe the operations of our carriers serving the United States are in material compliance with FAA requirements.

Security

In November 2001, the Aviation and Transportation Security Act (“ATSA”) allocated substantially all aspects of civil aviation security under direct federal control and created the Transportation Security Administration (“TSA”), an agency within the Department of Homeland Security (“DHS”), which assumed the aviation security responsibilities previously held by the FAA. The ATSA requires, among other things, the implementation of certain security measures by airlines and airports, such as the requirement that all passenger bags be screened for explosives. Pursuant to the ATSA, the TSA issues regulations governing foreign air carrier security. The regulations require foreign air carriers to adopt and implement a security program that covers security for operations and threat response. Our carriers serving the United States have adopted and implemented a security program in accordance with those regulations. The TSA also requires our passenger carriers serving the United States to implement the Secure Flight Program, which requires these carriers to collect certain personal information from passengers and transmit that information to TSA for comparison against watch lists maintained by the U.S. federal government. We believe the operations of our carriers serving the United States are in material compliance with TSA requirements.

Other Regulations

Our carriers serving the United States are subject to other regulations promulgated by CBP within DHS as well as APHIS within DOA. CBP agents inspect baggage and cargo to ensure, among other things, that items meet APHIS regulations related to the importation of animal and plant products. Also, CBP officers are responsible for immigration controls and other security controls, such as the transmittal of passenger information via the Advanced Passenger Information System. We believe the operations of our carriers serving the United States are in material compliance with CBP and APHIS requirements.

European Regulation

Carriers must obtain individual operational permits or equivalent documents related to “traffic rights” in the framework of agreements between E.U. Member States and third countries.

Notwithstanding, the European Parliament and the European Council tasked the EASA to manage a single European system for vetting the safety performance of foreign air carriers. In doing so, EASA issues safety authorizations to foreign air carriers known as third country operators when satisfied that they comply with minimum international safety standards.

Because we operate flights to Spain, we are subject to Spanish DGAC regulation and authorizations. Our license to operate to certain destinations in Spain and the frequency of our operations is reviewed on a semi-annual basis. We must also comply with special noise abatement procedures required by the Madrid airport and with a tax on nitrogen oxide emissions to the atmosphere caused by commercial aviation enacted by the Catalan authority (Generalitat de Cataluña).

Because we operate fights to London, we are subject to England’s Civil Aviation Authority regulation and authorizations. Our license to operate to certain destinations in the United Kingdom and the frequency of our operations is reviewed on a semi-annual basis.

Because we operate fights to Munich, we are subject to Germany’s Civil Aviation Authority regulation and authorizations. Our license to operate to certain destinations in Germany and the frequency of our operations is reviewed on a semi-annual basis.

We also are authorized by EASA to perform commercial and transport operations into, within or out of the E.U. territory subject to the provisions of the Union Treaty and applicable governmental authorizations.

Other Jurisdictions

We are also subject to regulation by aviation regulatory bodies which set standards and enforce national aviation legislation in each of the other jurisdictions to which we fly. These regulators may exercise powers associated with their duties, potentially including the ability to set fares, enforce environmental and safety standards, levy fines or restrict operations within their respective jurisdictions. We cannot predict how these regulatory bodies will act, and the evolving standards enforced by any of them could have a material adverse effect on our operations.

C.	Organizational Structure

The following is a simplified organizational chart showing our principal subsidiaries as of December 31, 2019:

LOGO

We are a holding company and operate through Avianca, Tampa Cargo, Avianca Costa Rica, Avianca Peru, Avianca Ecuador and Taca International, which are our operating airline subsidiaries in Colombia, Costa Rica, Peru, Ecuador and El Salvador, respectively. Grupo Taca Holdings Limited is a holding company positioned between Avianca Holdings and certain of our operating subsidiaries.

For a description of our loyalty business, operated by LifeMiles, see “—B. Business Overview—Cargo and Courier Operations —LifeMiles Loyalty Business.”

D.	Property, Plant and Equipment

We lease our principal administrative offices and operational training center in Bogotá and our maintenance center in Rionegro. The duration of our lease agreements varies but in most cases are long-term leases with monthly rent obligations. For more information on our property, plant and equipment, see note 4 to our audited consolidated financial statements as of and for the year ended December 31, 2019, included elsewhere in this annual report.

Item 4A.

Unresolved Staff Comments

None.

Item 5.

Operating and Financial Review and Prospects

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes thereto included elsewhere in this

annual report, as well as the information presented under “Presentation of Financial and Other Information” in this annual report. The following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed below and elsewhere in this annual report, particularly as set forth in “Item 3. Key Information—D. Risk Factors” and “Forward Looking Statements” in this annual report.

A.	Operating Results

Principal Factors Affecting our Results of Operations

Chapter 11 Proceedings

Our results of operations and our ability to continue as a going concern depend on developments relating to our Chapter 11 proceedings. On May 10, 2020, Avianca Holdings S.A. and certain of its affiliated entities filed voluntary petitions for chapter 11 relief under title 11 of the United States Code (11 U.S.C. § 101, et. seq.) with the United States Bankruptcy Court for the Southern District of New York, which cases are being jointly administered under Case No. 20-11133 (MG). For information on the risks and uncertainties associated with our Chapter 11 proceedings, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Our Chapter 11 Proceedings.”

Developments Relating to COVID-19

Our results of operations and our ability to continue as a going concern also depend on developments relating to the spread of COVID-19 and government measures to address it, which have already had a material and adverse effect on the airline industry and us and have resulted in unprecedented revenue, demand and overall macroeconomic uncertainty. For more information on the risks and uncertainties associated with the COVID-19 pandemic, see “Item 3. Key Information—D. Risk Factors—Risks Relating to the Airline Industry—The outbreak or the threat of an outbreak of a contagious disease has already and may further materially and adversely affect the airline industry.”

Macroeconomic Factors

We are generally affected by economic conditions in the main countries in which we operate: Colombia, Peru, El Salvador and Ecuador. Macroeconomic conditions in these countries affect demand for our services and exchange rates, especially against the U.S. dollar, affect our financing costs and our exposure to fuel prices, which are denominated in U.S. dollars.

The following table sets forth real GDP growth, inflation rates, average interest rates and foreign exchange rates in Colombia, Ecuador, Peru and El Salvador for the periods indicated:


	As of and for the year ended December 31,
	2019			2018			2017
GDP growth
Colombia		3.3	%		2.5	%		3.3	%
Ecuador		(0.5	)%		1.4	%		2.4	%
Peru		2.2	%		4.0	%		2.5	%
El Salvador		2.5	%		2.5	%		2.3	%
Inflation
Colombia		3.5	%		3.2	%		4.3	%
Ecuador		0.4	%		(0.2	)%		0.4	%
Peru		2.1	%		1.3	%		2.8	%
El Salvador		0.9	%		1.1	%		1.0	%
Interest rates
Colombia		4.3	%		4.3	%		4.8	%
Ecuador		0.2	%		0.2	%		0.2	%
Peru		2.3	%		2.8	%		3.3	%
El Salvador		4.4	%		4.2	%		4.2	%


	As of and for the year ended December 31,
	2019			2018			2017
Currency appreciation/(depreciation) in relation to the U.S. dollar
Colombia		0.8	%		8.9	%		(0.6	)%
Ecuador*		—			—			—
Peru		(1.6	)%		4.0	%		(3.5	)%
El Salvador		0.0	%		0.0	%		0.0	%
Period-end exchange rate per $1.00
Colombia	$	3,277.14		$	3,249.75		$	2,984.00
Ecuador*		—			—			—
Peru	$	3.31		$	3.37		$	3.24
El Salvador	$	8.75		$	8.75		$	8.75
Average exchange rate per $1.00
Colombia	$	3,281.01		$	2,956.43		$	2,951.32
Ecuador*		—			—			—
Peru	$	3.34		$	3.29		$	3.26
El Salvador	$	8.75		$	8.75		$	8.75

Sources: SFC and Bloomberg LLP.

*	Ecuador’s currency is the U.S. dollar

For additional information on how macroeconomic conditions in these key countries affect us, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Colombia, Peru, Central America, and Other Countries in which We Operate.”

Changes in Foreign Exchange Rates

Our consolidated financial statements are presented in U.S. dollars. However, a portion of our operating revenue and expenses is denominated in currencies other than the U.S. dollar, thereby exposing us to foreign exchange variation in translating our results denominated in other currencies into U.S. dollars, mainly in relation to the Colombian peso. Depreciation of these foreign currencies against the U.S. dollar affect our results of operations because many of our expenses, including aircraft and fuel expenses, are denominated in U.S. dollars. For more information, see “Item 3. Key Information—D. Risk Factors—Risks Relating to Colombia, Peru, Central America, and Other Countries in which We Operate—Fluctuations in foreign exchange rates and restrictions on currency exchange could adversely affect us.”

Fuel Prices

Aircraft fuel expenses constitute a significant portion of our total operating expenses, representing 23.3%, 26.0% and 22.3% of our total operating expenses in 2019, 2018 and 2017, respectively. International and local fuel prices are subject to wide price fluctuations and, in some cases, sudden disruptions, based on geopolitical issues and supply and demand as well as market speculation. When fuel prices decrease, we may be exposed to losses on our hedge contracts, which can partially offset savings in fuel expenses. On the other hand, our aircraft fuel purchase agreements do not protect us against price increases or guarantee the availability of fuel. We may not be able to adjust our fares adequately or otherwise respond quickly to protect us from volatility in fuel prices.

Principal Components of Our Results of Operations

Operating Revenue

Passenger Revenue. We recognize passenger revenue when we provide the transportation service, which we refer to as “flown revenue.” Passenger revenue is a function of the capacity of our aircraft on the routes we fly, our load factors and our yields. Our passenger capacity is measured in terms of ASKs. Our passenger usage is measured in terms of RPKs. We calculate load factors, or the percentage of our capacity that is actually used by paying customers, by dividing RPKs by ASKs. Our passenger yield is the average amount that one passenger pays to fly one kilometer. Within passenger revenue we generate other revenue deemed ancillary revenue, which includes additional charges that are billed to passengers, such as fees for changes of date, destination and name. These are not considered separate performance obligations but are combined with the existing performance obligation and accounted for as if they were part of the original ticket sale transaction.

We recognize fares for unused tickets that are expected to expire as revenue based on historical data and experience. We perform periodic evaluations of our air traffic liability relating to unused tickets, and we record any resulting adjustments to revenue, which can be significant, in our consolidated statement of comprehensive income. These adjustments relate primarily to the differences arising from actual events and circumstances such as historical fare sale activity and customer travel patterns, which may result in refunds, exchanges or forfeited tickets differing significantly from estimates. We evaluate these estimates and assumptions and adjust air traffic liability and passenger revenues as necessary.

Under IFRS 15, we recognize revenue associated with our LifeMiles loyalty program upon the redemption of miles by customers, as this represents the point in time where the performance obligation is satisfied. Prior to 2018, we recorded separately the value of marketing and branding activities from the fair value of the miles earned by our customers.

For additional information, see “—Critical Accounting Policies and New and Amended Standards and Interpretations—Revenue Recognition – Revenue from Contracts with Customers.”

Cargo and Other Revenue. We recognize cargo and courier revenue when we provide the transportation and/or services. We carry cargo in our dedicated freighter fleet and, to the extent we have excess capacity, in the bellies of our passenger aircraft. We operate our domestic Colombian courier operations primarily through our DEPRISA brand. Our cargo yield is the average price paid per one kilometer to fly one metric ton of cargo. Cargo revenue is a function of the total metric tons of cargo carried and cargo yield. Courier revenue is a function of the number of packages shipped and the price per package. Our cargo capacity is measured in terms of ATKs. Our cargo usage is measured in terms of RTKs. Our cargo load factor is determined by dividing RTKs by ATKs.

Our other revenue-generating activities primarily comprise sales of LifeMiles program rewards to commercial partners and members of the program (net of the value of the underlying rewards, which, when redeemed, are recognized as passenger revenue). We recognize revenue upon the signing of a commercial agreement. Our other revenue also includes air transport-related services such as maintenance, crew training and other airport services provided to other carriers through our Avianca Services division, service charges, ticket penalties, aircraft and property leases, marketing rebates, duty-free sales, charter flights and other general operating revenue.

For additional information, see “—Critical Accounting Policies and New and Amended Standards and Interpretations—Revenue Recognition – Revenue from Contracts with Customers.”

The following table sets forth certain passenger and cargo data for the periods indicated:


	Year ended December 31,
	2019			2018			2017
Passenger:
ASK (in millions)		54,410			53,310			48,401
RASK		8.5			9.2			9.2
CASK		9.5			8.7			8.6
Load factor		81.7	%		83.0	%		83.1	%
Yield (in U.S. cents)		8.8			9.2			8.8
Total passengers (in millions)		30,538			30,628			29,459
Cargo^*
Capacity (in ATKs, in millions)		2,739			2,460.2			2,489.0
Load factor		57.7			57.3			57.0
Yield (in U.S. cents)		0.32			0.395			0.340
Cargo (in thousands of metric tons)		601.8			563.1			566.0
RASK (in U.S. cents)		8.5			9.2			9.2.

*	Includes courier services.

Operating Expenses

Aircraft fuel expense is the main component of our operating expenses. In 2019, aircraft fuel expense represented 23.3% of our total operating expenses and 26.1% of our total operating revenue. In addition to aircraft fuel expense, our principal operating expense categories comprise salaries, wages and benefits, sales, ground operations, air traffic, maintenance and repairs, depreciation and amortization, impairment, administrative expenses, passenger services and flight operations. A common measure of per-unit costs in the airline industry is CASK.

Flight Operations. Our flight operations expense primarily comprises insurance coverage for hull and liabilities (passenger liability and third-party liability), hull war, hull deductible and war excess and also includes hotel accommodation, per diem expense and training costs. We insure in the London reinsurance market. From 2017 to October 2018, we also included short-term aircraft crew maintenance and insurance contracts to mitigate effects of the 2017 pilots’ strike under this line item.

Aircraft Fuel. Our aircraft fuel expenses refer to our “into-plane” fuel cost (which includes the fuel price, taxes and distribution costs). These expenses are variable and fluctuate based on global oil prices and vary significantly from country to country primarily due to local distribution and transportation costs and taxes. In 2019, we purchased 29% of our fuel at our largest hub in Bogotá, where we were able to obtain better fuel distribution prices relative to other locations due to volume discounts. We have 30 fuel suppliers across our international network and seek to fuel our aircraft in cities where fuel prices are lower. From 2018 to 2019, the price of WTI crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, decreased 12.6% from an average of $65.2 per barrel in 2018 to an average of $57.0 per barrel in 2019.

The following table sets forth certain summary information relating to our fuel expenses for the periods indicated:


	Year ended December 31,
	2019		2018		2017
Average price per gallon of jet fuel into plane (net of hedge) (in U.S. dollars)		2.23		2.34		1.91
Gallons consumed (in thousands)		538,990		518,248		483,512
Available seat kilometers (in millions)		54,410		53,310		48,401
Gallons per ASK (in thousands)		9.1		9.1		9.4

*	Data does not include regional operations in Central America or cargo operations.

Our total fuel costs are also affected by settlements of our fuel hedge instruments. Our fuel hedging strategy contemplates hedging between 0% to 50% of our projected fuel consumption over the next 12 months and in recent years we have generally hedged between 20% to 30% of our projected fuel consumption. As of December 31, 2019, we had hedges in place for approximately 2.6% of our projected fuel consumption for 2020 through mechanisms such as futures, forwards and option contracts. See “Quantitative and Qualitative Disclosures About Market Risk—Fuel” below.

Ground Operations. Ground operations expenses primarily comprise landing and parking fees, air navigation fees, ramp services and passenger security related costs. These expenses are generally correlated with the number of departures and passengers carried.

Rentals. Our rentals expenses comprise leases of aircraft, engines and other equipment, and are generally fixed by the terms of our lease agreements. As of December 31, 2019, we held 58, or 34%, of our total 171 aircraft under leases, the majority of which had fixed interest rates and therefore were not exposed to interest rate fluctuations during their term. Of these aircraft, one is under a wet lease for approximately two months and the others have an average lease term of 62 months.

One A330-200 that was subleased to Oceanair was returned at the end of February 2019 and one A330-200F was returned in March 2019.

As part of our strategy in recent years we have replaced some of the financed aircraft in our fleet with leased aircraft. As of December 31, 2019, we owned 113, or 66%, of our total 171 aircraft, of which 58.5% is debt-financed.

Passenger Services. Our passenger services expenses primarily comprise expenses related to meals and beverages, baggage handling, in-flight entertainment and other expenses related to aircraft and airport handling services. These expenses are directly related to the number of passengers we carry and the number of flights we operate, as well as the type of service provided.

Maintenance and Repairs. Our maintenance and repairs expenses primarily comprise repairs of aircraft components, engines and equipment and routine maintenance for aircraft. We account for engine and other aircraft components overhaul expenses by using the deferral method pursuant to which we capitalize the cost of the overhaul and then amortize it until the shorter of the period to the next overhaul (based on total flying hours of each overhauled engine or estimated cycles for other aircraft components) and the end of the lease term. Maintenance of flight and aircraft equipment costs is generally correlated with departures and block hours.

For certain leases, we are contractually obligated to return aircraft in a defined condition. We establish reserves for restitution costs related to aircraft held under leases at the time the asset does not meet return conditions criteria and throughout the remaining duration of the lease. With effect from January 1, 2018, we establish reserves for restitution costs based on our assessment of restitution costs that are probable. Restitution costs are based on the net present value of the estimated average costs of returning the aircraft. We review these costs annually and adjust as appropriate. We perform our line maintenance for all fleet types at our hubs in Bogotá and San Salvador. Line maintenance at other domestic and international destinations is carried out by third-party contractors. We outsource all of our engine and certain other heavy maintenance on aircraft components.

Air traffic. Our air traffic expenses primarily comprise expenses relating to airport facilities, airport outsourced personnel, outsourced customer call center services and passenger compensation for interrupted or over-booked flights.

Selling expenses. Our selling expenses comprise commissions paid to travel agencies, credit card fees, GDS costs, which are fees related to reservation systems and global distribution, and advertising expenses.

Salaries, wages and benefits. Our salaries, wages and benefits expenses relate to personnel, including cockpit crew, flight attendants and maintenance, airport and commercial and administrative personnel). In some cases, we adjust salaries of our employees based on changes in the cost of living in the countries where these employees work, usually based on inflation.

Fees and other expenses. Our fees and other expenses primarily comprise expenses related to administrative functions, general services, legal and other professional fees and the gain or loss from the sale of assets. They also include local taxes, such as a “turn over tax,” which is a Colombian municipal tax that levies gross income due to the rendering of services. Each municipality has a different rate which varies depending on the kind of service, but the average tax rate is approximately 1.0%. Likewise, the tax paid within the fiscal year is considered a deductible expense for income tax purposes. Sales in Colombia are subject to value added tax which we withhold on behalf of the government. Revenue from certain of our domestic routes and all cargo revenue are not subject to this tax. We pay value added taxes on most of the services and products that we purchase but do not apply a tax credit on our value added tax accounts to all such value added tax payments. The value added tax payments that are not registered as tax credits are registered as additional expenses in our Colombian accounting.

Depreciation and amortization. Our depreciation and amortization expense includes depreciation of aircraft owned or leased, depreciation of non-aircraft assets, amortization of capitalized projects owned or leased and amortization of intangible assets.

Impairment. Our impairment expense comprises fleet retirement charges and extends to spare parts.

Interest income, interest expense, derivative instruments, foreign exchange and equity method income

Interest income. Interest income comprises interest income on funds invested and changes in the fair value of financial assets. We recognize interest income as accrued using the effective interest rate method.

Interest expense. Interest expense comprises interest expense on borrowings, unwinding of the discount on provisions and changes in the fair value of financial assets. We recognize borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset using the effective interest method.

Derivative instruments. Derivative instruments include the net effect of changes in fair value of our financial instruments as a result of variation in their market value.

Foreign exchange, net. Foreign exchange, net primarily comprises the net non-cash gain or loss on our assets and liabilities related to the appreciation or depreciation of the Colombian peso against the U.S. dollar.

Equity method income. Equity method income comprises an increase in assets in the form of a non-controlling participation in subsidiary income.

Income Taxes

Set forth below are certain highlights relating to the determination of our income tax rate in certain countries relevant to our operations, in each case as of December 31, 2019.

Colombia. The corporate income tax rate in 2019 was 33%. The income taxable base is the higher of the presumptive income based on taxable net worth and the ordinary base of taxable net profits. There was no surcharge on income tax in 2019, while in 2018 it was 4%. In the following years no surcharge rate will apply.

Our income tax payment is calculated after considering costs, expenses, tax credits originated by advance payments and withholdings. Our effective income tax rate could be lower than the statutory rate due to the application of two mechanisms: first, a tax credit based on the proportion of revenue generated by international flights over total operating revenue; and second, the application of a special deduction based on the value of our investment in productive fixed assets. Both mechanisms are protected from tax reforms until March 2028 through a legal stability contract signed with the Colombian government.

A tax bill enacted in December 2018 and confirmed in December 2019 provided for changes in income tax and value-added tax, among other changes. Among the major changes that are applicable as of January 1, 2019 and for following years are: (i) decrease in the corporate income tax rates from 37% for fiscal year 2018 to 33% for fiscal year 2019, 32% for fiscal year 2020, 31% for fiscal year 2021 and 30% for fiscal year 2022 and onwards, and (ii) gradual elimination of the presumptive income taxable base to 1.5% for fiscal year 2019, 0.5% for fiscal year 2020 and 0% for fiscal year 2021 and onwards, among others. In addition, tax reforms allow for VAT paid on the acquisition, import, creation or construction of real productive fixed assets to be treated as a credit for income tax purposes. The decrease in the corporate income tax rates in Colombia resulted in a decrease in our deferred tax and an increase in our income tax expense in 2019 as compared to 2018.

El Salvador. The corporate income tax rate in 2019 was 30.0%. The taxable base is net profit for the year (which includes certain permanent adjustments between accounting and tax rules). The effective income tax rate for our local legal entity is lower than the statutory rate due to the application of a percentage based on the proportion of flights taking off from El Salvador and other domestic gross revenue items over total revenue (considering Salvadorian source income). This percentage is applied to the total costs and expenses to obtain the total deductions. The total deductions are then subtracted from taxable income to obtain the taxable net profits subject to the 30.0% tax rate. A special tax (contribución especial) of 5.0% of the annual net income applies for large taxpayers. The income tax payment is calculated after the application of the tax credits originated by advance payments and withholdings.

Peru. The corporate income tax rate in 2019 was 29.5%. The taxable base is net profit for the year (that includes certain permanent adjustments between accounting and tax rules). The income tax payment is calculated after the application of the tax credits originated in advance payments and withholdings. A temporary tax on net assets applies, based on the tax value of the net assets booked at the previous tax year closing. This tax rate is 0.4%, which is applied to the net assets which value exceeds an exempted threshold.

Costa Rica. The corporate income tax rate in 2019 was 30.0%, and the taxable base is the net profit for the year (which includes certain permanent adjustments between the accounting and tax rules). The effective income tax rate for our local legal entity is lower than the statutory rate due to the application of a percentage based on the proportion of flights taking off from Costa Rica and other domestic gross revenue items over total revenue (considering Costa Rican source income). This percentage is applied to the total costs and expenses to obtain the total deductions. As a result, the total deductions are subtracted from the taxable income to obtain the taxable net profits subject to the 30.0% tax rate. The income tax payment is calculated after application of the tax credits originated in advance payments and withholdings.

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. 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 local air transportation services, a reduce rate of 4% applies, by contrast for international air transportation services the tax rate is 0.4%). In addition, from July 1, 2019, any revenue obtained from the sale, lease, or assignment of rights over real estate, goods, intellectual property and other intangibles that are not part of the taxpayer ordinary business, is going to be taxed at the general rate of 15%. Any surplus of revenue distributed as dividends or that resembles dividends will also be taxed as capital gains at the rate of 10%. However, taxpayers that sell any of these goods or rights before the law comes into force can choose to pay a 2.25% rate over the first sale that amounts to any capital gain.

Mexico. The corporate income tax rate in 2019 was 30%. The taxable base is net profit for the year (that includes some permanent adjustments between accounting and tax rules), and the taxable base is the higher of the presumptive income based on taxable net worth and the ordinary base of taxable net profits.

Ecuador. The corporate income tax rate in 2019 was 25%. However, for Ecuadorian entities with a headquarter located in a tax haven jurisdiction (such as Panamá), the corporate income tax rate was 28%. This country also has an income tax advance payment that can be offset on the income tax return at the end of the fiscal year.

Panama. Revenue at our holding company generated by foreign operations are not subject to taxation in Panama in accordance with Panamanian legislation since it is not deemed to be earning active income from Panamanian sources.

Bahamas. The Commonwealth of the Bahamas does not impose income taxes on companies organized under its jurisdiction. Revenue of our subsidiary Grupo Taca Holdings generated by foreign operations are not subject to taxation in accordance with the legislation of the Bahamas. However, the subsidiaries of Grupo Taca Holdings are subject to local taxes in the jurisdictions in which they operate.

Bermuda. Currently, Bermuda’s government grants a Tax Insurance Certificate to permit companies, permanent establishments, unit trusts and partnerships until March 31, 2035, which imposes no taxes on profits, income, dividends, or capital gains and has no requirement to distribute dividends. An annual government fee, based on the assessable capital, is imposed on companies.

United States. Under President Trump’s administration, a tax reform was enacted on December 22, 2017, in which the corporate tax rate was reduced to 21%. The reform also established a mandatory repatriation of accumulative foreign earnings with a reduced tax rate of 15.5% payable in 8 installments (one per year) as incentive. For those entities that repatriate their foreign earnings, they will have a territorial income tax for the following years, and not a worldwide income tax as was applicable for 2017 and previous years. The reform also allows for indefinite net operating loss carryforwards that can offset up to 80% of taxable income.

Deferred income tax. Deferred tax is generated by temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is calculated using the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantially enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.

A deferred income tax asset is recognized for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. We book this difference in our income statement as deferred income tax. For the year ended December 31, 2019, we determined that we would generate sufficient taxable income to realize our deferred tax assets. According to our financial forecasts no taxable income will be generated during the next four to five years. Therefore, the deferred tax assets (of our subsidiaries that would allow for the realization of such deferred tax assets) have only been recognized by an amount up to the concurrence of the deferred tax liabilities.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with IFRS as issued by the IASB. The preparation of financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. We believe that our estimates and judgments are reasonable; however, actual results and the timing of recognition of such amounts could differ from those estimates.

The following discussion describes those areas that require considerable management judgment or involve a higher degree of complexity in the application of the accounting policies that currently affect our financial condition and results of operations. For more information, see notes 2.d. and 3 to our audited consolidated financial statements included elsewhere in this annual report.

Leased Assets

We have applied IFRS 16, which sets out the principles for the recognition, measurement, presentation and disclosure of leases, from January 1, 2019. We record leases in our statement of financial position and treat all leases as financial leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from these requirements.

To determine the value of our lease liability, we measure the value of the right-of-use assets and include the value of the payments made before the start of the lease. Because we adopted the modified retrospective approach to account for the introduction of IFRS 16, we did not adjust the comparable figures for prior years, and all adjustment effects as of January 1, 2019 have been presented as adjustments to retained earnings. For more information, see note 4.1 to our audited consolidated financial statements included elsewhere in this annual report.

Intangible Assets

We initially measure intangible assets acquired separately at cost in accordance with IAS 38 “Intangible Assets.” The cost of intangible assets acquired in a business combination is their fair value as of the date of acquisition. We do not capitalize internally generated intangible assets, excluding capitalized development costs, and we record the related expenditure in our consolidated statement of comprehensive income in the year in which we incur the expenditure.

We assess the useful lives of intangible assets as either finite or indefinite. We amortize intangible assets with finite lives over their useful economic lives and assess them for impairment whenever there is an indication that the intangible asset may be impaired. We review the amortization period and the amortization method for an intangible asset with a finite useful life at least at the end of each reporting period. We account changes in the expected useful life or in the expected pattern of consumption of future economic benefits embodied in the asset by changing the amortization period or method, as appropriate, and treat them as changes in accounting estimates. We record the amortization expense on intangible assets with finite lives in the consolidated statement of comprehensive income within depreciation and amortization and impairment.

We do not amortize intangible assets with indefinite useful lives, but we test them for impairment annually, either individually or at the cash-generating unit level. We review the assessment of indefinite life annually to determine whether the indefinite life continues to be supportable. If not, we make the change in useful life from indefinite to finite on a prospective basis.

We measure gains and losses arising from the de-recognition of an intangible asset as the difference between the net disposal proceeds and the carrying amount of the asset and we record any such gain or loss in our consolidated statement of comprehensive income when we derecognize the asset.

Revenue Recognition – Revenue from Contracts with Customers

We recognize revenue from two main sources: (i) passenger revenue and (ii) cargo and other revenue.

We recognize passenger revenue, which includes transportation, baggage fees, fares and other associated ancillary revenue, when transportation is provided. We recognize cargo revenue when shipments are delivered. We recognize other operating revenue when the related performance obligations are met.

We initially defer the tickets and other revenue related to transportation that have not yet been provided and record these as “air traffic liability” in our consolidated statement of financial position, deferring the revenue recognition until the trip occurs. For trips that have more than one flight segment, we consider each segment as a separate performance obligation and recognize the revenue of each segment as the trip takes place. We recognize revenue from tickets sold by other airlines where we provide transportation as passenger revenue at the estimated value that will be billed to the other airline when the trip is provided.

Reimbursable tickets usually expire after one year from the date of issuance. Non-refundable tickets generally expire on the date of the intended trip, unless the date is extended by customer notification on or before the scheduled travel date. We recognize rates for unused tickets that are expected to expire as revenue, based on historical data and experience, supported by a third party valuation specialist to assist management in this process. We periodically evaluate this liability and we record any significant adjustment in our consolidated statement of comprehensive income. These adjustments are mainly due to differences between actual events and circumstances such as historical sales rates and customer travel patterns that may result in refunds, changes or expiration of tickets that differ substantially from our estimates. We evaluate our estimates and adjust deferred revenue for unearned transportation and revenue for passenger transport when necessary.

We collect the various taxes and fees calculated on the sale of tickets to customers as an agent and send collections to the tax authorities. We record a liability when taxes are collected and deregister it when the government entity is paid.

Under our LifeMiles program, we recognize liabilities for accumulated miles are under “frequent flyer deferred revenue” until the miles are redeemed. We recognize the revenue for the redemption of miles at the time of the exchange of miles. We calculate the revenue based on the number of miles redeemed in a given period multiplied by the cumulative weighted average yield which leads to the decrease of “frequent flyer deferred revenue.” We review breakage estimates every six months. If a change in the estimate is presented, we account for the adjustments prospectively through income, with an adjustment of “update” to the corresponding deferred income balances.

Under IFRS 15, we do not consider ancillary revenue a separate performance obligation and we combine it with the existing performance obligation and account for it as if part of the original ticket sale transaction. Thus, we combine the original price of the ticket and the amount paid for the ancillary service and consider them one single performance obligation, which we defer and recognize as “passenger revenue” when the related consideration is satisfied.

Useful Life of Property and Equipment

We estimate useful lives and residual values of property and equipment, including fleet assets based on network plans and recoverable values. Useful lives and residual values are reassessed annually, taking into consideration the latest fleet plans and other business plan information.

We measure flight equipment, property and other equipment at cost less accumulated depreciation and accumulated impairment losses in accordance with IAS 16 “Property, Plant and Equipment.” Property, operating equipment, and improvements that are being built or developed for future use by us are recorded at cost as under-construction assets. When under-construction assets are ready for use, the accumulated cost is reclassified to the respective property and equipment category. We derecognize property and equipment upon disposal or when no future economic benefits are expected from its use or disposal. Gains and losses on disposal of property and equipment are determined by comparing the proceeds from disposal with the carrying amount.

The costs incurred for major maintenance of an aircraft’s fuselage and engines are capitalized and depreciated over the shorter period to the next scheduled maintenance or return of the asset. The depreciation rate is determined according to the asset’s expected useful life based on projected cycles and flight hours. Routine maintenance expenses of aircraft and engines are charged to income as incurred.

We calculate depreciation over the depreciable amount, which is the cost of an asset, or other amount substituted for cost, less its residual value. Depreciation is recognized in the consolidated statement of comprehensive income on a straight–line basis over the estimated useful lives of flight equipment, property and other equipment, since we believe this method most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. We depreciate rotable spare parts for flight equipment on the straight-line method, using rates that allocate the cost of these assets over the estimated useful life of the related aircraft. The estimated useful life for aircraft ranges between 10 to 30 years and for aircraft components and engines, the useful life of fleet associated with component or engines is taken as the reference point.

Residual values, amortization methods and useful lives of the assets are reviewed and adjusted, if appropriate, at each reporting date. The carrying value of flight equipment, property and other equipment is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable and the carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.

We receive credits from manufacturers on acquisition of certain aircraft and engines that may be used for the payment of maintenance services, training, acquisition of spare parts and others. These credits are recorded as a reduction of the cost of acquisition of the related aircraft and engines and against other accounts receivable. These amounts are then charged to expense or recorded as an asset, when the credits are used to purchase additional goods or services. These credits are recorded within other liabilities in the consolidated statement of financial position when awarded by manufacturers.

We do not depreciate land. Administrative property in Bogotá, Medellín, San Salvador and San Jose are recorded at fair value less accumulated depreciation on buildings and impairment losses recognized at the date of revaluation. We believe that valuations are performed with sufficient frequency to ensure that the fair value of a revalued asset does not differ materially from its carrying amount. A revaluation reserve is recorded in other comprehensive (loss) income and credited to the asset revaluation reserve in equity. However, to the extent that it reverses a revaluation deficit of the same asset previously recognized in profit or loss, the increase is recognized in profit and loss. A revaluation deficit is recognized in the other comprehensive (loss) income, except to the extent that it offsets an existing surplus on the same asset recognized in the asset revaluation reserve. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings.

Leased Aircraft Return Provisions

Our aircraft lease contracts establish certain conditions in which aircrafts shall be returned to the lessor once the contractual period terminates. To comply with these return conditions, we incur costs due to certain payments made to the lessor which reflect the use of certain components throughout the term of the lease contract, maintenance deposits, or overhaul costs of components. Under certain contracts, if the asset is returned to the lessor in a better

maintenance condition than the one in which the asset was originally delivered, we are entitled to receive compensation from the lessor. We accrue a provision to comply with the return conditions at the time the asset does not meet the return condition criteria under the conditions of each lease contract. The recognition of return conditions requires management to make estimates of the costs of return conditions and use inputs such as hours or cycles flown of major components, estimated hours or cycles at redelivery of major components, projected overhaul costs and overhaul dates of major components. Upon redelivery of aircraft, any difference between the provision recorded and actual costs is recognized in the result of the annual period.

Derivative Financial Instruments and Hedging Activities

Changes in the fair value of our financial instruments that are intended to reduce the levels of foreign currency risk and interest rates risk are recognized through profit or loss when the derivative contracts are not designated as hedges for accounting purposes.

Liabilities on derivatives which are not designated as hedges are recognized under “Other Liabilities” in our “Consolidated Statement of Financial Position.”

Foreign currency risk. Certain financial derivatives contracts are measured at fair value through profit or loss and are not designated as hedging instruments for accounting purposes. The foreign currency forward contract balances vary with the level of expected foreign currency sales and purchases and changes in foreign currency forward rates.

Interest rate risk. We are exposed to interest rate risk primarily on financial obligations to banks and aircraft lessors. Certain financial derivative instruments are recognized at fair value through profit or loss and are not designated as hedging instruments for accounting purposes. The interest rate contracts vary according to the level of expected interest payable and changes in interest rates of financial obligations. Interest rate risk is managed through a mix of fixed and floating rates on loans and lease agreements, combined with interest rate swaps and options. Under these agreements, the Group pays a fixed rate and receives a variable rate.

Deferred Income Tax

We recognize deferred tax for temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are recognized to the extent that it is probable that the temporary differences, the carry forward of unused tax credits and any unused tax losses can be utilized, except (i) where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss or (ii) in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax laws enacted or substantively enacted at the reporting date. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, and the tax rates used, based upon the likely timing and the level of future taxable profits together with future tax planning strategies and the enacted tax rates in the jurisdictions in which the entity operates.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax relating to items recognized outside profit or loss is recognized in correlation to the underlying transaction either in OCI or directly in equity. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but we intend to settle current tax liabilities and assets on a net basis.

Recent Accounting Pronouncements

Amendments to IFRS 3: Definition of a Business

In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to determine whether an acquired set of activities and assets is a business or not. The amendments clarify the

minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to assess whether an acquired process is substantive, narrow the definitions of a business and of outputs and introduce an optional fair value concentration test. The amendments apply prospectively to transactions or other events that occur on or after January 1, 2020.

Amendments to IAS 1 and IAS 8: Definition of Material

In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects of the definition. The new definition states that “information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” We do not expect these amendments to have a significant impact on our consolidated financial statements.

Results of Operations for the Year Ended December 31, 2019 and December 31, 2018

The following discussion of our results of operations is based on the financial information derived from our audited consolidated financial statements. In the following discussion, references to increases or decreases in any year are made by comparison with the corresponding prior year, as applicable, except as the context otherwise indicates. The following table sets forth certain income statement data for the years indicated:


	Year ended December 31,												% Change
	2019			2018			2019			2018			2018 to 2019
	(in $ millions)						(as a % of operating revenue)
Operating revenue:
Passenger		3,904.8			4,074.4			84.5	%		83.4	%		(4.2	)%
Cargo and other		716.7			816.4			15.5	%		16.6	%		(12.2	)%

Total operating revenue		4,621.5			4,890.8			100.0	%		100.0	%		(5.5	)%
Operating expenses:
Flight operations		75.7			153.6			1.6	%		3.1	%		(50.7	)%
Aircraft fuel		1,204.1			1,213.4			26.1	%		24.8	%		(0.8	)%
Ground operations		478.0			474.8			10.3	%		9.7	%		0.7	%
Rentals		11.8			267.7			0.3	%		5.5	%		(95.6	)%
Passenger services		176.5			188.7			3.8	%		3.9	%		(6.5	)%
Maintenance and repairs		257.6			206.5			5.6	%		4.2	%		24.8	%
Air traffic		279.0			269.6			6.0	%		5.5	%		3.5	%
Selling expenses		500.2			530.9			10.8	%		10.9	%		(5.8	)%
Salaries, wages and benefits		717.3			760.8			15.5	%		15.6	%		(5.7	)%
Fees and other expenses		411.6			203.3			8.9	%		4.2	%		102.4	%
Depreciation and amortization		593.4			350.5			12.8	%		7.2	%		69.3	%
Impairment		470.7			38.9			10.2	%		0.8	%		1,110	%

Total operating expenses		5,175.8			4,658.7			112.0	%		95.3	%		11.1	%


	Year ended December 31,												% Change
	2019			2018			2019			2018			2018 to 2019
	(in $ millions)						(as a % of operating revenue)
Operating (loss) profit		(554.3	)		232.1			(12.0	)%		4.7	%		—
Interest expense		(299.9	)		(212.3	)		(6.5	)%		(4.3	)%		41.3	%
Interest income		9.0			10.1			0.2	%		0.2	%		(10.6	)%
Derivative instruments		(2.2	)		(0.3	)		(0.0	)%		(0.0	)%		732.3	%
Foreign exchange, net		(24.2	)		(9.2	)		(0.5	)%		(0.2	)%		162.4	%

Equity method profit		1.5			0.9			0.0	%		0.0	%		69.5	%

Profit (loss) before income tax		(870.0	)		21.4			(18.8	)%		0.4	%		—
Total income tax expense		(24	)		(20.2	)		(0.5	)%		(0.4	)%		18.7	%

Net profit for the year		(894.0	)		1.1			(19.3	)%		0.0	%		—

Operating Revenue

Our operating revenue in 2019 was $4,621.5 million, a 5.5% decrease from $4,890.8 million in 2018, mainly due to a decrease in passenger revenue reflecting a 0.2% decrease in transported passengers and a 4.0% decrease in average fare across our network. In addition, passenger revenue from charter flights decreased because we terminated operations of certain domestic routes from and to San Andres, Cali and Leticia. Cargo revenue decreased due to volatility present in global markets in the first half of 2019.

In addition, in 2019, loyalty revenue increased $16.5 million compared to 2018. Our operating revenue per ASK was 8.49 cents in 2019, a 7.7% decrease from 9.2 cents in 2018.

Passenger Revenue. Our passenger revenue was $3,904.8 million in 2019, a 4.2% decrease from $4,074.4 million in 2018, mainly due to a 4.0% decrease in our average fare and a 0.2% decrease in transported passengers. In addition, passenger revenue from charter flights decreased because we terminated operations of certain domestic routes from and to San Andres, Cali and Leticia, which effects were partially offset by an increase in ancillary revenue, including from excess baggage and date change penalties. Loyalty revenues increased 5.9% due to the accounting impact in relation to reclassification in miles redemption and miles cash in 2019 from other revenue. Additionally, miles redeemed increased 4.2%, and our revenue recognition rate increased 5.9%, from 0.34 in 2018 to 0.36 in 2019.

Our passenger load factor decreased, from 83.1% in 2018 to 81.7%, in 2019, while our capacity increased 2.4%. Meanwhile, our passenger yield decreased 4.9%, from 9.3 cents in 2018 to 8.8 cents in 2019. Our transported passenger volume decreased 0.2%, from 30,594 million in 2018 to 30,538 million in 2019.

Cargo and Other Revenue. Our revenue from cargo and other was $716.7 million in 2019, a 12.2% decrease from $816.4 million in 2018, mainly due to a decrease in volume transported relative to 2018, as we terminated our partnership agreement with Etihad, and due to volatility present in global markets during the first half of 2019, and because strong competition and macroeconomic conditions have resulted in a decrease in average cargo fares. Additionally, there was a decrease in mail revenues and other cargo related revenues. Other revenues decreased due to reclassifications, recovery of provisions and other effects presented, such as the reclassification of compensation received from Rolls Royce due to Trend 1000 engines malfunctions in B787 aircraft. Also, there was a decrease in aircraft lease revenues as a result of returns of two aircraft leased to Ocean Air. Additionally, operative and administrative services revenues decreased due to reduction in ramp and traffic operations revenue. Finally, non-passenger loyalty revenues decreased, due to less fee revenues, which effect was partially offset by higher non-air partners redemptions revenue due to a redeemed mile increase.

Our cargo revenue was $568.4 million in 2019, a 8.1% decrease from $618.8 million in 2018, mainly due to a decrease in average cargo fares. In 2019, our cargo capacity increased 11% in terms of ATKs, as compared to 2018, while our cargo load factor increased from 57.3% in 2018 to 57.8% in 2019.

Our other operating revenue was $148.4 million in 2019, a 25% decrease from $197.7 million in 2018, mainly due to the factors discussed above.

Operating Expenses

Operating expenses were $5,175.8 million in 2019, a 11.1% increase from $4,658.7 million in 2018, mainly due to an increase in depreciation and amortization expense, impairment expense, maintenance expenses relating to engine and airframe line maintenance and landing gear expenditures, air traffic costs and fees and other expenses from legal and financial advisory as a part of our debt reprofiling and implementation of our Avianca 2021 Plan. As a percentage of operating revenue, operating expenses increased from 95.3% in 2018 to 112.0% in 2019.

LifeMiles operating expenses were $44.2 million in 2019, a 9.1% increase from $40.6 million in 2018, mainly due to a $1.4 million increase in selling and marketing expenses and a $3.9 million increase in salaries, wages and benefits, which effects were partially offset by a decrease of $1.0 million in depreciation and amortization expenses and a decrease of $0.7 million in general, administrative and other expenses.

In 2019, our operating expenses excluding aircraft fuel expenses increased 15.3% compared to 2018 and our capacity in ASKs increased 2.4% compared to 2018. As a result, our CASK excluding fuel increased 12.9% in 2019 compared to 2018. The following table sets forth the breakdown of our CASK:


	Year ended December 31,
	2019		2018		% Change
	(in U.S. cents, except for percentages)
CASK
Flight operations		0.14		0.29		(51.7	)%
Aircraft fuel		2.21		2.28		(2.8	)%
Ground operations		0.88		0.89		(1.4	)%
Rentals		0.02		0.50		(95.7	)%
Passenger services		0.32		0.35		(8.4	)%
Maintenance and repairs		0.47		0.39		22.3	%
Air traffic		0.51		0.51		1.4	%
Sales and marketing		0.92		1.00		(7.7	)%
General, administrative and other		0.76		0.38		98.4	%
Salaries, wages and benefits		1.32		1.43		(7.6	)%
Depreciation and amortization		1.09		0.66		65.2	%
Impairment		0.87		0.07		1,142.9	%

Total		9.51		8.74		8.9	%
Total excluding fuel		7.30		6.46		12.9	%

Flight operations. Flight operations expense decreased 50.7% from $153.6 million in 2018 to $75.7 million in 2019, mainly due to a decrease in lease expenses for cargo space and other outsourced services expenses driven by less wet leases expenses. Additionally, pilot, copilot and cabin crew initial training expenses decreased due to less hiring in 2019. In addition, pilot travel expenses decreased due to less operations and renegotiation of hotel rates. These effects were partially offset by an increase in aircraft and other insurance expenses. In terms of unit cost per ASK, flight operations decreased from 0.29 cents in 2018 to 0.14 cents in 2019.

Aircraft Fuel. Aircraft fuel expenses decreased 0.8% from $1,213.4 million in 2018 to $1,204.1 million in 2019, mainly due to a 4.6% fuel price decrease, from $2.34/gallon in 2018 to $2.23/gallon in 2019, which effect was partially offset by hedge settlement losses. Additionally, consumed gallons increased 4.0%. In terms of unit cost per ASK, aircraft fuel decreased from 2.28 cents in 2018 to 2.21 cents in 2019.

Ground Operations. Ground operations expense was $478.0 million in 2019, representing a 0.7% increase from $474.8 million in 2018, mainly due to an increase in landing and parking expenses as a result of an increase in operations with A320 and A321 aircraft and an increase in handling and airport expenses relating to navigation and ground service. In terms of unit cost per ASK, ground operations expense decreased 1.4%, from 0.90 cents in 2018 to 0.88 cents in 2019.

Rentals. Rentals expense was $11.8 million in 2019, representing a 95.6% decrease from $267.7 million in 2018, mainly due to the effects of our adoption of IFRS 16 as of January 1, 2019. Engine rentals expense decreased as a result of our reduced and simplified fleet strategy. In terms of unit cost per ASK, rentals expense decreased 95.7%, from 0.50 cents in 2018 to 0.02 cents in 2019.

Passenger Services. Passenger services expense was $176.5 million in 2019, representing a 6.5% decrease from $188.7 million in 2018, mainly due to a decrease in on-board food, beverage and entertainment expenses resulting from adjustments to options offered to passengers. In terms of unit cost per ASK, passenger services decreased by 8.4%, from 0.35 cents in 2018 to 0.32 cents in 2019.

Maintenance and Repairs. Maintenance and repairs expense was $257.6 million in 2019, representing a 24.8% increase from $206.5 million in 2018, mainly due to lower engine maintenance and repair expense in 2018 as a result of adjustments in the return provisions for CFM engines, pursuant to which we excluded overhaul provisions in 2018, an increase in airframe and line maintenance expense and an increase in the costs of line maintenance materials.

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