Avianca receives preliminary okay for Chapter 11 bankruptcy

An Avianca white plane is being loaded with cargo.

A U.S. federal court on Monday agreed on an interim basis to Avianca Holdings SA’s initial motions to voluntarily reorganize under court-supervised bankruptcy protection.

Latin America’s second-largest airline sought bankruptcy over the weekend in an effort to continue operating as a smaller company, saying the shutdown of its passenger network because of the coronavirus pandemic is putting extreme pressure on its cash reserves.

Avianca also operates a fleet of freighters and is a significant conduit for trade in Latin America.

The U.S. Bankruptcy Court for the Southern District of New York approved motions allowing Avianca to pay past-due and future employee wages and benefits, maintain its customer programs and honor obligations to travel agency partners, vendors and suppliers.

The relief provides the Colombian flag carrier short-term certainty that it can use funds for ongoing operations while it negotiates with creditors and other stakeholders on new terms of engagement. 

Avianca, which is liquidating its Peruvian operations, said it hopes to secure permanent approval of all orders at the next court hearing, which is scheduled for June 11.

One of the creditors that will take part in the restructuring is United Airlines, which  loaned more than $600 million to Avianca’s largest shareholder in an unsuccessful bid to create a joint venture that would have included Copa Airlines and helped it compete against other carriers in the region. One of the loans is now in foreclosure and United wrote off $697 million for the loans and related guarantees.

The bankruptcy was not unexpected given that Avianca had already been working to restructure its business for the past two years.

“The Chapter 11 process is a responsible way for Avianca to protect and preserve the company as we navigate the severe impact of COVID-19 on the airline and travel industries. We are continuing our government discussions, and with their support, we are confident that we will emerge as a better, more efficient airline that continues to serve customers and provide essential air travel across Colombia and Latin America,” said CEO Anko van der Werff in a statement. “We are grateful for the support of our business partners and recognize our continuing relationships will also be important to a successful outcome of this process.”

Avianca is negotiating with the government of Colombia and governments in other key markets for emergency coronavirus-related assistance, similar to the $50 billion aid package the U.S. government gave domestic airlines.

Experts say more bankruptcies and failures are likely as the airline industry tries to cope with the economic devastation from the coronavirus pandemic. Regional U.K. carrier Flybe and Virgin Australia Holdings entered into court-supervised bankruptcy proceedings in the past two months and South African Airways shut down operations on May 1.

Boeing CEO David Calhoun said on the “Today Show” Tuesday that a U.S. airline likely would collapse this year.