#ColumnaPHR Avianca – Viva: a year later and a shameful precedent

News

February 6, 2024

By Jorge De Los Rios

#ColumnaPHR On January 16, 2024, a U.S. Federal Court blocked the Spirit / JetBlue merger. On its decision, the Court stated that Sprit’s market exit amid a potential merger with JetBlue could significantly harm consumers and the market. In the Court’s view Spirit is a maverick whose potential merger with a larger airline could deprive consumers from purchasing airline tickets at low prices

Such a decision contrasts with the Avianca/Viva case, on which Colombian authorities (namely, The Civil Aviation Authority – Aerocivil, the Competition Agency – the Superintendency of Industry and Commerce and the Superintendency of Companies) did not act in a decisive and steadfast way to prevent the demise of Viva and, ultimately, of the air transportation market, which is critical to the Colombian economy.

At the end of April 2022, Avianca and Viva announced to the Colombian public their intention to merge.

At the beginning of August 2022, the Parties filed the request for authorization before the Aerocivil under the failing firm defense (FFD) and, therefore, requested Aerocivil to authorize the transaction in an expedite manner. Here, it is worth clarifying that in Colombia there is no such thing as an expedite merger review, nor does the failing firm defense allows for an expedited merger control procedure. On the contrary, as argued by the interested third parties (competitors), a merger clearance request made under the FFD requires a much more detailed analysis than a normal merger.

In a first decision the Aerocivil (competent authority for merger control purposes in the aviation sector) denied the merger arguing that the proposed transaction triggered serious antitrust concerns because of the undue concentration of slots in the Bogota airport which is the main airport in Colombia. Likewise, the Aerocivil pointed out that the critical financial situation of Viva was not of a nature that threatened Viva´s presence in the market. Moreover, the Aerocivil stressed that the transaction was structured through a simulating carve out that consequently, deprived Viva of having a shareholder that could inject capital for running its business effectively.

With the new President in office (Gustavo Petro), some changes of personnel within the Aerocivil were done including the appointment of the new director Sergio Paris, the new officials decided to change of posture and surprisingly declared null and void its first decision in January 2023. Such a shady decision produced unprecedented consequences in terms of due process and adequate antitrust enforcement. In this new stage, Aerocivil determined that the requirements for the FFD were met and that, therefore, the Transaction could be cleared subject to a remedies scheme. Truth been told, neither the remedies proposed by the Parties, nor those ultimately imposed by Aerocivil were in line with market needs and with the different theories of harm acknowledged in Colombia as well as in other relevant jurisdictions such as in the United States of America or in the European Union.

Furthermore, in December 2022 the Superintendency of Industry and Commerce, Colombia’s competition watchdog, opened an investigation against Avianca and Viva for allegedly engaging in gun-jumping.

The evidence presented by the SIC when charging Avianca and Viva was appalling, as the Parties created a transactional scheme through which they attempted to simulate a carve-out prior to obtaining clearance from Aerocivil.

Needless to say, the accusations made by the SIC in its indictment were very serious. It was an acquisition involving the third airline in terms of market share and a low-cost alternative that had invigorated competition in the country and, together with the other operators, exerted significant competitive pressure on Avianca. In short, Viva was the market’s maverick. Going back to the JetBlue/Spirit case, it is striking that in that case the merger was blocked, among other reasons, given that Spirit was the maverick in the low cost segment and in the case of Avianca/Viva case, such consideration had little to no relevance for Colombian authorities.

Now, while the preliminary stage of the gun-jumping investigation was underway, the inevitable happened: Viva suspended operations on February 27, 2023, leaving thousands of passengers stranded.

An airline crisis then broke out in Colombia. Other companies tried to save Viva and made formal proposals to acquire the company. However, no deal materialized as Avianca fiercely opposed any rescue alternative.

Despite the crisis caused by the economic blockade to which Viva was subjected, and appalling evidence, the SIC decided to close the gun-jumping investigation based on a settlement that was widely criticized by competitors. The settlement did not reverse the Transaction (which, under Colombian law, was a minimum condition for it to be accepted), nor did it respond to the needs of Colombian consumers.

Finally, on April 2023 the Colombian Superintendency of Companies opened an investigation against Avianca for failing to report the existence of a corporate group with a number of offshore shell companies which were instrumental to Avianca and Viva simulating a carve-out: this confirmed SIC’s case. Unfortunately, this last indictment came too late.

On June 20, 2023, following its operation suspension, Viva started its liquidation.

Since then, the effects on competition in the air transportation market and, thus, on consumer welfare have been devastating. It is logical: less supply means less competition and therefore less consumer welfare.

To this day, no one has been held accountable. All that was left was a weakened market and hundreds of stranded consumers.

Where were the Colombian authorities to enforce the rights of competitors and, specially, consumers? Surely this question will remain unanswered. However, returning to the case in the beginning of this article, contrasts are more than obvious. In the JetBlue/Spirit case, the best interests of competitors and consumers were placed at the center and a decision was made with the long-term stability of the air transportation market in mind.

On the contrary, in Colombia, local authorities did not thoroughly protect the best interests of consumers or ponder strategically about long – term effects on the air transportation market that the demise of VIVA could cause.

Nevertheless, we are left with some lessons that, hopefully, Colombian authorities will take note of:

Quick, coordinated, and decisive action is essential.
Decisions that may have a long-term impact on strategic sectors of the economy must be taken with particular caution.
Without dynamic and effective competition, there can be no innovation.

Finally, and I can’t stress this enough: consumer’s best interest should always come first in antitrust enforcement.