Avianca, Aeroitalia, Synergy, The Future of Low Cost: An Unfiltered Conversation with Germán Efromovich

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One of Latin American aviation’s most important figures in this century is Germán Efromovich. The Bolivian-born businessman, who also has Brazilian, Colombian and Polish citizenships, took over Avianca back in 2004, when the airline group was on the brink of bankruptcy, and put it back on track.

His other large business in the sector, OceanAir — better known as Avianca Brasil, as it was licensed under an agreement with the Colombian group — managed to capture over 10% of the aviation market in Latin America’s largest country.

Aviacionline’s last interview with Efromovich was in 2018, when he was launching Avianca Argentina, again with a licensed brand. But in this industry, five years can be too many. During this period, he lost his controlling stake in Avianca while the Argentina and Brazil airlines went bust — and that was even before the pandemic.

Less than two years ago, however, Efromovich helped launch Aeroitalia. The airline has seen relative success in its first year of operations, even registering a profit, according to its management.

Efromovich welcomed us in his office at Aeroitalia’s headquarters, located in the south of Rome, for a full interview.

The full transcript of the conversation, translated from Portuguese, was edited for clarity.

Aviacionline: Our last interview was in 2018. Tell me a little more about your life since then — quite a few years have passed.

German Efromovich: Yes, almost 5 years have gone by since that time, and they were quite difficult, you know? At that time in Colombia, obviously, I and the company left Avianca. We left in a rather grotesque way, but the legacy remained there. Unfortunately, there are many complaints today about the level of attention and the level of service since my time. But they changed the model, didn’t they? And the model is a different type of service, that’s what you’re saying, but people think they got too used to a special care.

Not only in Avianca, but the market also changed. Then came the pandemic, which changed a lot of other things.

During the pandemic, a lot of other things changed, right. I started in aviation, and the opportunity in Italy arose. Obviously, [with] my history and what I managed to achieve with the team I had created a trust in the market worldwide, and I have numerous investors approaching me to invest, saying that as long as I take on the management and strategic part of the business, they are in.

A business opportunity came up in Italy. We decided to start with the banking investors. Today, we have been in business for 14 months, and in less than a year, we were already flying. I think that was historically unprecedented in commercial aviation on planet Earth.

AL: You were talking about Avianca, and there are two situations: Avianca Brasil, right? First, it collapsed, and then there was the whole situation in Colombia. Let’s talk briefly about Avianca Brasil. Could that whole situation have been avoided? Now, looking back, it’s easy to say, right?

GE: Yes, it’s like being a sports commentator on Monday. Well, Avianca Brasil is the old OceanAir, which used to work under the brand authorization from Avianca Colombia. It could undoubtedly have been avoided because what happened was that the rug was pulled out from under the people in Brazil. They let the people who were managing the company at the time deal with the situation while I was already out for several years in Colombia. I witnessed that rug being pulled at the last minute when United had committed, along with another company, not to provide the funds they promised for payment. You remember, right? There would have been an investment of USD150 million that Brazil needed.

AL: So Synergy [Efromovich’s holding].

German Efromovich: Exactly. And at the last minute, they changed their minds; there wasn’t even time for the people in Brazil to look for alternatives. There wasn’t enough time to counter it. The situation caught everyone by surprise, so there were two facts. In my opinion, United must have done this because they had an interest in OceanAir disappearing since they had invested 20% in Azul. They bought it, and that was the final nail in the coffin.

The lessors made an agreement. And when they requested bankruptcy protection, LATAM and Azul came to the lessors and said “these guys are going to go bust, give us the planes.” So they took the planes away. You don’t recover without planes, right? So, it was very well orchestrated among the competitors because Avianca Brasil was causing trouble for many people. It was the underdog in Brazil at that time.

Without a doubt, this was unfortunate. It caught everyone by surprise. They even had hope of being able to fly again. They had promises of capital injections and, in my opinion, wrongly kept people at home due to the hope of being able to fly. And in the end, it didn’t work out. Unfortunately, from what I saw from the people there, it didn’t work. It’s very sad because it was a beautiful company.

AL: Now going to Colombia, is it the same story? Is it the same loan that caused the two events?

GE: No, no, no, no, no. The loan in Colombia had nothing to do with it. Avianca Colombia was doing well. Avianca Colombia was listed on the stock exchange. It had even managed to survive a strike and a default by Venezuela. And it was finalizing the cooperation contract with United. Everything was in place. The problem for Avianca Colombia was the loan that the group took from United to pay off a debt with a fund. They gave the shares as collateral.

Having given these shares as collateral, when the shares suffered a sudden drop in value on the stock market, [which] in my opinion, [was] also provoked and purposely done… if the value of the collateral is not sufficient, they do what is called a margin call. So they made a margin call, and the group didn’t have the liquidity for the margin call. Then a Machiavellian play was set up, and they took over the management of the company. Then the pandemic came.

The pandemic really brought the shares to the ground. They even delisted the company; we were already out, right? And then I said, “fine, keep the collateral.”

AL: But after the margin call, did you still have a chance to get the shares back?

GE: We filed a lawsuit in New York to get those shares back, and we had investors who were willing to invest. Then the pandemic came. So when the pandemic came, in economic terms, the group decided, and the board agreed, not to worry about getting the shares back; just let them take the shares to pay off the debt. Do you understand?

AL: So today, you don’t have anything to do with Avianca Colombia?

GE: The group has nothing to do with Avianca.

AL: There’s this change, not just a change in Avianca, but a transition in Latin America to this low-cost model. For example, JetSMART. How do you see this?

GE: First of all, I’ve said a million times for many years now that there is no such thing as a low-cost model. The term “low-cost” is wrong. The ticket prices have not gone down; the level of service has been lowered, and the level of discomfort on the planes has increased. That’s it. What you have is high-density seating at the same price. Now, why? Do you know why? Because the low-cost business is wrong.

The low-cost model only works in places like Europe, for example. Why does it work in Europe? It’s not because the airline’s costs are lower. The price of the plane, the fuel, the crew, almost everything is the same. It’s not because they remove the Coca-Cola and the sandwich that they make a profit. Where is the advantage of an EasyJet or Ryanair in terms of price? If you look at their prices today, the party is ending. But why did this model emerge and where did it grow?

Because they go to airports like London’s Luton Airport, for example. The airport pays millions to attract them. So the airline gets paid millions by the airport to operate there. Meanwhile, other airlines have to pay to operate at the same airport. They spend less, but even that is fictitious. Because they started charging for luggage and everything else, it’s just a matter of time before they charge for using the bathroom.

But with all these fees, sometimes a low-cost ticket ends up costing the same or more than other airlines. The difference is so small that today, legacy airlines also charge you when you want to choose your seat, bring extra luggage, etc. So this model has become unified. It will only make a difference if they want to operate at a different airport. If that different airport is far from the city center you’re going to, unless you walk or take the bus, you’ll end up paying the difference in the ticket price for a taxi.

AL: In Colombia, there was the situation with Ultra and Viva. Have you been called back or invited to any projects in Latin America?

GE: No, we’re always being called, and we always look at whether we’ll return or not. It will depend on the business opportunity at the moment, we’re always looking at everything. But for now, we have nothing 100% closed, at least today, May 3rd. But I would say I never say no to business opportunities.

JM: How do you see the situation with Ultra and Viva in Colombia?

German Efromovich: As I just told you, they had no advantage in terms of airports, but they started selling tickets and competing with each other, selling tickets below cost. They started to burn cash. This, combined with the pandemic, destroyed the companies.

AL: Did you put money in Aeroitalia?

GE: We were out of liquidity, so what I put in is my brainpower.

AL: And it’s been working so far.

GE: Yes, we have had positive results in the past 14-15 months.

AL: How did this whole process happen, with you being called to come here? Did they call you?

GE: I look for opportunities first and then contacted the people who had contacted me. I was interested in Italy. I think Alitalia was a very historical and well-received brand by the public. It had its ups and downs, but it was a traditional brand.

The government was indecisive about selling it or not, holding an auction or not. In the end, before the pandemic, we were pre-qualified to participate in the privatization. Then the pandemic hit, and they decided not to privatize anymore and open another company. During my travels in Italy, I met Professor Intrieri [Gaetano Intrieri, now Aeroitalia’s CEO, ed.] and some investors who supported us. We looked at Blue Panorama, but the condition of the company was very poor, so we decided it wasn’t interesting.

The Professor suggested starting from scratch. I went back to the investors and said if they were willing to, we could start clean and from zero. In 4 months, we had a license.

AL: And what is your role in the company today?

GE: My role is non-executive chairman.

AL: Then you are mainly involved in strategy.

GE: Exactly, that’s correct.

AL: After more than a year in Europe, you must have noticed that the European market is quite competitive. Were you surprised when you started going head-to-head with, for example, Ryanair?

GE: No, we are not going head-to-head with Ryanair. Our goal is not to compete directly with anyone. We participate in tenders for PSO contracts, for example, in Sardinia and Sicily, and we have won them. These were contracts that Alitalia used to have — where there’s a lot of traffic. We are focusing on markets where there is more demand for routes. We might end up flying the same routes as Ryanair, but we are not in a price war. We are not going to engage in a price war.

AL: You [say you] focus on quality, [but] in Europe customers are very sensitive to price, right?

GE: Not just in Europe, people are sensitive to price everywhere! If you are going to buy the same product and someone offers it cheaper, you will buy it. But there must be people to offer that price. We are not going to offer suicidal prices for tickets. We will offer fair prices and give the customer what they deserve: respect, attention, and care.

AL: Can you compete on price with Ryanair, or is that not your goal?

GE: No, no, that’s not our intention, and we can’t compete with Ryanair on price given their size compared to us. It would be worse than David and Goliath, even though David won the battle. Anyway, we’re not trying to face this Goliath.

AL: And from your experience in Europe over the last two years, is there anything you can export to Latin America, or does Latin America already know how to handle aviation perfectly?

GE: Latin America knows how to handle aviation. The problem isn’t knowing how to handle aviation; it’s understanding the business and knowing how to manage it like any other business. In other words, you can’t run a business when you start selling your product below cost. That’s true for any industry, not just aviation. And when you’re talking about services, you have to respect your customers.

AL: The first year in Italy was financially positive, but it wasn’t easy. Last winter, you announced an ambitious network from Bergamo, and a few weeks later, you removed most of the routes. You still have an important operation there…

GE: …the problem with some routes is that we’re in a very competitive market. You start some routes, and they need time to mature. What happened with us is that you can’t get planes overnight. When the Sicily and Sardinia contracts came up, which are subsidized and profitable, instead of waiting to see what would happen, we took a step back. We left Heathrow, for example, because landing there is very expensive.

In Tel Aviv we secured slots, we didn’t have the right time slots, and people didn’t like to travel at those times. So, we decided to focus on what we have now and address those routes when we have more planes.

AL: Then it’s still in the plans.

GE: It’s in the plans, but for next year, when we receive more aircraft. We intend to have 15 aircraft by the end of 2024.

AL: Regarding your fleet plan, you are currently operating with five aircraft in your AOC, and [then there’s] HelloJets, but you also have AirConnect and SkyAlps [operating under wet-lease]. Are you planning to continue with this mixed fleet?

GE: We’re simply doing code-shares to meet the market demand and fulfill signed contracts. That’s why we decided to use planes that are less profitable in the beginning.

AL: Were these planes already in the plan, or did opportunities for flights come up, and you pursued them?

GE: We pursued them as flights that were worth it and compensated came up.

AL: In the long run, do you intend to continue with the mixed fleet or not?

GE: The mixed fleet isn’t a business for a regular airline; it’s a specific, temporary business. However, if we continue to grow and opportunities present themselves, we’ll maintain the mixed fleet for a longer period.

AL: In terms of your fleet, will the MAX planes come this year or not?

German Efromovich: We don’t know yet. We have three MAX planes [ordered], but there are still some safety issues with the engines from both GE and Pratt. These are new engines with new technology, so they need time to mature. Instead of staying on the wing for several years, they need maintenance sooner. There’s no safety issue, but there’s an economic issue. If I have to send the engine to the workshop half the time earlier than usual, I’ll need backup engines.

For a company with 50 planes, having three or four backup engines is no big deal, but for a company with eight planes, it’s a problem. So, we’re studying what would give us the comfort of replacing the engine if it needs to go to the workshop before the regular deadline. The highest maintenance and operational cost, after fuel, is the engine.

AL: Is your contract with Air Lease Corporation [for three 737 MAX 8] still valid, or have you paused it?

GE: I don’t discuss my business or contracts with the media or through the press.

AL: You closed 2022 with a positive balance, and 2023 is going well so far. Will you close this year with a positive balance again?

GE: Thank God, yes.

AL: For the upcoming Winter season, will you grow more or maintain the current level?

GE: We’re planning for the next winter season. For this winter 2023-2024, we plan to include two more aircraft now with the Summer, and that will go through the Winter. By next Summer, we intend to include at least four more aircraft.

AL: So four more in addition to the two new ones; in practice, you’ll double the size of the fleet.

GE: Yes, that’s correct.

AL: Are you already financed for next summer as well?

GE: Without a doubt, yes.

AL: Is the plan for 2024 still [within] Europe?

GE: Yes, yes, yes.

AL: But in 2025, will you fly to other countries besides Italy, maybe long-haul flights?

GE: Long-haul wide-body flights, no. The main problems today with wide-body aircraft are production delays, lack of components, etc. It’s difficult to get these aircraft. So, our wide-body program has been practically stalled. Until we have a better view of the situation and prioritize other matters, there will be no wide-body aircraft before 2025.

AL: Hence you wouldn’t consider used aircraft — only new ones.

GE: For us, there’s no such thing as a used aircraft, as long as it has been well-maintained and has all its parts. It’s not about the price; it’s about availability. There’s neither availability nor room to discuss the price.

AL: So you’d have to prepare the company for long-haul flights, like starting a second company within the company.

GE: Exactly, when you go for wide-body intercontinental flights, it’s like starting a second company within the company.

AL: Last Saturday, Professor Intrieri mentioned that the plan would be to create connections between Italy and Latin America [in an interview for an upcoming report, ed.].

GE: If he told you that, he must know what he’s talking about.

AL: Are you already conducting market studies for long-haul flights, or is it too early for that?

GE: We always think about it, but we don’t have concrete plans yet.

GE: If he told you that, he must know what he’s talking about.

AL: Are you already conducting market studies for long-haul flights, or is it too early for that?

GE: We always think about it, but we don’t have concrete plans yet.

GE: If he told you that, he must know what he’s talking about.

AL: Are you already conducting market studies for long-haul flights, or is it too early for that?

GE: We always think about it, but we don’t have concrete plans yet.

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