F-1/A 1 d538577df1a.htm F-1/ AMENDMENT NO. 5 F-1/ Amendment No. 5
Table of Contents

As filed with the Securities and Exchange Commission on October 21, 2013.

Registration No. 333-191258

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 5

to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

AVIANCA HOLDINGS S.A.

(Exact name of registrant as specified in its charter)

 

 

 

Republic of Panama   4512   Not Applicable
(State or other jurisdiction of
incorporation or organization)
  (Primary standard industrial
classification code number)
  (I.R.S. employer
identification number)

Aquilino de la Guardia Calle No. 8, Panama City,

Republic of Panama

(+507) 205-600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Avianca Inc.

122 East 42nd Street, Suite 2525

New York, NY 10168

+1 (212) 399-0831

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

with copies to:

 

David L. Williams
Simpson Thacher & Bartlett LLP
425 Lexington Avenue

New York, New York 10017

 

John R. Vetterli
White & Case LLP
1155 Avenue of the Americas

New York, New York 10036

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, please check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

 

Title of each class of
securities to be registered
  Amount to  be
registered(1)
  Proposed maximum
aggregate offering
price(1)(2)
  Amount of
registration fee(4)

Preferred shares, par value $0.125(3)

 

250,561,168 shares

  $626,402,920   $80,681

 

 

(1) Includes preferred shares that the underwriters may purchase solely to cover over-allotments, if any, and preferred shares that are to be offered outside the United States that may be resold in the United States in transactions requiring registration under the Securities Act. All or part of these preferred shares may be represented by American Depositary Shares, each of which represents 8 of our preferred shares.
(2) Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act.
(3) American Depositary Shares evidenced by American Depositary Receipts issuable upon deposit of the preferred shares registered hereby will be registered under a separate registration statement on Form F-6. Each American Depositary Share represents 8 preferred shares.
(4) Registrant previously paid $13,640.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment, which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Preliminary Prospectus dated October 21, 2013 (Subject to Completion)

 

LOGO

AVIANCA HOLDINGS S.A.

27,234,910 American Depositary Shares

Representing 217,879,280 Preferred Shares

 

 

We are offering 12,500,000 American Depositary Shares, or ADSs, each representing 8 of our preferred shares, in an international offering outside of Colombia. The selling shareholders identified in this prospectus are offering 14,734,910 ADSs to be sold in this offering. We will not receive any proceeds from the sale by the selling shareholders of ADSs in this offering. We anticipate that the initial public offering price of the ADSs will be between $17 and $20 per ADS (equivalent of approximately COP 3,996.9 and COP 4,702.3 per preferred share, based on the exchange rate on October 17, 2013).

Our ADSs have been authorized for listing on the New York Stock Exchange, or NYSE, under the symbol “AVH”. Our preferred shares trade on the Colombian Stock Exchange (Bolsa de Valores de Colombia) under the symbol “PFAVH”. On October 17, 2013, the last reported sale price of our preferred shares on the Colombia Stock Exchange was COP 4,015, or US$2.13 per preferred share ($17.08 per ADS) (based on the exchange rate on such date, which was COP 1,880.9 per US$1.00). Prior to this offering, there has been a limited public market for our preferred shares in Colombia, and no public market currently exists for the ADSs or our preferred shares elsewhere.

 

     Price
to public
     Underwriting
discounts and
commissions
     Proceeds to us
(before
expenses)
     Proceeds to selling
shareholders
(before expenses)
 

Per ADS

   $                        $                    $                    $                

Total

   $         $         $         $     

 

 

Investing in the ADSs involves certain significant risks. See “Risk Factors” beginning on page 20.

One of the selling shareholders, Kingsland Holdings Limited, has granted the underwriters an option to purchase up to an additional 4,085,236 ADSs within 30 days of the date of this prospectus solely to cover over-allotments, if any.

 

 

Neither the Securities and Exchange Commission, the Colombian Financial Superintendency (Superintendencia Financeria de Colombia), the Panamanian Superintendency of the Securities Market (Superintendencia del Mercado de Valores) nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

The underwriters expect to deliver the ADSs to purchasers on or about                     , 2013.

 

J.P. Morgan            Citigroup   
BofA Merrill Lynch    UBS Investment Bank    BTG Pactual      Deutsche Bank Securities   

The date of this prospectus is                     , 2013


Table of Contents

 

LOGO


Table of Contents

TABLE OF CONTENTS

 

Presentation of Financial and Other Information

     ii   

Market Data

     iv   

Glossary of Operating Performance Terms

     v   

Special Note about Forward-Looking Statements

     vi   

Summary

     1   

Risk Factors

     20   

Market Price of our Preferred Shares

     54   

Use of Proceeds

     59   

Ratio of Earnings to Fixed Charges and Preferred Share Dividends

     60   

Dividends and Dividend Policy

     61   

Dilution

     62   

Capitalization

     63   

Selected Financial and Operating Data

     64   

Unaudited Pro Forma Consolidated Financial Information

     70   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     76   

Industry

     110   

Business

     118   

Regulation

     154   

Management

     170   

Principal and Selling Shareholders

     178   

Certain Relationships and Related Party Transactions

     180   

Description of Capital Stock

     184   

Description of American Depositary Shares

     192   

Exchange Rates and Foreign Exchange Controls

     200   

Shares Eligible for Future Sale

     203   

Income Tax Consequences

     204   

Underwriting

     211   

Expenses of the Offering

     223   

Legal Matters

     224   

Experts

     224   

Where You Can Find More Information

     225   

Enforcement of Foreign Judgments

     225   

Index to Consolidated Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus, any amendment or supplement to this prospectus or any free writing prospectus prepared by or on behalf of us. Neither we, the selling shareholders nor the underwriters or their affiliates have authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. Neither we nor the selling shareholders are, and the underwriters and their affiliates are not, offering to sell these securities in any jurisdiction where their offer or sale is not permitted. This document may only be used where it is legal to sell these securities. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of when this prospectus is delivered or when any particular sale of the ADSs occurs. Our business, financial condition, results of operations and prospects may have changed since that date.

Our preferred shares are currently registered in the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) kept by the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia). This registration should not be understood as a rating or assumption of liability by the Colombian Superintendency of Finance with respect to the price, quality or tradeability of the ADSs or underlying preferred shares or our solvency. The registration of the preferred shares on the Colombian Stock Exchange should not be understood as a rating or assumption of liability by the Colombian Stock Exchange with respect to the price, quality or tradability of the ADSs or underlying preferred shares or our solvency.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

IFRS Financial Statements

On December 11, 2012, our board of directors approved our adoption of International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. We used a transition date of January 1, 2011, and therefore our consolidated financial statements as of and for the year ended December 31, 2012 were our first annual audited consolidated financial statements required to be prepared in accordance with IFRS. We have not prepared any financial information in accordance with IFRS as of or for any prior periods. For periods prior to 2012, we prepared our audited consolidated financial statements solely in accordance with Colombian GAAP.

IFRS 1—First-time Adoption of International Financial Reporting Standards governs the adoption of IFRS and first-time preparation of consolidated financial statements and provides for certain exceptions and exemptions. See Note 33 to our audited consolidated financial statements for a description of how the transition from Colombian GAAP to IFRS affected our reported financial position and financial performance as of and for the periods covered.

Our consolidated financial statements prepared in accordance with IFRS are stated in U.S. dollars. This prospectus includes our audited consolidated financial statements as of January 1, 2011 (the date of our transition to IFRS) and December 31, 2011 and 2012 and for the years ended December 31, 2011 and 2012, together with the notes thereto, prepared in accordance with IFRS. Unless otherwise indicated, all financial information provided in this prospectus has been prepared in accordance with IFRS.

Colombian GAAP Supplemental Financial Information

Prior to January 1, 2013, we also maintained our books and records and prepared our consolidated financial statements in accordance with Colombian generally accepted accounting principles, including the Technical Bulletins issued by the Colombian Financial Superintendency, collectively, Colombian GAAP, and reported such consolidated financial statements in Colombian pesos, or COP. Our consolidated financial statements as reported in Colombian GAAP include financial information for the eleven-month period ended December 31, 2010, a period prior to our transition to IFRS (see “—IFRS Financial Statements”) and therefore may be useful to you in evaluating our financial performance.

Colombian GAAP differs in certain significant aspects from IFRS. For a description of the principal differences between Colombian GAAP and IFRS applicable to us, see Note 33 to our consolidated financial statements.

We present financial information under Colombian GAAP for the eleven-month period ended December 31, 2010 because we became the parent company of Aerovías del Continente Americano—Avianca S.A., or Avianca, and Grupo Taca Holdings Limited, or Taca, on February 1, 2010 in connection with the combination of Avianca and Taca. We have no consolidated financial information prior to such date. As a result, our financial information for the eleven-month period ended December 31, 2010 is not directly comparable to our financial information for the full fiscal years ended December 31, 2011 and 2012. This lack of comparability is heightened by the fact that our business is seasonal, and January is typically one of our busiest months.

Pro Forma Financial Information

In this prospectus we provide an illustration of the pro forma effect of certain events that may be deemed material to our financial condition or operations. This pro forma consolidated financial information has been derived from the unaudited condensed consolidated interim financial statements for the six months ended June 30, 2013 and the audited consolidated financial statements for the year ended December 31, 2012 included elsewhere in this prospectus.

 

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The pro forma adjustments are based on certain estimates and assumptions that management believes are reasonable under the circumstances. Any of the factors underlying these estimates and assumptions may change or prove to be materially different, and the estimates and assumptions may not be representative of facts existing as of the date of the pro forma transactions, the date of this prospectus or any future date. The historical consolidated financial information has been adjusted in the unaudited pro forma consolidated financial information to give effect to pro forma events that are (1) directly attributable to the pro forma transactions, (2) factually supportable, and (3) with respect to the statements of comprehensive income, expected to have a continuing impact on the consolidated results. The assumptions underlying the pro forma adjustments are described in “Unaudited Pro Forma Consolidated Financial Information.”

The unaudited pro forma consolidated financial information has been presented for informational purposes only. The pro forma information is not necessarily indicative of what our consolidated financial position or results of operations actually would have been had the pro forma transactions occurred as of the dates indicated. In addition, the unaudited pro forma consolidated financial information does not purport to project our future financial position or operating results.

Non-IFRS Financial Measures

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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Currency Presentation

In this prospectus, 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 prospectus, the meaning of billion is as used in American English.

We have converted certain U.S. dollar amounts presented in this prospectus from Colombian peso amounts solely for the convenience of the reader. We make no representation that the peso or dollar amounts shown in this prospectus could have been or could be converted into U.S. dollars or Colombia pesos at the rates shown in this prospectus 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. Unless otherwise noted in this prospectus, all figures appearing in U.S. dollars corresponding to our consolidated balance sheet at December 31, 2012 and our consolidated statement of comprehensive income and consolidated statement of cash flow for the year ended December 31, 2012 prepared in accordance with Colombian GAAP have been converted into U.S. dollars at the year-end exchange rate of COP 1,768.2 per US$1.00 in accordance with Regulation S-X 3-20(b).

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

On October 17, 2013, the exchange rate between the Colombian peso and the U.S. dollar certified by the SFC was COP 1,880.9 per US$1.00. See “Exchange Rates and Foreign Exchange Controls—Exchange Rates.”

Neither IFRS nor Colombian GAAP currently requires us to adjust our financial statements for inflation. Colombia experienced inflation rates of 3.2%, 3.7% and 2.4% for the years ended December 31, 2010, 2011 and 2012, respectively, according to the Colombian National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística), or DANE.

Rounding

Certain figures included in this prospectus have been rounded for ease of presentation. Percentage figures included in this prospectus have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this prospectus 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 prospectus may not sum due to rounding.

MARKET DATA

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

 

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

GLOSSARY OF OPERATING PERFORMANCE TERMS

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

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

“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.

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

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

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

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

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

“Operating revenue per available seat kilometer,” or RASK, represents operating revenue divided by available seat kilometers (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 known as AviancaPlus or Distancia) frequent flyer miles or other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).

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

 

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“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.

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

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements, principally under the captions, “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Industry.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this prospectus, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

 

   

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

 

   

our level of debt and other fixed obligations;

 

   

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;

 

   

changes in labor costs, maintenance costs, fuel costs and insurance premiums;

 

   

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

 

   

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

 

   

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

 

   

future threat or outbreak of diseases affecting traveling behavior and/or imports and/or exports;

 

   

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

 

   

cyclical and seasonal fluctuations in our operating results;

 

   

defects or mechanical problems with our aircraft;

 

   

our ability to successfully implement our growth strategy;

 

   

our ability to successfully implement our fleet modernization program;

 

   

our ability to obtain financing and the terms of such financing; and

 

   

the risk factors discussed under “Risk Factors” beginning on page 20.

The words “believe,” “may,” “should,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “will,” “expect” 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, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors. In light of the risks and uncertainties described above, the future events and circumstances discussed in this prospectus might not occur or come into existence and forward-looking statements are thus not guarantees of future performance. Considering these limitations, you should not make any investment decision in reliance on forward-looking statements contained in this prospectus.

 

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SUMMARY

This summary highlights selected information presented in greater detail elsewhere in this prospectus. This summary does not include all the information you should consider before investing in the ADSs. Before investing in the ADSs, you should read this entire prospectus carefully for a more complete understanding of our business and this offering, including our audited consolidated financial statements and related notes included herein and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In this prospectus, we use the terms “we,” “us,” “our,” “the Company” and “Avianca Holdings” to refer to Avianca Holdings S.A. (formerly AviancaTaca Holding, S.A.), together with its subsidiaries, except where the context requires otherwise.

Overview

We are a leading airline in Latin America. In February 2010, we completed the combination of Aerovías del Continente Americano—Avianca S.A., or Avianca, and Grupo Taca Holdings Limited, or Taca, two established airlines with geographically complementary operations in the Andean region (Colombia, Ecuador and Peru), in the case of Avianca, and Central America (Belize, Guatemala, Costa Rica, Honduras, El Salvador, Nicaragua and Panama) and Peru, in the case of Taca. In 2012, we were the market leader in terms of passengers carried in the domestic market of Colombia (the third largest domestic market in Latin America), according to the Colombian Civil Aviation Authority, and we believe we were the market 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, or MIDT. Our strong presence within the Andean region and Central America enables us to consolidate regional passenger traffic in our hubs and provide connectivity to international destinations, making us a leader in terms of international air passengers carried from our home markets to both North America and South America.

We operate an extensive route network from our strategically located hubs in Colombia, Peru and El Salvador (plus the focus markets of Costa Rica and Ecuador). We offer passenger and cargo service through more than 5,500 weekly scheduled flights to more than 100 destinations in over 25 countries around the world. Our code share alliances, together with our membership in Star Alliance, provide our customers with access to a worldwide network of over 1,200 destinations. During the six months ended June 30, 2013, we transported approximately 11.9 million passengers and 151,248 metric tons of cargo.

Since the combination of Avianca and Taca in February 2010, we have grown significantly. We believe we have already achieved many revenue-enhancing synergies from the integration of Avianca’s and Taca’s networks, which was the initial focus of the combination. We are now ready to implement a second stage of our integration plan focused primarily on achieving cost-oriented synergies from greater operating and administrative efficiencies and economies of scale. Our consolidated operating revenue increased from $3,794.4 million in 2011 to $4,269.7 million in 2012, and our consolidated operating profit increased from $202.4 million for the year ended December 31, 2011 to $280.9 million in 2012. Our consolidated operating revenue and consolidated operating profit increased from $2,078.7 million and $93.9 million, respectively, for the six months ended June 30, 2012 to $2,223.1 million and $138.0 million, respectively, for the six months ended June 30, 2013. The revenue-enhancing synergies from our network integration allowed us to optimize our route capacity and efficiency, through which we added 40 new routes and increased our available seat kilometers (ASKs) and our total passengers carried 26.6% and 31.8%, respectively, from 2010 (annualized from the eleven-month period from the combination of Avianca and Taca to December 31, 2010) to 2012, while maintaining a stable load factor of 79.6%. Our ASKs and total passengers carried increased 7.0% and 9.3%, respectively, from the six months ended June 30, 2012 to the six months ended June 30, 2013, while our load factor increased from 78.4% to 79.5%.

 

 

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As of June 30, 2013, we operated a fleet of 151 aircraft (119 jet passenger aircraft, 28 turboprop passenger aircraft and four jet cargo aircraft) highlighted by our modern and efficient jet passenger fleet, mainly from the Airbus family. Since 2010, we have focused on increasing homogeneity in our fleet, and therefore increasing efficiency, by decreasing the number of aircraft models we operate. We intend to enhance our modern jet fleet further by continuing to add new aircraft and we currently have firm orders for delivery between the second half of 2013 and 2019 of 68 new Airbus aircraft (including two Airbus A330F freight aircraft) and 15 Boeing 787 Dreamliners. We are also in the process of replacing our regional fleet of Fokker 50s and Cessna 42s with 15 new and more efficient ATR72s to be delivered between the second half of 2013 and 2015.

We provide other services that complement our passenger and cargo businesses and diversify our sources of revenue. In March 2011, we launched our LifeMiles frequent flyer program, which has become a significant Latin American frequent flyer program, with approximately 5.0 million members as of June 30, 2013. We also provide aircraft maintenance, crew training and other airport services to other carriers as well as travel-related services to our customers.

We are a Panamanian company (sociedad anónima), and approximately 17.7% of our outstanding capital stock is represented by our preferred shares that are listed on the Colombian Stock Exchange (Bolsa de Valores de Colombia). Approximately 70.3% of our voting common shares are owned by Synergy Aerospace Corp., or Synergy, a corporation indirectly controlled by Mr. Germán Efromovich and Mr. José Efromovich, and approximately 29.0% of our voting common shares are owned by Kingsland Holdings Limited, or Kingsland, a corporation controlled by the Kriete family. Following this offering and the related conversion of common shares into preferred shares by certain of our selling shareholders, approximately 33.5% of our outstanding capital stock will be represented by our preferred shares, including the preferred shares represented by the ADSs being offered hereby, and approximately 78.3% and 21.7% of our common shares will be held by Synergy and Kingsland, respectively (if the underwriters’ over-allotment option is not exercised), or approximately 82.3% and 17.7%, respectively (if the underwriters exercise their over-allotment option in full). See “—Summary of the Offering” and “Principal and Selling Shareholders.”

Our Strengths

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

 

   

A market leader in a dynamic Latin American region. We have a leading presence in the Colombian domestic market and also in the market for international passenger service within the Andean region and Central America, a region with approximately 136 million inhabitants as of December 31, 2012 and what we believe to be dynamic and growing economies despite the economic and political risks in the region, including risks related to inflation, currency devaluation and political instability. Our passengers carried increased 27.4% in 2011, 12.9% in 2012 and 9.3% in the six months ended June 30, 2013, outperforming Latin America average growth in passengers carried of 3.8% in 2011, 7.6% in 2012 and 6.7% in the six months ended June 30, 2013, according to the Latin American and Caribbean Air Transport Association (ALTA), which in turn outperformed worldwide average growth in passengers carried during such period, according to the International Air Transport Association (IATA). We believe our strong presence in the regions in which we operate positions us well to benefit from economies of scale and grow from a position of strength.

 

   

A strong brand associated with a superior customer experience. We believe our Avianca brand is associated with superior service in the minds of many customers in our core Latin American markets. Since the combination of Avianca and Taca in 2010, we have unified our service standards to strive for “Excelencia Latina” (Latin Excellence), the ideal we set for our service goals. In addition, we were recently recognized as the “Best Airline in South/Latin America 2012” (Business Traveler Magazine December 2012) and the “Best Airline in Central America & Caribbean” (Skytrax World Airline Awards 2012). Beginning in May 2013, Avianca became our sole, unified brand for all of our operations.

 

 

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A multi-hub network in Latin America. Our strategically located hubs in Bogotá, Lima and San Salvador provide coverage of the domestic markets in Colombia, Peru and Central America and support a broad international network connecting the Andean Region, Central America, the Caribbean, North America and Europe. Our hub network is complemented by focus city operations in San José in Costa Rica and Quito and Guayaquil in Ecuador and our membership in Star Alliance, the largest airline network in the world as of June 30, 2013 in terms of member airlines, daily flights, destinations and covered countries. We believe that the broad reach of our network, together with our code share alliances and Star Alliance membership, provide our customers with a wide range of destination options and provide us with a geographically diversified source of revenues that affords us flexibility and adaptability with respect to demand cycles in our industry.

 

   

One of the most modern passenger fleets among Latin American airlines. Our continuous fleet modernization process has increased our jet passenger fleet’s capacity and has made our jet passenger operative fleet one of the youngest among Latin American airlines, with an average aircraft age of 4.9 years as of June 30, 2013. Since 2010, as a result of our fleet modernization program, we have been able to increase fuel efficiency and improve our technical dispatch reliability. Since 2010, we have reduced the number of jet passenger aircraft types or models we use, and our current passenger fleet now consists primarily of Airbus aircraft. The increased homogeneity of our fleet has enabled us to reduce crew and staff training costs and also maintenance costs through the implementation of unified spare parts inventories and maintenance processes.

 

   

Experienced senior management team with strong track record. Our senior management team, which has an average of approximately 14 years of experience working with us, has significant industry knowledge and a demonstrated ability to successfully acquire and integrate businesses. In addition, we believe our incentive programs align our management team with our strategic objectives and contribute to our success by rewarding the accomplishment of pre-defined financial and operating goals.

Our Strategy

Our goal is to leverage our leadership position to take advantage of opportunities for profitable growth in the Latin American aviation market by expanding our network and continuing to reduce our operating costs. While we face challenges in our business, we are optimistic that successful implementation of our strategy will help us grow and increase our profitability. Key elements of our business strategy include the following:

 

   

Enhance customer loyalty through seeking to provide superior customer service and a culture of “Excelencia Latina.” Seeking to provide superior customer service is a cornerstone of our passenger and cargo business, and we seek to create a culture that delivers “Excelencia Latina” (Latin Excellence). We believe our Excelencia Latina can differentiate us from our competitors by combining high-quality operating performance with a warm, Latin American service culture that we believe caters to the tastes of Latin American passengers. Our strategy is based on selecting, training and rewarding dedicated personnel, establishing a solid operational and technological platform to provide high-quality operations, and delivering products and services such as improved VIP lounges, self-service check-in (over the internet, at kiosks or from mobile phones) and a superior experience aboard modern aircraft with a varied selection of in-flight entertainment options. We also intend to leverage our LifeMiles frequent flyer 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.

 

   

Focus on achieving further synergies from the Avianca-Taca combination to increase revenues and reduce costs. After the combination of Avianca and Taca in February 2010, we focused initially on the commercial integration of our combined network and grew significantly in terms of passengers carried and operating revenues. As we embark on the second phase of our post-combination integration, we believe there is still meaningful potential to achieve further revenue growth as we implement a single

 

 

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commercial code (which we believe will enhance the connectivity of our unified network), consolidate our operations under a single Avianca brand identified with superior customer service and improve our revenue management practices. In addition, we will seek to achieve cost synergies by consolidating our maintenance procedures across the regions we serve and optimizing our flight operations, increasing aircraft utilization through interchangeability of aircraft, better crew planning and more efficient use of our regional hubs. We also intend to achieve synergies by unifying our IT platforms in finance, maintenance and operations.

 

   

Pursue opportunities for profitable growth in our passenger segment. We seek to grow our passenger business by protecting and leveraging our strong presence and optimizing our network in the markets we serve. We expect to add new destinations, routes and flight frequencies in Latin America to meet or stimulate demand for our services, in particular by adding new long-haul and other international destinations to be served from our Bogotá and Lima hubs, by enhancing our connectivity for passengers traveling between South and North America via our San Salvador hub and by taking advantage of what we believe to be increasing demand for air travel within Latin America. We also expect to continue to evaluate selectively additional growth opportunities through strategic alliances with other airlines as well as potential acquisitions and strategic opportunities that would complement our existing operations.

 

   

Grow our cargo operations. We believe our cargo operations offer an attractive opportunity for growth, complementing our passenger operations and diversifying our sources of revenue. We also believe that we have a significant opportunity to increase our footprint in the cargo business by leveraging our leadership position in Colombia to grow in other Latin American markets. We continuously evaluate opportunities to grow our cargo business through selective acquisitions in strategic markets and are focused in particular on opportunities to develop our presence in the cargo markets in Mexico and Brazil. We plan to enhance our competitiveness in the cargo sector by adding two new Airbus A330F freight aircraft dedicated exclusively to cargo transport. In addition, our modernized passenger fleet will have greater cargo capacity and allow us to continue to earn incremental revenues by complementing our cargo routes with cargo transported in the bellies of our passenger flights.

 

   

Expand our LifeMiles program to enhance our overall value. We believe our LifeMiles frequent flyer program enhances our brand recognition, strengthens our position in strategic markets and provides ancillary revenue opportunities. Our wholly-owned loyalty business unit operates our LifeMiles frequent flyer program and offers miles and loyalty services to program members and about 200 commercial partners. Sales from our loyalty business unit increased by approximately 40% from 2011 to 2012 and approximately 57% from the six months ended June 30, 2012 to the six months ended June 30, 2013. We intend to further enhance the program’s revenue growth by (1) increasing the number of active members, (2) increasing the accrual and redemption of miles per active member and (3) strengthening the network of commercial partners who allow their customers to earn LifeMiles, including by developing new co-branding and similar initiatives with hotel chains, car rental companies, banks, credit card companies and other airlines.

Corporate Information

Our resident agent executive offices are located at Aquilino de la Guardia Calle No. 8, Panama City, Republic of Panama, and our telephone number is (+507) 205-6000.

Recent Developments

We are in the process of preparing our results of operations for the quarter ended September 30, 2013. We expect that our consolidated financial statements for the third quarter will become available on or about November 14, 2013. Set forth below are our preliminary estimates of certain anticipated results of operations and operating data that, based on available information to date, we expect to report as of and for the nine months ended September 30, 2013.

 

 

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We expect our operating revenue for the three months ended September 30, 2013 to increase approximately 7.0% to 8.0% compared to the third quarter of 2012. We also expect our Adjusted EBITDAR for the three months ended September 30, 2013 to increase between 10% and 15% compared to the third quarter of 2012, and as a result we expect our Adjusted EBITDAR Margin for the three months ended September 30, 2013 to increase approximately 50 to 130 basis points compared to the third quarter of 2012.

We expect our total passengers carried for the three months ended September 30, 2013 to increase approximately 2.7% to 3.7% compared to the third quarter of 2012. We also expect our available seats per kilometer (ASKs) for the three months ended September 30, 2013 to increase approximately 5.0% to 6.0% compared to the third quarter of 2012. As a result, we expect our load factor for the three months ended September 30, 2013 to be generally in line with our load factor of 81.8% for the third quarter of 2012.

The information presented above is preliminary and is based upon our estimates. This information does not constitute a statement of our financial or operating results, and is subject to further internal review by our management and compilation of actual results. We have provided only estimates of ranges for this information because our closing procedures for the quarter ended September 30, 2013 are not yet complete, and we have not generated data for the full quarter. Our management’s estimates are based upon monthly information currently available from our subsidiaries and business segments and extrapolation from that information. Although we currently expect that our results and operating data are likely to be within the ranges stated above, our actual results and operating data may differ materially from these preliminary estimates. All of the information presented above has been prepared by and is the responsibility of our management. Our independent registered public accounting firm has not audited, reviewed, compiled or performed any procedures with respect to such preliminary information. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to such information.

New aircraft deliveries. Since June 30, 2013, we have accepted delivery of three new aircraft, consisting of one Airbus A330F, one Airbus A319 and one ATR72. The three aircraft are owned. The Airbus A330F and the Airbus A319 were financed with debt and the ATR72 was purchased with cash but will be refinanced.

Indebtedness. Since June 30, 2013, we have incurred $105.3 million of new debt for aircraft and $2.6 million of additional debt. During the same period, we repaid $59.1 million of other debt. As a result, our total outstanding debt increased from $2,163.2 million on June 30, 2013 to $2,212.0 million as of the date of this prospectus.

Other. On October 8, 2013, we successfully concluded negotiations with our non-unionized Colombian pilots and reached an agreement to modify the terms of our voluntary benefits program with them. These non-unionized pilots represent approximately 57% of our pilots in Colombia. This agreement with the non-unionized Colombian pilots includes a system of variable compensation goals associated with productivity, fuel savings and on-time performance metrics. We estimate that this new compensation system will result in an approximately 11% increase in salaries for these pilots, which will be retroactive to March 2013, but if the variable compensation goals are achieved, we believe other cost savings will result that will contribute to offset the increased salary costs associated with such agreement.

Simultaneously with our negotiations with the non-unionized Colombian pilots, we offered the terms of such voluntary benefits program to the Colombian Association of Civil Aviators (ACDAC), which represents approximately 43% of our pilots in Colombia, in the context of our ongoing negotiation of the terms of a new collective bargaining agreement. On October 8, 2013, the Colombian Association of Civil Aviators (ACDAC) stepped aside and terminated negotiations with us. The prior collective bargaining agreement we had with the Colombian Association of Civil Aviators (ACDAC) expired in March 2013, so there is no active collective bargaining agreement between us and this union at this time. We have not been able to come to an agreement on terms of a collective bargaining agreement with this union to date and do not know when we will be able to do so or under what terms. The union will not have the ability to renegotiate the collective bargaining agreement again until

 

 

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March 2014. Currently, the union pilots are compensated according to the terms of the expired collective bargaining agreement, but union pilots have the option of leaving the union and accepting the increased compensation under the voluntary benefits program available to our non-unionized Colombian pilots. The pilots in the Colombian Association of Civil Aviators (ACDAC) have continued to fly our aircraft but recently stopped following certain of our cost-saving and time-saving operating practices, adversely affecting our flight schedules and fuel costs. See “Risk Factors—Risks Relating to Our Company—Disputes relating to our labor practices and labor unions may result in a material adverse effect on our results of operations.”

 

 

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Summary of the Offering

The following is a brief summary of the terms of this offering and should be read together with the more detailed information and financial data and statements contained elsewhere in this prospectus. For a more complete description of our offering, see “Description of Capital Stock” and “Description of American Depositary Shares” in this prospectus.

 

Issuer

Avianca Holdings S.A.

 

Selling shareholders

Synergy Aerospace Corp., Kingsland Holdings Limited, Inter Allied Holdings Two Corp. and A. Daniel Ratti.

 

Primary offering

We are offering 12,500,000 ADSs.

 

Secondary offering

The selling shareholders are offering 14,734,910 ADSs. Prior to offering their ADSs, certain of the selling shareholders will convert common shares into preferred shares at a one-to-one exchange ratio, as permitted by our articles of incorporation (Pacto Social). Synergy Aerospace Corp. is offering 880,421 ADSs (7,043,368 preferred shares), Kingsland Holdings Limited is offering 13,102,176 ADSs (34,817,411 preferred shares and 69,999,997 common shares converted into preferred shares), Inter Allied Holdings Two Corp. is offering 401,968 ADSs (415,744 preferred shares and 2,800,000 common shares converted into preferred shares) and Mr. Ratti is offering 350,345 ADSs (2,760 preferred shares and 2,800,000 common shares converted into preferred shares).

 

ADSs

Each ADS represents 8 preferred shares held by Fiduciaria Bancolombia S.A., as custodian of the depositary. The ADSs will be evidenced by American Depositary Receipts, or ADRs, issued under a deposit agreement among us, The Bank of New York Mellon, as depositary, and the holders of the ADSs.

 

Offering price

We expect the offering price will be between $17 and $20 per ADS (equivalent of approximately COP 3,996.9 and COP 4,702.3 per preferred share, based on the exchange rate on October 17, 2013).

 

Over-allotment option

Kingsland Holdings Limited has granted the underwriters the right to purchase up to an additional 4,085,236 ADSs (32,681,888 common shares converted into preferred shares) within 30 days of the date of this prospectus.

 

Use of proceeds

We estimate that our net proceeds from this offering, based on an assumed offering price of $18.50 per ADS (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting commissions and expenses, will be up to approximately $219.5 million.

 

  We expect to use the net proceeds to finance our fleet modernization plan and to use the remainder for general corporate purposes. See “Use of Proceeds.”

 

  We will not receive any of the net proceeds from the sale of ADS by the selling shareholders, including any sales by Kingsland pursuant to the over-allotment option.

 

 

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Limited voting rights

Holders of our preferred shares will not be entitled to voting rights, except in limited circumstances. See “Description of Capital Stock—Common Shares” and “—Preferred Shares.”

 

  Holders of ADSs evidencing our preferred shares will not have direct voting rights but may instruct the ADR depositary how to exercise such limited voting rights of the preferred shares underlying their ADSs under the circumstances described in the deposit agreement. See “Description of American Depositary Shares—Voting Rights.”

 

Liquidation preference

Upon liquidation, each holder of preferred shares, and consequently ADSs, will be entitled to a preferential reimbursement of its capital contribution (aporte) to us out of our surplus assets available for distribution to shareholders. This reimbursement, if any, is payable in Colombian pesos before any distribution or payment may be made to holders of our common shares. Amounts in Colombian pesos will be converted by the depositary into U.S. dollars and paid to the holders of ADSs, net of fees, expenses and any taxes. If, upon any liquidation, assets that are available for distribution among the holders of preferred shares and ADSs (in liquidation) are insufficient to pay in full their respective liquidation preferences, such assets will be distributed among those holders pro rata. See “Description of Capital Stock—Preferred Shares—Liquidation Preference.”

 

Dividend policy

Our shareholders have adopted a dividend policy that provides for the payment of annual dividends to the holders of our common and preferred shares equal to at least 15% of our annual distributable profits. “Annual distributable profits” are defined in our by-laws as our annual profits (after taxes), minus amounts used to offset losses of previous fiscal periods, minus amounts necessary to fund legal and other reserves, if any. See “Dividends and Dividend Policy.”

 

Minimum preferred dividend

Holders of the preferred shares and ADSs will be entitled to receive a minimum dividend to be paid preferentially over holders of common shares, so long as dividends have been declared by our shareholders at their annual meeting. If no dividends are declared, none of our shareholders will be entitled to any dividends. If dividends are declared and our annual distributable profits are sufficient to pay a dividend per share of at least COP 50 per share to all our holders of preferred and common shares, such profits will be paid equally with respect to our preferred and common shares. However, if our annual distributable profits are insufficient to pay a dividend of at least COP 50 per share to all our holders of preferred and common shares, a minimum preferred dividend of COP 50 per share will be distributed pro rata to the holders of our preferred shares, and any excess above such minimum preferred dividend will be distributed solely to holders of our common shares. See “Dividends and Dividend Policy” and “Description of Capital Stock—Preferred Shares—Minimum Preferred Dividend.”

 

Shares outstanding immediately following this offering

Our capital stock is divided into common and limited-voting preferred shares. Each share of our capital stock represents the same economic

 

 

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interest, except that the preferred shares are entitled to the preferences described under “Description of Capital Stock—Preferred Shares—Minimum Preferred Dividend” and “Dividends and Dividend Policy.”

 

  Our outstanding capital stock immediately after completion of this offering (assuming no exercise of the underwriters’ overallotment option) will consist of:

 

   

common shares; and

 

   

preferred shares (including preferred shares in the form of ADSs).

 

Lock-ups

We, the selling shareholders and our directors and executive officers will enter into lock-up agreements with the underwriters of this offering under which neither we nor they may, subject to certain exceptions, directly or indirectly, during the period ending 180 days after the date of this prospectus, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, or file a registration statement with the SEC under the U.S. Securities Act of 1933, as amended, or the Securities Act, or publicly disclose an intention to perform any such actions relating to any of our common shares, preferred shares, ADSs, or any securities convertible into or exercisable or exchangeable for any of our common shares, preferred shares or ADSs, without the prior written consent of the representatives of the underwriters. See “Underwriting.”

 

Depositary

The Bank of New York Mellon

 

Transfer Agent

Depósito Centralizado de Valores de Colombia—DECEVAL S.A., or Deceval

 

Listing and trading markets

Our ADSs have been authorized for listing on the New York Stock Exchange under the symbol “AVH”. Our preferred shares are listed on the Colombian Stock Exchange under the symbol “PFAVH”.

 

Certain fees and expenses

The depositary will charge any party depositing or withdrawing preferred shares or any party surrendering ADSs or to whom ADSs are issued certain fees, expenses and charges, such as expenses incurred by the depositary in the conversion of foreign currency pursuant to the deposit agreement, and a fee of $0.05 or less per each ADS (or portion thereof) issued or surrendered. See “Description of American Depositary Shares—Fees and Expenses.”

 

Risk factors

See “Risk Factors” beginning on page 20 and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our ADSs.

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

No exercise of the underwriters’ option to purchase up to 4,085,236 additional ADSs to cover over-allotments of ADSs, if any; and

 

   

The ADSs to be sold in this offering will be sold at $18.50, which is the midpoint of the range set forth on the cover page of this prospectus.

 

 

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Summary Financial and Operating Data (IFRS)

The following tables present summary consolidated financial and operating data as of the dates and for the periods indicated. We prepare consolidated financial statements in accordance with IFRS in U.S. dollars. You should read this information in conjunction with our consolidated financial statements prepared in accordance with IFRS, together with the notes thereto, included in this prospectus, “Presentation of Financial and Other Information” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

The summary consolidated financial information as of January 1, 2011 (the date of our transition to IFRS) and December 31, 2011 and 2012 and for the years ended December 31, 2011 and 2012 has been derived from our audited consolidated financial statements prepared in accordance with IFRS included in this prospectus. The summary consolidated financial information as of June 30, 2013 and for the six months ended June 30, 2012 and 2013 have been derived from our unaudited condensed consolidated financial statements prepared in accordance with IFRS included in this prospectus. Our results of operations for the six months ended June 30, 2013 are not necessarily indicative of our results to be expected for the year ended December 31, 2013 or for any other period.

On December 11, 2012, our board of directors approved our adoption of IFRS. We used a transition date of January 1, 2011, and therefore our consolidated financial statements as of and for the year ended December 31, 2012 were our first annual audited consolidated financial statements required to be prepared in accordance with IFRS. We have not prepared any financial information in accordance with IFRS as of or for any prior periods. For periods prior to 2012, we prepared our audited consolidated financial statements solely in accordance with Colombian GAAP.

IFRS 1—First-time Adoption of International Financial Reporting Standards governs the adoption of IFRS and first-time preparation of consolidated financial statements and provides for certain exceptions and exemptions. See Note 33 to our audited consolidated financial statements for a description of how the transition from Colombian GAAP to IFRS affected our reported financial position and financial performance as of and for the periods covered.

 

    As of June 30,     As of December 31,     As of
January 1,
 
    2013     2012     2011     2011  
    (Unaudited)                    
    (in US$ thousands)  

BALANCE SHEET DATA

       

Assets

       

Current assets:

       

Cash and cash equivalents

  $ 614,185      $ 402,997      $ 288,726      $ 274,171   

Restricted cash

    4,923        6,547        1,815        7,753   

Available-for-sale securities

    19,027        19,460        —         6,500   

Accounts receivable, net of provision for doubtful accounts

    319,648        202,962        186,353        161,349   

Accounts receivable from related parties

    30,301        29,427        7,836        9,716   

Expendable spare parts and supplies, net of provision for obsolescence

    51,954        48,796        45,235        48,079   

Prepaid expenses

    51,807        54,512        51,603        43,333   

Assets held for sale

    3,631        9,832        28,339        9,091   

Deposits and other assets

    70,944        105,028        295,609        194,102   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,166,420        879,561        905,516        754,094   

Non-current assets:

       

Available-for-sale securities

    11,168        13,165        30,052        25,123   

Deposits and other assets

    227,383        221,558        221,712        181,644   

Accounts receivable, net of provision for doubtful accounts

    69,041        64,540        41,755        34,950   

Accounts receivable from related parties

    22,644        24,001        56,167        55,890   

Intangible assets

    352,231        344,908        340,496        331,515   

Deferred tax assets

    34,699        73,644        70,513        76,693   

Property and equipment, net

    2,911,146        2,699,546        2,309,477        2,156,795   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

    3,628,312        3,441,362        3,070,172        2,862,610   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 4,794,732      $ 4,320,923      $ 3,975,688      $ 3,616,704   

 

 

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     As of June 30,      As of December 31,      As of
January 1,
 
     2013      2012      2011      2011  
     (Unaudited)                       
     (in US$ thousands)  

Liabilities and equity

           

Current liabilities:

           

Current portion of long-term debt

   $ 302,742       $ 282,145       $ 283,520       $ 285,000   

Accounts payable

     501,736         488,568         449,695         366,460   

Accounts payable to related parties

     5,544         7,309         13,746         2,909   

Accrued expenses

     146,792         181,802         119,235         101,674   

Provisions for legal claims

     7,568         7,903         11,060         43,021   

Provisions for return conditions

     —           7,598         10,987         10,939   

Employee benefits

     52,919         57,241         44,390         45,675   

Air traffic liability

     611,528         468,789         417,745         389,957   

Other liabilities

     21,218         29,470         38,333         40,914   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     1,650,047         1,530,825         1,388,711         1,286,549   

Non-current liabilities:

           

Long-term debt

     1,860,445         1,572,299         1,375,994         1,505,912   

Accounts payable

     2,734         3,041         19,596         35,052   

Provisions for return conditions

     72,785         59,297         57,792         27,807   

Employee benefits

     265,784         400,831         340,366         317,016   

Deferred tax liabilities

     8,077         2,528         2,134         1,008   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     2,209,825         2,037,996         1,795,882         1,886,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     3,859,872         3,568,821         3,184,593         3,173,344   

Equity:

           

Common stock

     92,675         92,675         92,675         100,163   

Preferred stock

     19,448         19,473         19,988         —    

Additional paid-in capital on common stock

     263,178         263,178         263,178         284,444   

Additional paid-in capital on preferred stock

     269,598         270,061         279,112         —    

Retained earnings

     255,809         68,153         96,167         21,317   

Revaluation and other reserve

     25,418         25,418         27,059         25,510   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity attributable to the Company

     926,126         738,958         778,179         431,434   

Non-controlling interest

     8,734         13,144         12,916         11,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     934,860         752,102         791,095         443,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 4,794,732       $ 4,320,923       $ 3,975,688       $ 3,616,704   

 

 

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     For the Six Months Ended
June 30,
    For the Year Ended
December 31,
 
     2013     2012     2012     2011  
     (Unaudited)        
     (in US$ thousands, except per share data)  

INCOME STATEMENT DATA

        

Operating revenue:

        

Passenger

   $ 1,843,562      $ 1,738,021      $ 3,550,559      $ 3,182,953   

Cargo and other

     379,550        340,705        719,097        611,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenue

     2,223,112        2,078,726        4,269,656        3,794,428   

Operating expenses:

        

Flight operations

     40,940        42,054        84,774        79,934   

Aircraft fuel

     652,153        639,874        1,305,396        1,123,547   

Ground operations

     166,929        156,056        321,552        279,607   

Aircraft rentals

     140,546        132,444        255,566        214,861   

Passenger services

     68,244        63,733        132,823        115,049   

Maintenance and repairs

     103,256        107,194        222,705        228,280   

Air traffic

     88,673        84,559        169,650        177,407   

Sales and marketing

     309,798        291,568        522,645        500,822   

General, administrative and other

     112,445        86,957        206,666        184,700   

Salaries, wages and benefits

     335,780        316,932        644,901        561,331   

Depreciation, amortization and impairment

     66,338        63,485        122,080        126,507   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,085,102        1,984,856        3,988,758        3,592,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     138,010        93,870        280,898        202,383   

Interest expense

     (50,255     (52,612     (122,112     (90,778

Interest income

     7,950        12,157        25,006        33,649   

Derivative instruments

     (5,861     (14,152     (24,042     (3,164

Foreign exchange

     84,850        (73,675     (56,788     1,600   
  

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before income tax

     174,694        (34,412     102,962        143,690   

Total income tax expense

     (27,188     (11,265     64,705        43,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net profit (loss) for the period

   $ 147,506      $ (45,677   $ 38,257      $ 99,876   

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

     153,850        (49,270     35,141        98,886   

Net profit (loss) attributable to non-controlling interest

     (6,344     3,593        3,116        990   

Basic and diluted earnings per share (common and preferred)

     0.16        (0.05     0.04        0.11   

Preferred share dividends per share (COP / US$)(1)

     N/A        N/A        75/0.04        50/0.03   

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

     741,400        741,400        741,400        761,369   

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

     155,587        159,549        158,081        114,939   

CASH FLOW DATA

        

Net cash provided by operating activities

   $ 157,214      $ 135,938      $ 391,226      $ 330,312   

Net cash (used in) provided by investing activities

     (105,787     86,622        (300,805     (371,179

Net cash provided by (used in) financing activities

     143,083        (139,132     16,744        57,001   

OTHER FINANCIAL DATA

        

Adjusted EBITDAR(2)

   $ 344,894      $ 289,799      $ 658,544      $ 543,751   

Operating margin(3)

     6.2     4.5     6.6     5.3

Adjusted EBITDAR margin(4)

     15.5     13.9     15.4     14.3

 

 

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Table of Contents
     For the Six Months Ended
June 30,
    For the Year Ended
December 31,
    For the Eleven
Months Ended
December 31,
 
         2013             2012         2012     2011     2010(26)  

OPERATING DATA (Unaudited)(5)(6)

          

Total passengers carried (in thousands)

     11,924        10,911        23,093        20,455        16,061   

Revenue passengers carried (in thousands)(7)

     11,555        10,586        22,425        19,909        15,639   

Revenue passenger kilometers (RPK) (in millions)(8)

     14,995        13,813        29,072        26,368        21,065   

Available seat kilometers (ASK) (in millions)(9)

     18,858        17,624        36,545        33,136        26,463   

Load factor(10)

     79.5     78.4     79.6     79.6     79.6

Block hours(11)

     236,729        226,168        466,439        429,712        346,484   

Average daily aircraft utilization(12)

     10.0        10.1        10.2        9.9        9.3   

Average one-way passenger fare

     160        164        158        160        —    

Yield(13)

     12.3        12.6        12.2        12.1        —    

Passenger revenue per ASK (PRASK)(14)

     9.8        9.9        9.7        9.6        —    

Operating revenue per ASK (RASK)(15)

     11.8        11.8        11.7        11.5        —    

Cost per ASK (CASK)(16)

     11.1        11.3        10.9        10.8        —    

CASK excluding fuel

     7.6        7.6        7.3        7.4        —    

Revenue ton kilometers (RTK)(17)

     375        356        748        695        677   

Available ton kilometers (ATK)(18)

     654        588        1,198        1,087        974   

Gallons of fuel consumed (in thousands)

     200,225        187,614        388,066        350,122        300,703   

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

     3.22        3.35        3.33        3.15        —    

Average stage length (kilometers)(19)

     1,008        1,030        1,056        1,063        1,030   

On-time domestic departure(20)

     75.2     61.3     66.4     70.1     72.5

On-time international departure(21)

     83.5     78.3     79.2     79.3     83.8

Completion rate(22)

     98.3     97.8     98.3     98.3     99.5

Technical dispatch reliability(23)

     99.5     99.5     99.5     99.3     99.1

Departures

     126,626        119,153        247,365        228,056        183,866   

Average daily departures

     703        658        678        627        552   

Average number of aircraft(24)

     131.7        124.2        125.7        119.8        112.3   

Airports served at period end

     98        96        98        110        103   

Routes served at period end

     159        167        169        168        156   

Direct sales as     % of total sales(25)

     33.0     32.3     33.3     32.1     —    

Full-time employees and cooperative members at period end

     18,335        17,538        18,071        17,360        15,340   

Revenue per full-time employee plus cooperative members ($)

     121        119        236        219        —    

 

 

13


Table of Contents

 

(1) Dividends of 75/0.04 COP/US$ per preferred share were declared and paid in March 2013 based on profits for the year 2012. Dividends of 50/0.03 COP/US$ per preferred share were declared and paid in March 2012 based on profits for the year 2011.
(2) Adjusted EBITDAR represents our consolidated net profit for the year plus the sum of income tax expense, depreciation, amortization and impairment and aircraft rentals , minus interest expense, minus interest income, minus derivative instruments, minus foreign exchange. Adjusted EBITDAR is presented as supplemental information, because we believe it is a useful indicator of our operating performance and is useful in comparing our operating performance with other companies in the airline industry. However, Adjusted EBITDAR should not be considered in isolation, as a substitute for net profit determined in accordance with IFRS or as a measure of a company’s profitability. In addition, our calculation of Adjusted EBITDAR may not be comparable to other companies’ similarly titled measures. The following table presents a reconciliation of our net income to Adjusted EBITDAR for the specified periods:

 

    Six Months Ended June 30,     Year Ended December 31,  
            2013                     2012                     2012                 2011          

Net profit (loss) for the year

    147,506        (45,677   $ 38,257      $ 99,876   

Add: Income tax expense

    27,188        11,265        64,705        43,814   

Add: Depreciation, amortization and impairment

    66,338        63,485        122,080        126,507   

Add: Aircraft rentals

    140,546        132,444        255,566        214,861   

Minus: Interest expense

    (50,255     (52,612     (122,112     (90,778

Minus: Interest income

    7,950        12,157        25,006        33,649   

Minus: Derivative instruments

    (5,861     (14,152     (24,042     (3,164

Minus: Foreign exchange

    84,850        (73,675     (56,788     1,600   
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR

  $ 344,894      $ 289,799      $ 658,544      $ 543,751   

 

(3) Operating margin represents operating profit divided by total operating revenue.
(4) Adjusted EBITDAR margin represents Adjusted EBITDAR divided by total operating revenue.
(5) 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), average number of aircraft, full-time employees and cooperative members at period end, revenue per full-time employee plus cooperative members, RTK and ATK.
(6) Operating data does not include regional operations in Central America except for airports served at period end, routes served, full-time employees and cooperative members at period end, revenue per full-time employee plus cooperative members.
(7) Total number of paying passengers (excluding all passengers redeeming LifeMiles frequent flyer miles and other travel awards) flown on all flight segments (with each connecting segment being considered a separate flight segment).
(8) Revenue passenger kilometers (RPKs) represent the number of kilometers flown by scheduled revenue passengers.
(9) Aircraft seating capacity multiplied by the number of kilometers the seats are flown.
(10) Percentage of aircraft seating capacity that is actually utilized. Load factors are calculated by dividing revenue passenger kilometers by available seat kilometers.
(11) The number of hours from the time an airplane moves off the departure gate for a revenue flight until it is parked at the gate of the arrival airport.
(12) Average number of block hours operated per day per average number of passenger aircraft.
(13) Average amount (in U.S. cents) one passenger pays to fly one kilometer.
(14) Passenger revenue (in U.S. cents) divided by the number of available seat kilometers.

 

 

14


Table of Contents
(15) “Operating revenue per available seat kilometer” (RASK) represents operating revenue (in U.S. cents) divided by available seat kilometers.
(16) “Cost per available seat kilometer” (CASK) represents service rendering costs and operating expenses (in U.S. cents) divided by available seat kilometers.
(17) “Revenue ton kilometers” (RTKs) represent the total cargo tonnage uplifted multiplied by the number of kilometers the cargo is flown.
(18) “Available ton kilometers” (ATKs) represent cargo ton capacity multiplied by the number of kilometers the cargo is flown.
(19) The average number of kilometers flown per flight.
(20) Percentage of domestic scheduled flights that depart from the gate within 15 minutes of the scheduled departure time.
(21) Percentage of international scheduled flights that depart from the gate within 15 minutes of the scheduled departure time.
(22) Percentage of scheduled flights that arrive at the destination gate (other than flights cancelled with at least 48 hours’ notice).
(23) Percentage of scheduled flights that are not delayed at departure more than 15 minutes or cancelled, in each case, due to technical problems.
(24) Includes only aircraft in service.
(25) Direct sales include sales from our ticket offices, our call centers, direct agents and our website.
(26) Certain items of operating data are not available for the eleven months ended December 31, 2010 because we do not have audited financial information under IFRS available for any period prior to January 1, 2011, our transition date to IFRS. We present operating data for the eleven-month period ended December 31, 2010 because we became the parent company of Avianca and Taca on February 1, 2010 in connection with the combination of Avianca and Taca. As a result, our operating data for the eleven-month period ended December 31, 2010 is not directly comparable to our operating data for the full fiscal years ended December 31, 2011 and 2012. This lack of comparability is heightened by the fact that our business is seasonal, and January is typically one of our busiest months.

 

 

15


Table of Contents

Summary Financial and Operating Data (Colombian GAAP)

The following tables present summary consolidated financial and operating data as of the dates and for the periods indicated. You should read this information in conjunction with our consolidated financial statements prepared in accordance with IFRS, together with the notes thereto, included in this prospectus, “Presentation of Financial and Other Information” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

The summary consolidated financial information as of December 31, 2010, 2011 and 2012 and for the eleven-month period ended December 31, 2010 and the years ended December 31, 2011 and 2012 has been derived from our consolidated financial statements prepared in accordance with Colombian GAAP not included in this prospectus. Beginning January 1, 2013, we no longer report financial information in Colombian GAAP. See “Presentation of Financial and Other Information—Colombian GAAP Supplemental Financial Information.”

Colombian GAAP differs in certain significant respects from IFRS. We have included a description of certain significant measurement and recognition differences between Colombian GAAP and IFRS as applied to us in Note 33 to our consolidated financial statements.

We present financial information under Colombian GAAP for the eleven-month period ended December 31, 2010 because we became the parent company of Avianca and Taca on February 1, 2010 in connection with the combination of Avianca and Taca. We have no consolidated financial information prior to such date. As a result, our financial information for the eleven-month period ended December 31, 2010 is not directly comparable to our financial information for the full fiscal years ended December 31, 2011 and 2012. This lack of comparability is heightened by the fact that our business is seasonal, and January is typically one of our busiest months.

 

     As of December 31,  
     2012      2012      2011      2010  
     (in millions)  
     (US$)      (COP)  

BALANCE SHEET DATA

           

Assets:

           

Current assets:

           

Cash and cash equivalents

     396         700,876         915,349         702,044   

Investments, net

     65         115,052         76,503         692   

Debtors, net

     444         785,186         502,647         497,900   

Deposits, net

     35         62,701         62,700         34,363   

Inventories, net

     50         88,565         92,309         64,606   

Deferred assets, net

     125         220,335         135,381         119,244   

Other assets, net

     4         6,239         5,800         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     1,119         1,978,954         1,790,689         1,418,849   

Non-current assets:

           

Investments, net

     17         29,912         60,605         63,169   

Debtors, net

     221         390,738         636,934         522,201   

Deposits, net

     179         315,710         326,157         352,331   

Property and equipment, net

     2,325         4,111,863         3,578,571         3,463,338   

Intangible assets, net

     389         688,456         571,901         596,354   

Deferred charges, net

     134         236,460         203,095         152,102   

Other assets, net

     22         38,972         90,311         41,013   

Revaluations

     101         178,173         259,385         355,247   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     3,388         5,990,284         5,726,959         5,545,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     4,507         7,969,238         7,517,648         6,964,604   

 

 

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Table of Contents
     As of December 31,  
     2012      2012      2011      2010  
     (in millions)  
     (US$)      (COP)  

Liabilities and equity:

           

Current liabilities:

           

Financial obligations

     235         415,348         480,483         422,264   

Suppliers

     197         348,110         349,946         326,589   

Accounts payable

     192         338,702         350,954         297,790   

Taxes, tax burden and rates

     84         148,431         83,401         75,751   

Employer obligations

     96         170,618         156,491         137,171   

Estimated liabilities and provisions

     279         493,495         246,374         209,473   

Unearned transportation income

     357         630,801         633,035         730,370   

Deferred income tax

     20         34,697         24,226         —    

Other liabilities

     60         105,656         83,218         97,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     1,519         2,685,858         2,408,128         2,296,641   

Non-current liabilities:

           

Financial obligations

     1,314         2,322,982         2,193,394         2,424,824   

Accounts payable

     27         48,219         70,734         52,940   

Taxes, tax burden and rates

     7         12,777         24,098         —    

Employer obligations

     120         212,369         283,710         280,313   

Estimated liabilities and provisions

     22         39,551         184,774         167,015   

Deferred income tax

     30         53,780         32,954         34,947   

Bonds

     283         500,000         500,000         511,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     1,804         3,189,678         3,289,664         3,471,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     3,323         5,875,536         5,697,792         5,768,066   

Equity

     1,177         2,080,401         1,801,601         1,185,355   

Minority interest

     8         13,301         18,255         11,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

     4,507         7,969,238         7,517,648         6,964,604   

 

 

17


Table of Contents
     For the Year Ended December 31,     For the Eleven
Months Ended
December 31,
 
     2012     2012     2011     2010  
     (in millions)  
     (US$)           (COP)        

INCOME STATEMENT DATA

        

Operating income:

        

Passenger revenue

     3,733        6,599,851        6,188,904        4,521,399   

Cargo and courier services

     486        859,796        716,554        622,018   

Related activities

     107        189,175        159,325        178,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross operating income

     4,326        7,648,822        7,064,783        5,321,601   

Service rendering costs:

        

Fuel

     1,327        2,347,145        2,079,747        1,315,284   

Salaries, social security and other

     487        861,834        775,107        589,380   

Airport facilities and other

     383        677,147        627,177        527,416   

Leases of flight equipment and other

     293        517,950        466,483        337,375   

Professional fees, general services and other

     198        350,329        334,701        286,493   

Depreciation, amortization and provision

     170        300,868        377,133        357,992   

Maintenance of flight and aircraft equipment

     202        356,759        320,784        276,718   

Passenger services

     138        244,881        221,118        62,147   

Insurance policies

     22        38,533        45,105        39,125   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total service rendering costs

     3,221        5,695,446        5,247,355        3,791,930   

Gross profit

     1,105        1,953,376        1,817,428        1,529,671   

Operating expenses:

        

Selling

     564        998,048        922,367        823,757   

Administrative

     254        448,293        373,211        285,065   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     818        1,446,341        1,295,578        1,108,822   

Operating profit

     287        507,035        521,850        420,849   

Retirement pension plans

     18        32,481        74,969        33,619   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit after retirement pension plans

     268        474,554        446,881        387,230   

Non-operating income:

        

Profits from sales of assets, recoveries and other, net

     143        252,547        161,761        59,532   

Foreign exchange differences, net

     17        30,175        (5,349     36,480   

Finance income—interest and other

     23        40,346        37,010        28,620   

Other non-operating income

     —          —         —         12,818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating income

     183        323,068        193,422        137,450   

Non-operating expenses:

        

Finance expenses—interest and commissions

     142        250,454        272,630        296,820   

Other non-operating expenses

     60        106,634        81,178        63,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-operating expenses

     202        357,088        353,808        359,844   

Profit before income taxes and minority interest

     249        440,534        286,495        164,836   

Taxes:

        

Current income tax

     49        86,700        53,866        11,449   

Deferred income tax

     (1     (1,223     24,247        44,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income tax

     48        85,477        78,113        56,172   

Profit before minority interest

     201        355,057        208,382        108,664   

Minority interest

     (2     (3,373     (6,165     1,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net profit for the period

     199        351,684        202,217        110,032   

 

 

18


Table of Contents
     For the Year Ended December 31,     For the Eleven
Months Ended
December 31,
 
     2012     2012     2011     2010  
     (in millions)  
     (US$)           (COP)        

CASH FLOW DATA

        

Net cash provided by operating activities

     401        720,367        504,316        602,160   

Net cash (used in) investing activities

     (573     (1,030,865     (396,270     (759,461

Net cash provided by financing activities

     53        96,025        105,259        221,774   

OTHER FINANCIAL DATA

      

Operating profit

     287        507,035        521,850        420,849   

Adjusted EBITDAR(1)

     750        1,325,853        1,365,466        1,116,216   

Operating margin(2)

     6.6     6.6     7.4     7.9

Adjusted EBITDAR margin(3)

     17.3     17.3     19.3     21.0

Weighted average shares used in computing net profit per share

     901,307,920        901,307,920        876,307,920        100,163,490   

Net profit per share

     0.2        390        231        1,099   

 

(1) Adjusted EBITDAR represents our consolidated net income plus the sum of income taxes, non-operating expenses, pension plans, depreciation, amortization and provision and lease of flight equipment and other minus non-operating income and minority interest. Adjusted EBITDAR is presented as supplemental information because we believe it is a useful indicator of our operating performance and is useful in comparing our operating performance with other companies in the airline industry. However, Adjusted EBITDAR should not be considered in isolation, as a substitute for net income prepared in accordance with Colombian GAAP or IFRS or as a measure of a company’s profitability. In addition, our calculation of Adjusted EBITDAR may not be comparable to other companies’ similarly titled measures. The following table presents a reconciliation of our net income to Adjusted EBITDAR for the specified periods:

 

     Year Ended December 31,     Eleven Months
Ended December 31,
 
     2012     2012     2011     2010  
     (in millions)  
     (US$)           (COP)        

Net profit for the period

     199        351,684        202,217        110,032   

Add: Income taxes

     48        85,477        78,113        56,172   

Add: Non-operating expenses(a)

     202        357,088        353,808        359,844   

Add: Pension plans

     18        32,481        74,969        33,619   

Add: Depreciation, amortization and provision

     170        300,868        377,133        357,992   

Add: Leases of flight equipment and other

     293        517,950        466,483        337,375   

Minus: Non-operating income(a)

     183        323,068        193,422        137,450   

Minus: Minority interest

     (2     (3,373     (6,165     1,368   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDAR

     750        1,325,853        1,365,466        1,116,216   

 

  (a) Under Colombian GAAP non operating expenses and non operating income includes interest expense, interest income, derivative instruments and foreign exchange IFRS categories.

 

(2) Operating margin represents operating profit divided by gross operating income.
(3) Adjusted EBITDAR margin represents Adjusted EBITDAR divided by gross operating income.

 

 

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RISK FACTORS

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

Risks Relating to Our Company

Our recent growth and profitability may not be sustainable.

Since our February 1, 2010 combination of Avianca and Taca, we have grown significantly and have been profitable. Since that date, we have benefited from favorable external circumstances that may not continue, including, among others, growth in the overall market for air travel in Latin America and favorable political and economic conditions in Colombia, Peru and much of Central America. Prospective investors should understand that our future results of operations are subject to significant uncertainties, and that our past results (and improvements in market share) may not be indicative of our future performance.

We seek to continue to grow by expanding our service to new markets and by increasing the frequency of our flights to some of the markets we currently serve. We cannot assure you, however, that any such future growth will improve our overall profitability. When we commence a new route, our load factors tend to be lower than those on our established routes, and our advertising and other promotional costs tend to be higher, which may result in initial losses that would have a negative impact on our consolidated results of operations as well as require a substantial amount of cash to fund. We also periodically offer special promotional fares, particularly in connection with the opening of new routes. Promotional fares may have the effect of increasing load factors while reducing our yield on such routes during the period that they are in effect.

Our growth and profitability depend on the number of markets we serve and our flight frequencies, which in turn depend on our ability to identify the appropriate geographic markets upon which to focus and to gain suitable airport access and route approval in these markets. According to ALTA, air travel in Latin America grew at rates of 13.5%, 5.4%, 8.2% and 7.0% in 2010, 2011, 2012 and the six months ended June 30, 2013, respectively. We cannot give you any assurance that this growth will continue in the future or that any new markets we enter will provide passenger traffic that is sufficient to make our operations in those new markets profitable. Any condition that would prevent or delay our access to key airports or routes, including limitations on the ability to carry more passengers, the imposition of flight capacity restrictions, the inability to secure additional route rights under bilateral agreements or the inability to maintain our existing slots and obtain additional slots, could constrain the expansion of our operations. In light of these factors, we cannot assure you that we will be able to successfully establish new markets or expand our existing markets, and our failure to do so could harm our business and results of operations, as well as the value of the ADSs.

We may not be able to achieve all the anticipated benefits of the combination of Avianca and Taca.

We became the parent company of Avianca and Taca in February 2010 in connection with the combination of Avianca and Taca, two large and complex airlines that had previously operated as competitors. The success of the combination of Avianca and Taca depends in large part on our ability to achieve anticipated synergies from the streamlining of operations and personnel, increased economies of scale, new product and service offerings and organic growth. To date, we have focused primarily on the initial phase of our integration, which consists of the commercial integration of our fleets, networks and certain revenue management practices, but we still face challenges in implementing the second phase of operational integration, which focuses on achieving improved operating efficiencies from synergies and economies of scale. There is a risk that we may not be able to complete this integration in a manner that achieves the revenue synergies, cost savings and growth opportunities in the time, manner or amounts that we seek, if at all.

 

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Challenges we face in the ongoing integration process include, among others, the following:

 

   

integrating differing customer service practices and corporate cultures in order to provide a unified and superior client experience in each of the jurisdictions in which we now operate;

 

   

integrating our network and various hubs and focus markets to optimize our network coverage and service offerings across the region;

 

   

integrating and simplifying our fleet to optimize aircraft utilization and related operating expenses, including consolidating multi-jurisdictional maintenance and regulatory compliance costs;

 

   

streamlining human resources and differing management structures while retaining highly qualified personnel;

 

   

integrating different accounting, information technology and management systems;

 

   

maintaining customer loyalty while consolidating our frequent flyer and other loyalty programs and repositioning our brand and promotional efforts; and

 

   

encountering unforeseen expenses, delays or liabilities that could exceed the savings that we seek to achieve from the elimination of duplicative expenses and the realization of greater efficiencies from increased scale and market integration, other efficiencies and cost savings.

In addition, the integration process itself presents significant management challenges and is time consuming and disruptive, as it requires coordination of geographically diverse organizations. As a result, the integration process may divert our management’s attention from the day-to-day operation of our core businesses. Any such diversion could adversely affect our ability to maintain good relations with our customers, suppliers, employees, regulators and other constituencies or otherwise adversely affect our businesses, financial condition, results of operations and or business prospects.

In order to achieve the anticipated benefits of the combination of Avianca and Taca, the operations of both companies will need to continue to be reorganized, and their resources will need to be combined in a timely and efficient manner. We cannot assure you that we will be able to do so as anticipated. If we fail to implement the integration effectively and within the time frame currently contemplated, or if for any other reason the anticipated revenue synergies, cost savings and growth opportunities fail to materialize, our business, financial condition, results of operation and business prospects could be materially and adversely affected.

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

We have entered into several agreements to acquire up to 68 Airbus, 15 Boeing and 15 ATR aircraft for delivery between the second half of 2013 and 2019. The timely delivery of these new aircraft by Airbus and Boeing is subject to a number of uncertainties including (i) the fact that Airbus, Boeing or ATR may be unable or unwilling to fulfill its contractual delivery obligations as a result of production capacity constraints or otherwise, (ii) the aircraft delivered to us may encounter unexpected safety or other operational problems and could be grounded, such as the recent worldwide grounding of 787 Dreamliners operated by other airlines and (iii) our inability to obtain necessary aircraft financing for any reason.

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

 

   

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

 

   

difficulties in obtaining the required documentation to complete the registration of the aircraft before the Colombian National Aviation Registry (Registro Aeronáutico Nacional) kept by the Colombian Civil Aviation Authority;

 

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difficulties in the process of reporting the entrance and import of the aircraft into Colombia and in obtaining the approval of surety bonds to assure the payment of the applicable custom taxes from the Colombian Customs Authority (Dirección de Impuestos y Aduanas Nacionales—DIAN);

 

   

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

 

   

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

These and other such risks may significantly delay our ability to implement the critically important continuing modernization of our passenger and cargo fleet. While our jet passenger operative fleet had an average age of 4.9 years as of June 30, 2013, our total operative fleet had an average age (including both jet and turboprop aircraft) of approximately 6.6 years. Our ability to remain competitive and to achieve improvements in operating efficiencies is heavily dependent on the prompt modernization of our fleet, and any disruptions of, or delays in, our proposed modernization program may significantly harm our business by eroding our competitive position, delaying our ability to reduce operating costs and complicating our ability to retire our older aircraft on schedule.

Underperformance of any new aircraft that we have ordered from Airbus, Boeing and ATR may adversely impact our operations and financial results.

We expect the introduction of our new Airbus, Boeing and ATR aircraft will increase fuel efficiency and crew productivity, lower training costs and lead to higher operational efficiency and flexibility. However, these aircraft may not perform as expected, and their introduction may not result in the aforementioned benefits, which we expect to help offset the increased costs associated with their purchase. Although our agreements with Airbus, Boeing and ATR would permit us to receive compensation under certain circumstances should these aircraft fail to meet their agreed specifications, we can offer no assurance that these amounts would fully compensate us for the loss of the anticipated benefits of these new aircraft. The incurrence of the additional financing costs to purchase these aircraft without achieving the related increase in efficiency and cost reductions could have a negative impact on our business, operations and financial performance.

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

We currently expect to integrate approximately 98 new aircraft into our fleet between the second half of 2013 and 2019 and may exercise purchase rights for additional new aircraft. We may experience difficulties in integrating these new aircraft into our fleet. In addition, we face risks in integrating new types of aircraft into our existing infrastructure and operations, including, among other things, the additional costs, resources, space, personnel and time needed to hire and train new pilots, technicians and other skilled support personnel. We may also face significant difficulties selling the aircraft we own in a short period of time at favorable prices and returning our leased aircraft and engines on reasonable terms due to rigorous pre-return inspections by the lessors, which can lead to lengthy and costly negotiations during which we are obliged to continue making lease payments for unutilized equipment. Our failure to integrate these newly purchased aircraft into our fleet as planned might require us to seek extensions of the terms for some leased aircraft. Such unanticipated extensions may require us to operate existing aircraft beyond the point at which it is economically optimal to retire them, resulting in increased maintenance costs. If new aircraft orders are not filled on a timely basis, we could face higher monthly rental rates. We also have a large inventory of spare parts and components for our current fleet and we may not be able to sell this inventory at favorable prices.

We may not be able to obtain the capital we need to finance our growth and modernization strategy.

We seek to implement our growth and modernization strategy by providing new service and increased frequencies to markets where we believe demand for air travel exceeds availability of flights, replacing our

 

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existing fleet with a new fleet and expanding our cargo activities, among other capital-intensive initiatives. The majority of our aircraft are subject to favorable long-term operating leases or are financed on favorable terms. We may be unable to obtain similarly favorable financing for our new fleet. In addition to the proceeds of this offering, we intend to rely upon internally-generated cash from our operations and additional debt financing in the domestic and international capital markets to fund our growth and modernization strategy. There can be no assurance, however, that we will be able to generate sufficient cash flow from operations or obtain sufficient funds from external sources with favorable financing terms. Failure to generate sufficient cash flow or to obtain such financing could result in us paying higher financing rates or being unable to accept delivery of the new aircraft, which may result in defaults under our aircraft purchase contracts with Airbus, Boeing and ATR or in the delay or abandonment of some or all of our planned expenditures, which, in turn, could adversely affect our competitive position and our business, financial condition, results of operations, cash flows and prospects.

We have significant financing costs and expect to incur additional financing costs as we modernize our fleet.

We have substantial and increasing fixed financial costs in connection with our aircraft financing obligations. As of December 31, 2012 and June 30, 2013, respectively, we had $1,854.4 million and $2,163.2 million of total debt outstanding. Our interest expense was $122.1 million in 2012 and $50.3 million for the six months ended June 30, 2013. For the year ended December 31, 2012 and the six months ended June 30, 2013, our aircraft rental expense under aircraft operating leases aggregated $255.6 million and $140.5 million, respectively, and our facility rental costs aggregated more than $17.8 million and $9.0 million, respectively. In addition, we have entered into agreements to acquire up to 68 Airbus, 15 Boeing and 15 ATR aircraft for delivery between the second half of 2013 and 2019, which will require significant additional financing costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Commitments and Contractual Obligations” for information on the magnitude of such financial commitments.

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

 

   

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

 

   

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

 

   

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

 

   

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

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

We have significant off-balance sheet arrangements.

We have significant off-balance sheet arrangements, which must be taken in to account in evaluating our overall level of leverage and financial health. As of December 31, 2012 and June 30, 2013, we had $984.2 million and $1,017.5 million, respectively, of off-balance sheet arrangements, primarily related to obligations under our operating leases for aircraft in our fleet. See “Management’s Discussion and Analysis of Financial

 

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Condition and Results of Operations—Liquidity and Capital Resources—Off-Balance Sheet Arrangements.” The amount of these off-balance sheet arrangements may grow in the future as we incorporate new aircraft into our fleet under our fleet modernization plan, many of which could be through operating leases.

Our existing debt and lease financing arrangements contain restrictive covenants and events of default that impose significant operating and financial restrictions on us. Certain of our subsidiaries were not in compliance with certain debt covenants as of December 31, 2012.

Several of our financing arrangements and several aircraft leases contain a number of covenants and restrictions including limits on our ability and our subsidiaries’ ability to incur additional debt and make certain investments. Some of these covenants require that we comply with specified financial ratios and other financial and operating tests. Our access to certain borrowings under our financing arrangements is conditioned upon our maintenance of minimum debt service coverage and capitalization ratios and a maximum leverage ratio. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Financing Agreements.”

Complying with these covenants may cause us to take actions that make it more difficult to successfully execute our business strategy and we may face competition from companies not subject to such restrictions. Moreover, our failure to comply with these covenants could result in an event of default or refusal by our creditors to renew certain of our loans.

Our subsidiary, Avianca, is required to maintain compliance with certain financial covenants under a loan agreement with the IFC. As of June 30, 2013, Avianca did not comply with the adjusted debt to tangible net worth covenant (which, if not waived, is required to be less than 5.0 to 1 but as of June 30, 2013 was 7.95 to 1), but IFC granted a waiver for this noncompliance. Our subsidiary, Taca, is required to maintain compliance with certain financial covenants (including a leverage ratio) under a credit agreement that Taca International (as defined below) has with Banco Davivienda. As of June 30, 2013, Taca did not comply with the leverage ratio (which, if not waived, is required to be less than 6.0 to 1 but as of June 30, 2013 was 7.51 to 1), but a waiver for this noncompliance was obtained on May 15, 2013. We cannot give you any assurance that we will be able to obtain waivers for any future or continuing failures to meet financial covenants or that our lenders will not take action to declare defaults our accelerate the repayment of our debt as a result of such failures.

We recently began preparing our financial statements in accordance with IFRS and, as a result, our available financial data is limited.

As of December 11, 2012, our board of directors approved the adoption of IFRS. We used a transition date of January 1, 2011, and as a result our consolidated financial statements as of and for the year ended December 31, 2012 were our first annual audited consolidated financial statements required to be prepared in accordance with IFRS. We have not prepared any financial information in accordance with IFRS for any prior periods. This makes it more difficult for you to compare our consolidated results of operations for prior years to our results of operations for the two most recent years and to discern trends that would otherwise be more apparent if we were to present financial information in accordance with IFRS for years prior to 2012. The lack of financial information from which to draw comparisons of our financial data may make it difficult for you to gain a full and accurate understanding of trends affecting our results of operations, financial condition and business prospects.

Our maintenance costs will increase as our fleet ages.

Because the average age of our operative fleet was approximately 6.6 years as of June 30, 2013, our fleet requires less maintenance now than it will in the future. As of June 30, 2013, our jet passenger operative fleet had an average age of 4.9 years, our cargo operative fleet had an average age 9.5 years and our turboprop operative fleet had an average age of 13.7 years. We have incurred a low level of maintenance expenses in recent years

 

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because most of the parts on our aircraft were still covered under multi-year warranties. Our maintenance costs can be expected to increase significantly, both on an absolute basis and as a percentage of our operating expenses, if our fleet ages and such fleet is not replaced or the warranties covering such fleet expire and are not renewed.

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

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

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

One of the elements of our business strategy is to save costs by operating a simplified fleet. At June 30, 2013, 112 of the 166 aircraft that comprised our total fleet (including eight aircraft we lease or sublease to an entity indirectly controlled by José Efromovich, Ocean Air Linhas Aereas S.A., which conducts business under the trade name Avianca Brazil, or OceanAir, and seven inactive aircraft) were Airbus. Our jet fleet also includes 12 Embraer aircraft, and we have also entered into agreements to acquire up to 15 Boeing 787 Dreamliners, to implement our long-haul strategy. We are also in the process of replacing our regional turboprop fleet of Fokker 50s and Cessna 42s with 15 new ATR72s to be delivered between the second half of 2013 and 2015. As a result, we are vulnerable to significant problems associated with the Airbus, Embraer, Boeing or ATR aircraft or the engines that power them, including design defects, mechanical problems, contractual performance by the manufacturers or adverse perception by the public that would result in customer avoidance or in actions by the FAA or other regulators resulting in a reduced ability to operate our aircraft. The 787 Dreamliner has experienced a number of high-profile incidents, including a battery overheating incident that led the FAA and other international aviation authorities to ground the airplanes from January to April 2013.

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

Our business would be significantly harmed if a design defect or mechanical problem with any of the types of aircraft that we operate were discovered that would ground any of our aircraft while the defect or problem was corrected, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by regulatory authorities in the event of any actual or perceived mechanical or design problems. Our business would also be significantly harmed if the public began to avoid flying with us due to an adverse perception of the types of aircraft that we operate stemming from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft. Carriers that operate a more diversified fleet are better positioned than we are to manage such events.

 

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We are dependent on our hub at Bogotá’s El Dorado International Airport.

Our business is heavily dependent on our operations at our Bogotá hub consisting of El Dorado International Airport and Puente Aéreo. During the first half of 2013, approximately 74% of our domestic flights and approximately 30% of our total international flights either departed from or arrived at our Bogotá hub. As a result, any significant interruption or disruption in service at El Dorado International Airport, or any other condition adversely affecting the international competitiveness of the Bogotá hub, could have a serious impact on our business, financial condition and operating results.

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. 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. El Dorado International Airport currently faces significant traffic congestion due to aircraft-flow management problems. At the present time, El Dorado International Airport handles approximately 40 hourly departures under favorable weather conditions. IATA is currently providing advisory services to the Colombian Civil Aviation Authority to improve overall runway capacity and ground movement patterns at El Dorado International Airport, but we cannot give any assurance that IATA’s solutions will in fact be implemented as planned, or that, if implemented, they will be successful in alleviating the current congestion.

If the current congestion problems at El Dorado International Airport are not resolved promptly, this will likely constrain significantly our ability to grow and adversely affect our ability to maintain the competitiveness of our business model. Delays inconvenience passengers, reduce aircraft utilization and increase costs, all of which negatively affect our profitability. During periods of fog, rain, storms or other adverse weather conditions, flights may be cancelled or significantly delayed. Cancellations or delays due to weather conditions, traffic control problems and breaches in security could harm our operating results and financial condition. In addition, the number of gates at El Dorado International Airport need to be increased to accommodate demand, which currently exceeds the airport’s capacity, but it has not yet defined how and when the Colombian government is going to address the airport’s infrastructure constraints. If these infrastructure constraints are not resolved on a timely basis, they can be expected to constrain our growth opportunities and adversely affect our results of operations.

We are in the process of incorporating new information technology systems, the phase-in of which may have a negative impact on our service and operating standards.

We are in the process of incorporating new information technology systems to improve our maintenance, flight operations, enterprise resource planning, human resource management and back office functions. Although we seek to implement our new flight operations systems by late 2013 and our other new maintenance, enterprise resource planning, human resource management systems by 2014, we cannot assure you we will be able to do so. Our incorporation of these new systems was intended to help us increase revenue, reduce costs, enhance customer satisfaction and increase operating efficiencies, however, these new systems may not deliver the benefits we seek. In addition, in the short term, the phase-in of these new systems may result in lower service and operating performance, which could adversely affect how our customers perceive us. Also, in transitioning to new systems, we may lose data or experience interruptions in service, which could harm our business.

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

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

 

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Our cargo demand, especially from Latin American exporters, is concentrated in a small number of product categories, such as fresh flowers from Ecuador and Colombia. Events that negatively affect the production or trade of these goods may adversely affect the volume of goods that we transport and may have a significant impact on our results of operations. Some of our cargo products are sensitive to foreign exchange rates, and therefore traffic volumes could be impacted by the appreciation or depreciation of local currencies. As a result of the foregoing factors, most of which are beyond our control, we may not be able to expand our cargo business and our inability to do so could adversely affect our business, financial condition and results of operations.

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

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

Our business is subject to extensive regulation and bilateral treaties, which may restrict our growth or ability to operate in certain jurisdictions.

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

We are also subject to international bilateral air transport agreements that provide for the exchange of air traffic rights between the different countries, and we must obtain permission from applicable governments to provide service to international destinations. Bilateral aviation agreements as well as local aviation approvals frequently involve political and other considerations beyond our control. We cannot give you any assurance that existing bilateral agreements among the countries in which we are based and to which we fly, and permits from local and foreign governments, will continue, or that we will be able to obtain more traffic rights to accommodate our future expansion plans.

In addition, certain of the bilateral air transport agreements, including, among others, agreements of Colombia with Bolivia, Ecuador, Peru, Panama, Chile, Argentina, the Dominican Republic, Cuba, the Netherlands and Costa Rica contain the requirement that our relevant operating subsidiaries must be incorporated and have their principal domicile, management, operations, technical maintenance and offices in certain designated countries. Also, all of the agreements negotiated by El Salvador, (except for the agreements with Ecuador, Colombia, Emirates, Qatar and Chile) contain a clause that our airline in El Salvador (Taca International) remains substantially owned and effectively controlled by Salvadoran nationals. A substantial part of the agreements negotiated by Costa Rica also contain ownership and control requirements.

Other bilateral air transport agreements, including, among others, agreements with the United States, Brazil and Mexico, contain requirements that we remain substantially owned and effectively controlled by a national governmental entity or its nationals. We cannot assure you that national citizens, directly or indirectly, will

 

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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 different citizenships and are the beneficial owners of approximately 99.3% 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, or if we fail to continue to have our corporate domicile, administrative headquarters, and our base of operations within each territory, we may no longer comply with the requirements of bilateral agreements and, as a result, our 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. A modification, suspension or revocation of one or more bilateral agreements and other permission from applicable foreign governments could have a material adverse effect on our business, financial condition and results of operations. See “Regulation.”

As of June 30, 2013, approximately 70% of our total fleet was U.S.-registered. The U.S. Federal Aviation Administration, or FAA, and the European Aviation Safety Agency, or EASA, are our most significant foreign government regulators. For example, the FAA from time to time issues directives and other regulations relating to the maintenance and operation of aircraft that require significant expenditures. FAA requirements, which apply to our U.S.-registered aircraft, cover, among other things, collision avoidance systems, airborne wind shear avoidance systems, noise abatement and other environmental issues, and increased inspections and maintenance procedures to be conducted on older aircraft. We expect to continue incurring expenses to comply with these and other international government regulations, and any increase in the cost of compliance could have an adverse effect on our financial condition and results of operations. Additional new regulations continue to be regularly implemented by various U.S. and European agencies, including, among others, the U.S. Transportation Safety Administration, or TSA, and the U.S. Drug Enforcement Agency. We cannot assure you that the laws and regulations of the jurisdictions to which we fly (including, without limitation, immigration and security regulations, which directly affect passengers) will not change or that new laws adverse to us will not be enacted, and any such events may adversely affect our business, financial condition and results of operations.

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

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

We are required by our creditors and the lessors of our aircraft under our operating lease agreements to carry liability insurance, but the amount of such liability insurance coverage may not be adequate, and we may be forced to bear substantial losses in the event of any future incident. Our insurance premiums may also increase significantly due to an accident or incident affecting one of our aircraft. Substantial claims resulting from an accident in excess of our related insurance coverage or increased premiums would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause the public to perceive us as less safe or reliable than other airlines, which could materially and adversely affect our results of operations and business prospects. Our business would also be significantly harmed if the public were to avoid flying with us due to an adverse perception of an aircraft type, safety concerns or other problems, whether real or perceived, or in the event of an accident involving an aircraft of a type that we operate.

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

Our future profitability and cash flows could be affected by an adverse ruling in any of the potentially significant lawsuits currently pending against us or that may be filed against us in the future. We cannot give you any assurance that we will be successful in any of such lawsuits.

 

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Some of our subsidiaries are currently defendants to several lawsuits of a civil, commercial or labor nature originating from alleged acts or omissions related to their activities as carriers or as employers, with varying claims for damages on legal and contractual bases, including the Valórem arbitration involving Avianca’s former controlling shareholder. See “Business—Litigation” and “Note 21—Provisions for legal claims” to our unaudited financial statements as of and for the six months ended June 30, 2013.

Additionally, there are several proceedings in which our subsidiaries are plaintiffs demanding that certain decisions of administrative authorities be declared null. In the event that our subsidiaries do not prevail in such proceedings, not only will the decisions of the authorities remain effective, but our subsidiaries may also be required to pay penalties, sanctions or other additional amounts.

Additionally, some tax returns filed on time with the different authorities are pending review in accordance with the applicable statute of limitations. The auditing of those tax returns may result in additional taxes, or interest, or penalties which could give rise to administrative proceedings with applicable authorities. Our business also makes us and our subsidiaries subject to potential lawsuits which have not yet materialized, but in the future could negatively impact our business.

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

Our operations are covered by environmental regulations at the local and national levels, in our hubs, focus markets and in foreign countries. These regulations cover, among other things, emissions into the atmosphere, disposal of solid waste and aqueous effluents, management and disposal of hazardous wastes, aircraft noise and other activities incident to our business. Future operations and financial results may vary as a result of such regulations. Compliance with these regulations and new or existing regulations that may be applicable to us in the future could increase our cost base and adversely affect our operations and financial results. In addition, failure to comply with these regulations could adversely affect us in a variety of other ways, including adverse effects on our reputation. Remediation obligations can result in significant costs associated with the investigation and clean-up of contaminated properties, as well as damage claims arising out of the contamination of properties or any impact on natural resources.

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

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

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

 

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

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

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

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

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

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

 

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

We expect our quarterly operating results to fluctuate due to seasonality including high vacation and leisure demand occurring during the summer months of July and August and again during December and January. Actions of our competitors may also contribute to fluctuations in our results. As a result of this, our first quarter results are usually higher than our second quarter results. We are more susceptible to adverse weather conditions, including hurricanes, as a result of our operations being concentrated in Colombia, Central America and the Caribbean, than some of our competitors. As we enter new markets we could be subject to additional seasonal variations along with any competitive responses to our entry by other airlines. Price changes in aircraft fuel as well as the timing and amount of maintenance and advertising expenditures also impact our operations. As a result of these factors, quarter-to-quarter comparisons of our operating results may not be a good indicator of our future performance. In addition, it is possible that in any future period our operating results could be below the expectations of investors and any published reports or analyses regarding 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 and commercial personnel. Our employment agreements with members of our senior management team may be terminated by them at any time, without prior notice and without penalties. Furthermore, in certain countries we are not permitted to have non-competition agreements in place with members of our senior management team after termination of employment. In addition, our business is labor-intensive and our operations require us to employ a large number of highly-skilled personnel including pilots, maintenance technicians and other skilled operating personnel. In the countries in which we operate, there is a significant shortage of qualified pilots and maintenance technicians, and we have faced considerable turnover of our skilled employees, many of whom have left us to work in other countries where compensation is higher. The loss of any executive officer, senior manager, key employee or other highly skilled personnel without adequate replacement or the inability to attract new qualified personnel could have a material adverse effect upon our business, operating results and financial condition. Further, should the turnover of such employees (particularly pilots and maintenance technicians) increase, our training costs would be significantly higher. We cannot assure you that we will be able to recruit, train and retain the managers, pilots, technicians and other qualified employees that we need to continue our current operations or replace departing employees. A failure to hire and retain such qualified employees at a reasonable cost could materially adversely affect our business, financial condition and results of operations.

Labor disputes may result in a material adverse effect on our results of operations.

Approximately 6% of our overall employees and 25% of our pilots, belong to a labor union. There are currently ten unions covering our employees: the National Workers Union of Avianca, the National Union of Air Transportation Industry Workers, the Colombian Air Transportation Workers Union, the Colombian Association of Flight Attendants, the Colombian Association of Civil Aviators, the Colombian Association of Aircraft Mechanics, the Colombian Association of Flight Engineers, the Association of Tampa Cargo Workers, the National Union of Aviation and similar workers of Mexico and the Workers Union of Trans American Airlines, S.A.

Until recently, we were negotiating a new collective bargaining agreement with the Colombian Association of Civil Aviators (ACDAC), which represents approximately 43% of our pilots in Colombia, but we were not able to reach an agreement. The prior collective bargaining agreement we had with the Colombian Association of Civil Aviators (ACDAC) expired in March 2013, so there is no collective bargaining agreement between us and this union at this time. To date, we have been unable to reach an agreement with this union and do not know when we will be able to do so or under what terms. The pilots in the Colombian Association of Civil Aviators (ACDAC) have continued to fly our aircraft but recently stopped following certain of our cost-saving and time-saving operating practices. For example, the pilots in the Colombian Association of Civil Aviators (ACDAC)

 

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have started to fly and taxi at the minimum speeds permitted by their respective labor contracts, increasing our block hours and flying times, and have ceased implementing certain cost-saving practices such as taxiing with only one engine and requesting direct landing approaches to air controllers and therefore increasing flying time. Furthermore, the level of absenteeism among these unionized pilots has increased since they started the no cooperation movement.

We cannot predict the duration of the labor dispute with the Colombian Association of Civil Aviators (ACDAC) or the terms of our future collective bargaining agreements so cannot accurately predict the impact of this labor dispute on our financial condition or results of operations. If this situation were to continue unresolved for a significant period or if it is resolved on terms that we deem to be unfavorable, it could have a material adverse effect on our results of operations.

We expect to negotiate with the Workers Union of Trans American Airlines, S.A. in the fourth quarter of 2013. The results of the negotiations with the Workers Union of Trans American Airlines, S.A. may affect the negotiations with the members of the Colombian Association of Flight Attendants. The negotiations with the National Union of Air Transportation Industry Workers, the Colombian Association of Aircraft Mechanics and the Colombian Association of Flight Engineers, and the Association of Tampa Cargo workers are expected to take place during the second quarter of 2015. Typically, our collective bargaining agreements in Colombia, Peru and Mexico last two to five years. In addition, the Pilot’s Union of Trans American Airlines S.A. was recently formed and this union may cover some of our pilots and require us to negotiate a collective bargaining agreement. Because we provide an essential public service, strikes and work interruptions are forbidden by law; however, a slow-down or stoppage or any prolonged dispute with our employees who are represented by any of these unions, or any other sizable number of our employees, could have an adverse impact on our operations. These risks are typically exacerbated during periods of renegotiation with the unions.

As of June 30, 2013, we had 4,219 individuals hired through nonprofit cooperative organizations. However, in 2010, the Colombian Congress passed Law 1429, which modified the legal regime of labor relationships for full-time employees in Colombia. As a consequence of these changes, we have been directly hiring all administrative personnel while continuing to use the cooperatives for services and maintenance personnel. Even though we believe we were and continue to be in compliance with applicable laws, individuals hired through cooperatives may potentially file claims against us in connection with alleged labor benefits earned during the time they were hired through the cooperatives. An adverse decision under these claims could force us to make substantial payments, which could adversely affect our financial condition.

A significant percentage of our sales depends on our relationships with travel agencies and tour operators.

Approximately 68%, 67% and 67% of our sales were derived from tickets sold by travel agencies or tour operators in 2011, 2012 and the six months ended June 30, 2013, respectively. We cannot assure you that we will be able to maintain favorable relationships with these ticket agencies and operators. In addition, our contractual arrangements with these sellers may be terminated on short notice. Our revenue could be adversely impacted if travel agencies or tour operators were to elect to favor other airlines or to disfavor us. Our relationships with travel agencies and tour operators may be affected by:

 

   

the size of commissions offered by us when compared to those offered by other airlines;

 

   

changes in our arrangements with other distributors of airline tickets;

 

   

the introduction and growth of new methods of selling tickets, including sales through the internet, which may minimize the roles of travel agencies in the future and may affect our sales revenues; and

 

   

changes in government regulations, including regulations which would increase the commissions we pay to travel agencies and tour operators.

 

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

Our business strategy includes expanding our portfolio of ancillary products and services, such as LifeMiles. There can be no assurance that passengers will pay for additional ancillary products and services or that passengers will continue to choose to pay for the ancillary products and services we currently offer. Failure to maintain our non-ticket revenues could have a negative effect on our results of operations and financial condition.

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

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

We are exposed to increases in landing charges and other airport access fees and cannot be assured access to adequate facilities and landing rights necessary to achieve our expansion plans.

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. We cannot assure you that the airports we use will not impose, or further increase, passenger taxes and airport charges in the future. Any substantial increase in airport charges could have a material adverse impact on our results of operations.

Moreover, some of the airports to which we fly impose various restrictions, including limits on aircraft noise levels, limits on the number of average daily departures and curfews on runway use. In addition, we cannot assure you that the airports at which there are currently no such restrictions will not implement restrictions in the future or that, where such restrictions exist, they may not become more onerous. Such restrictions may limit our ability to continue to provide or to increase services at such airports.

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

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 is dependent on cash flow generated by our subsidiaries, which are subject to limitations on their ability to make dividend payments to us.

We conduct no operations, and our only material asset is our equity interests in our operating subsidiaries. Accordingly, our ability to repay our indebtedness and pay dividends to holders of the ADSs is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt

 

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repayment or otherwise. Our subsidiaries’ ability to generate sufficient cash from operations to make distributions to us will depend upon their future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond their control.

In addition, our subsidiaries may not be able to, or may not be permitted to, make distributions to us in order 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 be able to make funds available to us by dividend, debt repayment or otherwise, we may not have sufficient funds to fulfill our obligations under our indebtedness or pay dividends to our shareholders, including holders of the ADSs. For example, our local bonds restrict Avianca’s ability to pay dividends prior to December 31, 2015 and certain of our financial loans prohibit Avianca from paying any dividend prior to any initial public offering or private placement unless required by law.

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

We are obligated to make contributions to a pilot’s pension fund for the Colombian Association of Civil Aviators known as La Caja de Auxilios y de Prestaciones de la Asociación Colombiana de Aviadores Civiles, or CAXDAC, on behalf of certain of our eligible pilots. The pensioners affiliated with CAXDAC include not only some of our current pilots and former pilots, but also pilots employed and formerly employed by other Colombian airlines. The assets that we have contributed to CAXDAC are segregated into a separate account that is restricted for the payments of retirement benefits payments of our employees. The amount in the common CAXDAC fund used to pay the pensions may not be sufficient to cover all accrued pension liabilities since other Colombian airlines have gone bankrupt or have been liquidated and have failed to pay their ratable contributions to the pension fund. Although CAXDAC, as a pension fund manager, is the only entity obligated to pay retirement pensions to those pensioners legally affiliated with CAXDAC, it is uncertain how the expected deficiency will ultimately be funded, and whether or not pensioners and other third parties may bring actions against contributing airlines, including ourselves, seeking contributions to cover such deficiency, in which case we will be required to defend our position that we are not liable for this deficiency and face the uncertainty of judicial review.

Risks Relating to the Airline Industry

The airline industry is highly competitive.

We face intense competition throughout our domestic and international route networks. Overall airline industry profit margins are low and industry earnings are volatile. Airlines compete in the areas of pricing, scheduling (frequency and flight times), on-time performance, on-board experience, frequent flyer programs and other services.

During 2012 and the six months ended June 30, 2013, respectively, domestic air travel in Colombia, Peru and Ecuador accounted for approximately 31.0% and 29.9% of our passenger revenue and approximately 57.1% and 58.0% of our revenue passengers; as a result, our financial performance is highly sensitive to competitive conditions in the Colombian, Peruvian and Ecuadorian domestic air travel market. Our primary competitors in the Colombian domestic market are Copa Airlines, EasyFly, LATAM Airlines Group, Satena and VivaColombia. We may face significantly stronger domestic competition in the near future because of these competitors and new competitors, therefore, our prior results and market share may not be indicative of future performance in the domestic market. Our primary competitors in the Peruvian domestic market are Star Peru, LATAM Airlines Group and Peruvian and in the Ecuadorian domestic market our primary competitors are LATAM Airlines Group and TAME. 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 our cargo business.

 

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We also compete with a number of large airlines that serve the same international routes that we fly, including, among others, Copa Airlines, LATAM Airlines Group, American Airlines, United Airlines, Iberia, Delta Air Lines, Aeromexico, Interjet, Jet Blue Airways, Spirit Airlines and Aerolineas Argentinas. See “Business—Competition.” Some of our competitors, including American Airlines, United Airlines and LATAM Airlines Group, 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. Airlines based in other countries may also receive subsidies, tax incentives or other state aid from their respective governments, which are not provided to us by the governments in the countries in which we operate. The commencement of, or any increase in, service on the routes we serve by existing or new competitors could negatively impact our operating results. Likewise, competitors’ service on routes that we are targeting for expansion may make those expansion plans less attractive.

We must constantly react to changes in prices and services offered by our competitors to remain competitive. The airline industry is highly susceptible to price discounting, particularly because airlines incur very low marginal costs for providing service to passengers occupying otherwise unsold seats. Carriers use discount fares to stimulate traffic during periods of lower demand in order to generate cash flow and increase market share. Any lower fares offered by one airline are often matched by competing airlines, which often results in lower industry yields with little or no increase in traffic levels. Price competition among airlines in the future could lead to lower fares or passenger traffic on some or all of our routes, which could negatively impact our profitability. Such activity by other airlines could lead to reductions in the fares or passenger traffic on our routes, to the point where profitable operations could not be maintained. Due to our smaller size and financial resources compared to some of our international competitors, we may be less able to withstand aggressive marketing tactics or fare wars engaged in by or with our competitors should such events occur.

Increases 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 approximately 31.3%, 32.7% and 31.3%, respectively, of our operating expenses in the years ended December 31, 2011 and 2012 and the six months ended June 30, 2013. Therefore, substantial increases in fuel costs would materially and adversely affect our operating results. Fuel costs have been subject to wide fluctuations as a result of increases in demand and sudden disruptions in, and other concerns about, global supply, as well as market speculation. Both the cost and availability of fuel are subject to many economic and political factors and events occurring throughout the world that we can neither control nor accurately predict, such as political instability in major oil-exporting countries in the Middle East, Latin America and Africa. As a result of factors such as this, fuel costs continue to exhibit substantial volatility.

We are vulnerable to any future increases in the cost of fuel. We cannot assure you that fuel costs will not increase significantly above their current levels. Our aircraft fuel purchase agreements do not protect us against price increases or guarantee the availability of fuel. Additionally, some of our competitors may have more leverage than we do in obtaining fuel. We have and may continue to enter into a variety of option contracts and swap agreements for crude oil, heating oil, and jet fuel to partially protect against significant increases in fuel prices; however, such contracts and agreements do not completely protect us against price volatility, are limited in volume and duration, can be less effective during volatile market conditions and may carry counterparty risk. Under the fuel hedge contracts we may enter from time to time, counterparties to those contracts may require us to fund the margin associated with any loss position on the contracts if the price of crude oils falls below specified benchmarks. Meeting our obligations to fund these margin calls could adversely affect our liquidity.

Due to the competitive nature of the airline industry, at times we have not been able to adequately increase our fares to offset the increases in fuel prices and we may not be able to do so in the future. Future fuel price increases, continued high fuel price volatility or fuel supply shortages may result in a curtailment of scheduled services and could have a material adverse effect on our financial condition and results of operations. From the

 

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beginning of 2006 to the end of 2012, the average price of West Texas Intermediate (“WTI”) crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, increased from $63.45 per barrel to $91.82 per barrel. During 2008, fuel prices experienced significant volatility, with WTI crude prices in excess of $140 per barrel during the summer before dropping to $44.60 to close the year. Prices then increased to approximately $71 per barrel in the second half of 2009. During 2010, prices gradually increased and closed the year at approximately $90 per barrel and by the end of 2011, prices had reached approximately $99 per barrel. The average price of WTI as of June 28, 2013 (the last trading date in June) was $96.56.

In addition, should Ecopetrol S.A. (Colombia’s government-controlled oil company) experience any disruption or slow-down in its fuel production or pumping capacity, particularly in Bogotá, we may be unable to obtain fuel or may be forced to pay significantly higher prices to do so. This risk is heightened by the low oil storage levels that we understand are maintained by Ecopetrol S.A. and its distributors in Bogotá. We currently have an exclusive agreement with a single fuel distributor in Bogotá, Organización Terpel S.A., or Terpel, pursuant to which Terpel supplied us with approximately 90.2% of our fuel needs in Colombia for each of 2012 and the six months ended June 30, 2013. During 2012 and the six months ended June 30, 2013, respectively, it supplied approximately 35.6% and 36.7% of our total fuel consumption. In the event such arrangement were to terminate, we could be forced to renegotiate our fuel supply in a market with a limited number of suppliers, which might result in higher costs for us.

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

Airlines in the United States and Europe have in recent years faced substantial and increasing competitive pressure from low-cost carriers offering discounted fares. The 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. As has been evidenced by the operations of competitors such as Gol Linhas Aéreas Inteligentes, or Gol, in Brazil, and other Latin American countries and several new low-cost carriers which have started service in Mexico, Colombia and other markets, such as Interjet, Viva Aerobus, Volaris and VivaColombia, the low-cost carrier business model is gaining acceptance in the Latin American aviation industry. For example, in October 2010 EasyFly started operations in Colombia with deeply discounted fares. Currently EasyFly operates 17 domestic routes. During 2012 VivaColombia started operations, and after one year, is serving 13 routes in the domestic market. JetBlue Airways initiated operation between the U.S. and Colombia in 2009 and is currently offering four routes. JetBlue Airways also operates three routes between the U.S. and Central America. Spirit Airlines, another U.S. low cost carrier, operates four routes between the U.S. and Colombia, six routes between the U.S. and Central America and one route between the U.S. and Peru.

Our business model is significantly different from that of low-cost carriers and is predicated on providing a level of service that we consider superior and charging higher prices for such service. As low-cost carriers continue to penetrate our home markets, they could have a material adverse effect on our financial condition and results of operations; therefore, we may be forced to reconsider our business model and adapt it to evolving passenger preferences. In any event, we may face new and substantial competition from low-cost carriers in the future which could result in significant and lasting downward pressure on the fares we charge for flights on our routes. We must constantly react to changes in prices and services offered by our competitors to remain competitive. Price competition among airlines in the future could lead to lower fares or passenger traffic on some or all of our routes, which could adversely affect our profitability.

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

Over the last 25 years the global airline industry has been shifting to increasing acceptance of liberalized and “open skies” air transport agreements among nations. For example, “open skies” agreements currently exist among the countries of the European Union, and between Europe and the United States. In Latin America, “open

 

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skies” agreements exist among Colombia, Ecuador, Peru and Bolivia and among each of these countries and the United States, Chile, Panama, Venezuela and the countries of Central America. El Salvador also has an “open skies” policy. As a general matter, these liberalized or “open skies” air transport agreements serve to (i) reduce (or, in the case of “open skies,” eliminate) restrictions on route rights, designated carriers, aircraft capacity or flight frequencies and (ii) promote competitive pricing.

Recently, Chilean laws and regulations began permitting foreign airlines to operate domestic flights in Chile. There are currently foreign airlines participating in the Chilean domestic market all related to LATAM Airlines Group. The presence of foreign airlines in the domestic Chilean market may affect the Chilean aviation competitive landscape, thereby affecting the competition we face in our international operations in Chile.

As a result of this continuing trend toward liberalized air transport agreements, a number of countries to which we fly have been negotiating with each local government to liberalize or provide more flexibility to its bilateral agreements with such countries and to permit more flights to and from each local country. For example, the United States and Spain have each requested the adoption of an unrestricted “open skies” regime with Colombia. We cannot assure you that each government’s political position will not change or that additional flights will not be granted when requested by carriers from any other country.

It is likely that the different governments will continue to liberalize the current restrictions on international travel to and from each country, 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 such liberalization, we could face substantial new competition, which may erode our pricing and market share and have a material adverse effect on our consolidated financial position and consolidated results of operations.

We face increased competition from certain airlines that have recently been restructured or emerged from bankruptcy and further consolidation of the Latin American airline industry may adversely affect our business and results of operations.

In recent years, a number of air carriers have sought to reorganize in bankruptcy, including some of our principal competitors, including American Airlines and Delta. The successful completion of reorganizations could present us with competitors with significantly lower operating costs derived from favorable labor, supply and financing contracts renegotiated under the protection of the applicable bankruptcy laws. In addition, many air carriers involved in reorganizations have historically undertaken substantial fare discounting in order to maintain cash flows and to enhance continued customer loyalty. Such fare discounting could further lower yields for all carriers, including us.

Further consolidation of the Latin American airline industry may increase competition in the markets we serve. For example, in 2012, LAN Airlines completed its combination with TAM, creating the LATAM Airlines Group, which is the largest airline in Latin America in terms of fleet size, passengers carried, and destinations served. As a result of the competitive environment, there may be further consolidation in the Latin American and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry. Furthermore, consolidation in the airline industry and changes in international alliances will continue 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.

Some of our competitors may receive external support which could negatively impact our competitive position.

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, financial aid or tax waivers. This support could place us at a competitive disadvantage and adversely affect our operations and financial performance.

 

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The airline industry’s financial performance is characterized by low profit margins and high fixed costs, and we may be unable to compete effectively against other airlines with greater financial resources or lower operating costs.

The airline industry is characterized generally by low profit margins and high fixed costs, primarily consisting of wages and salaries of crew and other personnel, fuel costs and aircraft and engine lease payments and other financing costs related to aircraft equipment. 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 and our competitors’ pricing strategies. However, the operating expenses of flying an aircraft do not vary significantly with the number of passengers transported and cannot be adjusted quickly to respond to changes in revenue and a deficit in expected revenue levels. As a result, fluctuations in the number of passengers per flight or in pricing could have a significant effect on our operating and financial results.

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

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

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

The terrorist attacks in the United States on September 11, 2001 had an adverse impact on the airline industry. Airline traffic in the United States fell dramatically after the attacks, while it decreased less severely in Latin America. Our revenue depends on the number of passengers traveling on our flights. Therefore, any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations or otherwise and any related economic impact could result in decreased passenger traffic and materially and negatively affect our business, financial condition and results of operations.

Following the 2001 terrorist attacks, airlines have experienced increased costs resulting from additional security measures that may be made even more rigorous in the future. In addition to measures imposed by the U.S. Department of Homeland Security and the TSA, IATA and certain foreign governments have also begun to institute additional security measures at foreign airports we serve. A substantial portion of the costs of these security measures is borne by the airlines and their passengers. Security measures imposed by the U.S. and foreign governments after September 11, 2001 have increased our costs and may adversely affect us and our financial results, and additional measures taken in the future may result in similar adverse effects.

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

 

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governments in other countries have agreed to indemnify airlines for liabilities that they might incur from terrorist attacks or provide low-cost insurance for terrorism risks, the Colombian government has not indicated any intention to provide similar benefits to us. Increases in the cost of insurance may result in both higher airline ticket prices and decreased demand for air travel generally, which could materially and negatively affect our business, financial condition and results of operations.

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

In recent years, concerns about the possibility of an outbreak of a disease that can be spread by commercial airline passengers (such as avian flu, swine flu, Severe Acute Respiratory Syndrome, tuberculosis or other contagious illnesses) has had a negative impact on the public’s willingness to travel by air. It is impossible to determine when and where threats of contagious diseases may arise, but if and to the extent they do, the public’s willingness to travel by air may significantly decline, which could materially and negatively affect our business, financial condition and results of operations.

Risks Relating to Colombia, Peru, Central America and Other Countries in which We Operate

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

Passenger demand is heavily cyclical and highly dependent on global and local economic growth, economic expectations and foreign exchange rate variations. In the past, we have been negatively impacted by poor economic performance in certain countries in which we operate. Any of the following developments in the countries in which we operate could adversely affect our business, financial condition and results of operations:

 

   

changes in economic or other governmental policies;

 

   

changes in regulatory, legal or administrative practices;

 

   

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

 

   

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

 

   

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

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

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

 

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

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

Colombia’s fiscal deficit and growing public debt could adversely affect the Colombian economy. The Colombian fiscal deficit was 3.2% of GDP in 2010, 2.2% of GDP in 2011, and 2.4% of GDP in 2012.

The Colombian government frequently intervenes in Colombia’s economy and from time to time makes significant changes in monetary, fiscal and regulatory policy. Our business and results of operations or financial condition may be adversely affected by changes in government or fiscal policies, and other political, diplomatic, social and economic developments that may affect Colombia. We cannot predict what policies will be adopted by the Colombian government and whether those policies would have a negative impact on the Colombian economy or our business and financial performance.

We cannot assure you as to whether current stability in the Colombian economy will be sustained. If the condition of the Colombian economy were to deteriorate, we would likely be adversely affected.

The Colombian government and the Central Bank may seek to implement new policies aimed at controlling further fluctuation of the Colombian peso against the U.S. Dollar and fostering domestic price stability. The Central Bank may impose certain mandatory deposit requirements in connection with foreign-currency denominated loans obtained by Colombian residents, including us. Although no mandatory deposit requirement is currently in effect, a mandatory deposit requirement was set at 40% in 2008 after the Colombian peso appreciated against foreign currencies. We cannot predict or control future actions by the Central Bank in respect of such deposit requirements, which may involve the establishment of a different mandatory deposit percentage. The use of such measures by the Central Bank may be a disincentive for us to obtain loans denominated in a foreign currency. The U.S. dollar/Colombian peso exchange rate has shown some instability in recent years. We cannot assure you that measures adopted by the Colombian government and the Central Bank will suffice to control this instability. We cannot predict the effects that such policies will have on the Colombian economy. In addition, we cannot assure you that the Colombian peso will not depreciate or appreciate relative to other currencies in the future.

Colombia has suffered from periods of widespread criminal violence over the past four decades, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or FARC, paramilitary groups and drug cartels. In regions of the country with limited governmental presence, these groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers. In response, the Colombian government has implemented various security measures and has strengthened its military and police forces by creating specialized units. Despite these efforts, guerilla, paramilitary and criminal activities, particularly in the form of terrorism attacks, homicides, kidnappings and extortion, persist in Colombia. These continuing activities, their possible escalation and the violence associated with them may have a material adverse effect on the Colombian economy and/or on us in the future. We cannot assure you that preventative measures we have taken will protect us, our customers, employees or assets from violence or other actions that are detrimental to us.

Colombian diplomatic relations with Venezuela and Ecuador, two of Colombia’s main trading partners and two countries accounting for a significant portion of our passenger and cargo service, have from time to time been tense and affected by events surrounding the Colombian armed forces combat of the FARC throughout Colombia. Any deterioration in relations with Venezuela or Ecuador may result in the closing of borders, the

 

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imposition of trade barriers or a breakdown of diplomatic ties, any of which could have a negative effect on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition.

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

El Salvador has a history of political instability marked by long periods of civil unrest and military rule. From 1979 until 1991, El Salvador was mired in guerrilla activities which were ended by a United Nations-brokered peace accord in January of 1992. Since the peace accords were signed, El Salvador has experienced political stability. The Nationalist Republican Alliance Party, or ARENA, controlled the presidency from 1989 to 2009, at which time the FMLN (a former guerrilla organization now turned into a political party) won the presidential elections. The next presidential election is scheduled to take place in February 2014.

El Salvador’s economy has recently been growing at a moderate pace, yet its unemployment and poverty rates remain high. Despite reforms and initiatives, El Salvador still ranks among the ten poorest countries in Latin America and suffers from inequality in the distribution of income. We cannot assure you that El Salvador will not face political, economic or social problems in the future, and we may be seriously affected by such problems.

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

In the past, Peru has experienced periods of severe economic recession, large currency devaluation and high inflation. In addition, Peru has experienced periods of political instability, which have led to adverse economic consequences. We cannot assure you that Peru will not experience similar adverse developments in the future.

While Peru has experienced economic growth in the recent past, political tensions, high levels of poverty and unemployment, and social conflicts within local communities continue to be pervasive problems in Peru. In recent months, certain areas in the south and the northern highlands of Peru with significant mining developments have experienced strikes and protests related mainly to the environmental impact of metallic mining activities, which have resulted in political tensions, commercial disruptions and a climate of uncertainty with respect to future mining projects. Future government policies in response to social unrest could include, among other things, increased taxation, as well as expropriation of assets. These policies could materially and adversely affect the Peruvian economy and, as a result, our business, financial condition and results of operations.

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

Moreover, although Peru’s current president, Ollanta Humala, has substantially maintained the moderate economic policies that sustained and fostered economic growth, while controlling the inflation rate at historically low levels, we cannot assure you that the current or any future administration will maintain business-friendly and open-market economic policies or policies that stimulate economic growth and social stability. Any changes in the Peruvian economy or the Peruvian government’s economic policies may have a negative effect on our business, financial condition and results of operations.

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

While Costa Rica is one of Latin America’s oldest democracies, we cannot assure you that these conditions will continue. Costa Rica faces a poverty level estimated at 25% (as of 2011), sizeable internal and external

 

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deficits resulting in high inflation, and an outdated tax system. Additionally, Costa Rica’s traditionally strong social safety net is eroding as a result of fiscal constraints, as well as increasing pressure from both legal and illegal immigration from other Central American countries.

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

The Ecuadorian economy is heavily dependent on the oil industry and was severely impacted by the 2009 financial crisis, which adversely affected the country’s economic growth. While Ecuador’s economic growth has since improved, it faces a poverty level estimated at approximately 27% in 2012. In addition, Ecuador defaulted on a sovereign debt obligation in 2008 and its economic policies have created a great deal of uncertainty about its future.

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

We are organized under the laws of the Republic of Panama and as a result may be affected by economic and political conditions prevailing from time to time in Panama. Panama’s economic conditions are highly dependent on the continued profitability and economic impact of the Panama Canal. Control of the Panama Canal and many other assets were transferred from the United States to Panama in 1999 after nearly a century of U.S. control. Although the Panamanian government is democratically elected and the Panamanian political climate is currently stable, we cannot assure you that current conditions will continue. If the Panamanian economy experiences a recession or a reduction in its economic growth rate, or if Panama experiences significant political disruptions, our business, financial condition and results of operations could be materially and negatively affected.

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

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

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

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

We are exposed to natural disasters in each of the countries in which we operate, such as earthquakes, volcanic eruptions, tornadoes, tropical storms and hurricanes. For example, heavy rains in Colombia, attributable in part to the La Niña weather pattern, have resulted in severe flooding and mudslides. El Salvador has experienced many significant earthquakes, including in 1982, 1986 and 2001, that in each case resulted in numerous fatalities. Peru has also experienced numerous significant earthquakes, including in 2001, 2005, 2007

 

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and 2011. Moreover, the Central American isthmus, in particular El Salvador, Costa Rica, Guatemala and Nicaragua, is home to one of the world’s largest concentrations of active volcanos. In the event of a natural disaster, there is a risk of damage to our airport hubs and other facilities, and our disaster recovery plans may prove to be ineffective, which could have a material adverse effect on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In any such event, our property damage and business interruption insurance might not be sufficient to fully offset our losses, which could adversely affect our results of operations and financial condition. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised.

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

The Colombian government and the Colombian Central Bank have historically exercised and continue to exercise, substantial influence over the Colombian economy; they occasionally make significant changes in monetary, fiscal and regulatory policy. Changes in macroeconomic policies could materially and adversely affect our business and the market value of the ADSs.

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

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

Uncertainty relating to applicable tax legislation poses a constant risk to us. Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting eligible expenses and deductions, and eliminating incentives and non-taxed income. Currently, Panama imposes no income tax on revenues generated from a source outside Panama and subjects dividends paid to a withholding tax of only 10% of the portion of the dividend that is attributable to Panamanian sourced income (as defined pursuant to the territoriality principles that govern Panamanian tax law) and to a withholding tax of 5% of the portion of the dividend that is attributable to foreign sourced income. Currently Panama does not impose a withholding tax on dividends distributed by entities that do not earn income from Panamanian sources. Nevertheless, we cannot assure you that Panamanian tax laws will not change, and any change could result in the imposition of significant additional taxes. Moreover, the Colombian and Salvadoran governments have significant fiscal deficits that may result in future tax increases. Additional tax regulations could be implemented that could require us to make additional tax payments, negatively affecting our results of operations and cash flow. In addition, national or local taxing authorities may not interpret tax regulations in the same way that we do. Differing interpretations could result in future tax litigation and associated costs.

 

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

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

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

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

In 2012, approximately 66.6% of our costs and expenses and 67.0% of our revenues were denominated in U.S. dollars. The remainder of our expenses and revenues 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 could adversely affect our business, financial condition and results of operations. 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 significant amount of our liabilities are denominated in Colombian pesos. At times when the Colombian peso appreciates against the U.S. dollar, the value of these liabilities will increase in U.S. dollar terms, resulting in an increase in our non-operating expenses, which can have a negative effect on our consolidated financial statements and can have a real or perceived impact on our financial performance, which could negatively affect the market price of the ADSs. Our $56.8 million foreign exchange loss in 2012 was principally the result of the appreciation of the Colombian peso in 2012 and our $84.8 million foreign exchange gain in the six months ended June 30, 2013 was principally the result of depreciation of the Colombian peso against the U.S. dollar during the period. Variations in the values of other currencies may have similar effects.

We also have a significant cash balance in bolivares, which currency is subject to Venezuelan exchange controls. In Venezuela, effective 2003, the authorities determined that all remittances abroad had to be approved by the Currency Management Commission or, CADIVI. Despite having availability of bolivares in Venezuela, we have certain restrictions that limit us from freely remitting such funds outside of Venezuela. For example, on February 8, 2013, the Venezuelan government announced that it would change the bolivares-U.S. dollar exchange rate from 4.30 to 6.30. As a result, our losses related to the devaluation of these funds were approximately $9.2 million.

Since 2003, the Venezuelan government decreed that all remittances abroad require the prior approval of CADIVI. During the years ended December 31, 2011 and 2012, we did not obtain approval for remittance of the total amount of funds requested and, as of June 30, 2013, there was a pending amount to be authorized of $31,461,142 related to 2012 and $151,764,708 related to 2013.

Due to the recent death of former President Hugo Chavez in March 2013, future political and economic conditions in Venezuela are uncertain, and we do not know if his recently elected successor will adopt policies more or less favorable to us than those currently in effect. Our operations in Venezuela are significant to us, and

 

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we cannot assure you that we will be able to remit any present or future assets from Venezuela in the foreseeable future, and our continuing inability to do so could adversely affect our liquidity, financial condition and results of operations.

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

We are exposed to the risk of interest rate variations. Our Colombian peso-denominated debt is mainly exposed to variations in long-term interest rates and the Colombian 90-day deposit rate for commercial banks (establecimientos bancarios), financial corporations (corporaciones financieras) and financing companies (companies de financiamiento), or DTF, as published by the Colombian Central Bank. Our non-Colombian peso-denominated debt is mainly exposed to variations in the London Interbank Offer Rate, or LIBOR. Any increase in inflation or other macroeconomic pressures may lead to increases in these rates. As of December 31, 2012 and June 30, 2013, respectively, we had approximately $582 million and $456 million in aggregate principal amount of variable-rate debt.

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

Risks Relating to the ADSs and our Preferred Shares

Our two principal shareholders have veto power over certain strategic and operating transactions, and their interests may differ significantly from the interests of our other shareholders.

We and our controlling shareholders, Synergy and Kingsland, are parties to a joint action agreement, or the Joint Action Agreement, that gives Synergy and Kingsland veto power over most significant strategic and operating transactions. See “Certain Relationships and Related Party Transactions—Joint Action Agreement.” Assuming that Kingsland converts 69,999,997 common shares into preferred shares and assuming that Synergy and Kingsland dispose of 7,043,368 and 104,817,408 preferred shares, respectively, in the offering of the ADSs, we expect that immediately after giving effect to the offering of the ADSs, Synergy’s investment in us will be approximately 78.3% of our common shares and 52.0% of our total outstanding shares and Kingsland’s investment in us will be approximately 21.7% of our common shares and 14.5% of our total outstanding shares. The Joint Action Agreement gives Synergy and Kingsland veto power over significant strategic and operating transactions including, among others:

 

   

mergers and consolidations;

 

   

certain acquisitions or investments in excess of $30 million in any single instance and $75 million in the aggregate during any fiscal year, except as already contemplated in our annual budget;

 

   

our business plan and annual budget;

 

   

capital expenditures in excess of $120 million, except as already contemplated in our annual budget;

 

   

changes to our charter and bylaws or other similar document;

 

   

issuance of voting stock; and

 

   

related party transactions.

As a result of the foregoing veto rights, as well as the Synergy Purchase Right and Kingsland Tag-along Right (see “Certain Relationships and Related Party Transactions—Joint Action Agreement”), Synergy and Kingsland have the ability to prevent us from taking strategic and other actions that may be in your best interests,

 

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including strategic transactions that might enhance the long-term value of the ADSs and/or provide you with an opportunity to realize a premium on your investment in our ADSs. Mr. José Efromovich, who together with his brother Germán Efromovich indirectly control Synergy, controls OceanAir, which operates under the trade name Avianca Brazil and provides passenger services primarily in the Brazilian market. In addition, the Kriete family, the beneficial owners of Kingsland, have a significant interest in Volaris, a growing Mexican airline that provides passenger service to markets including North America. We cannot predict the extent to which we may compete with OceanAir or Volaris in the future in Brazil, Mexico and elsewhere, and as a result cannot assure you that the interests of Synergy and Kingsland will be aligned with those of the holders of the ADSs and cannot give you any assurance that Synergy and Kingsland will exercise their respective rights under the Joint Action Agreement in a manner that is favorable to your interests as a holder of ADSs.

Our controlling shareholders have the ability to direct our affairs, and their interests could conflict with those of ADS holders.

Upon the consummation of this offering, our controlling shareholders will beneficially own all of our outstanding common shares. Holders of our preferred shares and the ADSs are not entitled to attend or vote at any of our general shareholders’ meetings except under very limited circumstances including:

 

   

changes to our by-laws which would impair the rights of holders of preferred shares;

 

   

conversions of preferred shares into common shares;

 

   

our dissolution, transformation or change of corporate purpose; and

 

   

the delisting of our preferred shares on the Colombia Stock Exchange.

Holders of our preferred shares and ADSs will not be entitled to vote on other matters, many of which may be significant and may adversely affect the value of our preferred shares and ADSs. As a result, 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, among others, the following:

 

   

the composition of our board of directors and, consequently, 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, other business combinations and other transactions, including those that may result in a change of control;

 

   

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

 

   

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

 

   

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. Also, our controlling shareholders may prevent change of control transactions that might otherwise provide you with an opportunity to dispose of or realize a premium on your investment in our ADSs. In addition, we have entered into various transactions with OceanAir, an entity indirectly controlled by Mr. José Efromovich, including, among other things, licensing our Avianca trademark for use by OceanAir in Brazil, leasing and subleasing aircraft to OceanAir and entering into various agency agreements. See “Certain Relationships and Related Party Transactions.” We cannot assure you that our controlling shareholders will act in a manner consistent with your best interests.

 

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

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

American Depositary Shares on our preferred shares are subject to certain foreign exchange regulations from the Colombian Central Bank that may impose registration requirements upon certain events of the ADS Program

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

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

Under Panamanian law, we may pay dividends only out of retained earnings and capital surplus. Our articles of incorporation provide that all dividends declared by our shareholders’ meeting will be paid equally with respect to all of the preferred shares and common shares. Although our common shareholders have adopted a dividend policy that provides for the payment of at least 15% of our annual consolidated net income to shareholders as a dividend, our common shareholders may at any time, in their sole discretion and for any reason, amend or discontinue the dividend policy. If they decide not to declare a dividend, you will not have any right to participate in or override that decision. Future dividends with respect to shares of 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 our common shareholders and board of directors may deem relevant. As a result, we cannot give you any assurance that we will pay dividends in accordance with our current dividend policy or otherwise.

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

Under our organizational documents, and in accordance with Panamanian law, holders of our preferred shares are not entitled to any preemptive rights with respect to future issuances of capital stock by us. Therefore,

 

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unlike companies organized under the laws of many other Latin American jurisdictions, we will be free to issue new shares of stock to other parties without first offering them to our existing preferred shareholders. In the future we may sell common or other shares to persons other than our existing preferred shareholders at a lower price than the shares being sold in this offering, and as a result you may experience substantial dilution of your interest in us.

Future sales of ADSs or our preferred shares after this offering, or conversion of our common shares to preferred shares, could cause the market price of the ADSs or preferred shares to decrease.

Our controlling shareholders are expected to beneficially own approximately 66.5% of our capital stock immediately following this offering (assuming the underwriters’ over-allotment option is not exercised). The market price of the ADSs could drop significantly if our controlling shareholders or other large holders of our capital stock sell a significant amount of such capital stock, or convert a significant number of common shares into our preferred shares, or if the market perceives that such a sale or conversion is likely. We, our controlling shareholders and our directors and executive officers have agreed, subject to certain exceptions, not to issue or transfer, until 180 days after the date of this prospectus, any shares of our capital stock, any options or warrants to purchase shares of our capital stock, or any securities convertible into, or exchangeable for, shares of our capital stock including in the form of ADSs. Nevertheless, after these lock-up agreements expire, our controlling shareholders and our directors will be free to sell and/or convert their shares in the United States, subject to U.S. securities laws, including by depositing them with the depositary and selling them in the form of ADSs, and if any of them does so, this could have a material adverse effect on the market value of the ADSs.

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

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

 

   

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

 

   

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

 

   

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

 

   

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

There has been no public market for the ADSs, and an active trading market for the ADSs may not develop or be sustained.

Prior to this offering, there has been a limited public market for the preferred shares in Colombia and no public market for the preferred shares or the ADSs elsewhere. Although the underwriters have advised us that, following the completion of the offering, they intend to make a market in the ADSs, an active and liquid public trading market may not develop or be sustained after this offering. Third parties may not find the ADSs to be attractive and other firms may not be interested in making a market in the ADSs. Also, if you purchase ADSs in this offering, you will pay a price that has not been established in a large public trading market. Illiquid or inactive trading markets generally result in higher price volatility and lower efficiency in the execution of sale and purchase orders. The initial public offering price of the ADSs has been determined through negotiations

 

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between us and the representatives of the underwriters and thus may not be indicative of the market price for our preferred shares after this offering. Consequently, you may not be able to resell the ADSs at the time you desire or above the initial public offering price and you could suffer a loss on your investment. We cannot predict the prices at which the ADSs will trade. For a further discussion of the factors affecting the determination of the initial public offering price of the ADSs, see “Underwriting”.

In addition, holders of ADSs may choose to cancel them and receive instead the underlying preferred shares. The cancellation of a considerable number of ADSs may significantly influence the development of a liquid market for the ADSs, which may have a material adverse effect on the price of the ADSs.

The market price for the ADSs could be highly volatile, and the ADSs could trade at prices below the initial offering price.

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

 

   

fluctuations in our periodic operating results;

 

   

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

 

   

changes in conditions or trends in the airline industry;

 

   

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

 

   

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

 

   

increased competition in the airline industry;

 

   

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

 

   

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

 

   

legal or regulatory measures affecting our financial condition;

 

   

departures of managers and other key personnel; and

 

   

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

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

If holders of ADSs surrender their ADSs and withdraw preferred shares they may face adverse Colombian tax consequences.

Although Colombian tax law does not specifically refer to the tax consequences applicable to an ADS holder withdrawing the underlying preferred shares, we believe, based on the advice of our Colombian counsel, that such a transaction should not result in a taxable event under Colombian law in the case of non-resident entities and non-resident individuals given the nature of the transaction. Nevertheless, this issue is not free from doubt, and the Colombian tax authorities may have a different interpretation of the law and may assess taxes on

 

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the conversion of ADSs into preferred shares based upon the difference between the market value of the preferred shares and the adjusted tax basis of the ADSs. Furthermore, an investor who surrenders ADSs and withdraws preferred shares will be subject to income taxes on any gain associated with the sale of such preferred shares. See “Income Tax Consequences—Colombia.”

We have not yet assessed the effectiveness of our internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

We will be required to comply with the internal control, evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act of 2002 in our Annual Report on Form 20-F for the year ending December 31, 2014. In addition, our independent registered public accounting firm will be required to report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002. We have not yet commenced the process of assessing the effectiveness of our internal control over financial reporting. This process will require the investment of substantial time and resources, including by our chief financial officer and other members of our senior management. As a result, this process may divert internal resources and take a significant amount of time and effort to complete. We cannot predict the outcome of this determination and whether we will need to implement remedial actions in order to implement effective control over our financial reporting. Any failure of our internal controls could result in us not being able to assert that our internal control over financial reporting is effective. If in subsequent years we are unable to assert that our internal control over financial reporting is effective, or if our auditors express an opinion that our internal control over financial reporting is ineffective, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on the market value of the ADSs.

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

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

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

 

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

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

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

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

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

 

   

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

 

   

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

 

   

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

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

We are subject to anti-corruption laws in the jurisdictions in which we operate.

We are subject to a number of anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (“FCPA”) and various other anti-corruption laws. The FCPA generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. Although our code of ethics and standards of conduct require our employees to comply with the FCPA and similar laws, we have not yet conducted formal FCPA compliance training for our

 

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employees and consultants. We are currently developing a more comprehensive global anti-corruption policy and training program, but we do not expect this policy and training program to be implemented until the end of 2013. In addition, despite our ongoing efforts to ensure compliance with the FCPA and similar laws, there can be no assurance that our employees, agents, and the companies to which we outsource certain of our business operations, will not take actions in violation of our policies, for which we may be ultimately held responsible. If we are not in compliance with anti-corruption laws and other laws governing the conduct of business with government entities (including local laws), we may be subject to criminal and civil penalties and other remedial measures, which could harm our reputation and have a material adverse impact on our business, financial condition, results of operations and prospects. Any investigation of any actual or alleged violations of such laws could also harm our reputation or have an adverse impact on our business, financial condition, results of operations and prospects.

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 with respect to shareholder disputes, such as derivative lawsuits and class actions, is less developed under Panamanian law than under U.S. law as a result of Panama’s short history with these types of claims and the small number of successful cases in each country. In addition, there are different procedural requirements for bringing these types of shareholder lawsuits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company to do the same.

We may invest or spend the net proceeds from this offering in ways that may not yield an acceptable return to you.

We intend to use a portion of the net proceeds of this offering to finance our fleet modernization plan and for other general corporate purposes, which may include pursuing our strategic interests in the aviation sector in Latin America through acquisitions or other strategic transactions, prepaying outstanding indebtedness and engaging in transactions with our principal shareholders and other related parties. See “Use of Proceeds.” You will have no opportunity to evaluate our decisions and may not agree with the manner in which we spend such proceeds. We may invest or spend our net proceeds from this offering in ways that may not yield an acceptable return to you.

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

We are organized under the laws of Panama, and our principal place of business (domicilio social) is in Bogotá, Colombia. All of our directors, officers and controlling persons reside outside of the United States. In addition, substantially all our assets are located outside of the United States. As a result, it may be difficult for holders of ADSs to effect service of process within the United States on such persons or to enforce judgments against them, including in any action based on civil liabilities under the U.S. federal securities laws. Based on the opinion of our Panamanian and Colombian counsel, there is doubt as to the enforceability against such persons in Panama and 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. See “Enforcement of Foreign Judgments.”

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

 

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disproportionately large percentage of market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for our securities might not develop on the Colombian Stock Exchange. A limited trading market could impair the ability of an ADS holder to sell preferred shares (obtained upon withdrawal of such shares from the ADS facility) on the Colombian Stock Exchange in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADSs.

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

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

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

The insolvency laws of Panama, 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 rights as a holder of ADSs may be limited if we become subject to the insolvency proceedings set forth in Title I of the Third Book of the Commercial Code, as amended from time to time, which establishes the events under which a petition for the declaration of insolvency of a company can be filed before a circuit court, considering that this preference reimbursement will be feasible after payment to third-party creditors.

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

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

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

Our preferred shares have been traded on the Colombian Stock Exchange since May 2011 and we have applied to have our ADSs representing preferred shares approved for listing on the NYSE. Trading in our ADSs or preferred shares on these markets will take place in different currencies (U.S. dollars on the NYSE and COP on the Colombian Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Colombia). The trading prices of our shares on these two markets may differ due to these and other factors. Any decrease in the price of our preferred shares on the Colombian Stock Exchange could cause a decrease in the trading price of our ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying preferred shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

 

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MARKET PRICE OF OUR PREFERRED SHARES

The ADSs

Prior to this offering, there has been no public market for the ADSs. Our ADSs have been authorized for listing on The New York Stock Exchange. We cannot assure you that an active trading market will develop for our ADSs, or that our ADSs will trade in the public market subsequent to the offering at or above the initial public offering price. See “Risk Factors—Risk Factors relating to the ADSs and Preferred Shares—There has been no public market for the ADSs, and an active market for the ADSs may not develop or be sustained.”

Our Preferred Shares

Prior to this offering, there has been a limited public market for our preferred shares and our preferred shares have traded only in Colombia. Our preferred shares are currently registered in the Colombian National Registry of Securities and Issuers (Registro Nacional de Valores y Emisores) kept by the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia) and trade on the Colombian Stock Exchange (Bolsa de Valores de Colombia) under the symbol “PFAVH”. On October 17, 2013, the closing price of our preferred shares on the Colombian Stock Exchange was COP 4,015, or $2.13 per share ($17.08 per ADS). Historically, trading volumes of our preferred shares on the Colombian Stock Exchange have been limited, and the prices of our preferred shares on the Colombian Stock Exchange may not necessarily be indicative of the price of the ADSs in this offering.

The following table sets forth for each year since our preferred shares began trading on May 11, 2011 and for the current year the high and low closing prices and average daily trading volumes in Colombian pesos of our preferred shares on the Colombian Stock Exchange as reported by the Colombian Stock Exchange.

 

     Preferred Shares      Preferred Shares      Preferred Shares  
     High      Low      High      Low      Volume  
     (in COP/share)      (in US$/share)      (in COP millions)      (in US$ millions)  

2011 (beginning from the commencement of trading on May 11, 2011)

     5,390         3,105         2.92         1.68         616,955         334.6   

2012

     4,705         3,290         2.62         1.83         345,228         192.0   

2013 (through October 17)

     4,645         3,680         2.50         1.98         245,264         132.1   

 

* COP converted to US$ with the average exchange rate of each period.

 

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The following table sets forth for each quarter since our preferred shares began trading on May 11, 2011, the high and low closing prices and average daily trading volumes in Colombian pesos of our preferred shares on the Colombian Stock Exchange as reported by the Colombian Stock Exchange.

 

     Preferred Shares      Preferred Shares      Preferred Shares  
     High      Low      High      Low      Volume  
     (in COP/share)      (in US$/share)      (in COP millions)      (in US$ millions)  

2011:

                 

Second quarter (beginning from the commencement of trading on May 11, 2011)

     5,390         5,010         3.00         2.79         429,897         239.3   

Third quarter

     4,975         4,100         2.77         2.29         138,577         77.3   

Fourth quarter

     4,700         3,105         2.45         1.62         48,481         25.2   

2012:

                 

First quarter

     4,405         3,290         2.45         1.83         89,576         49.7   

Second quarter

     4,050         3,595         2.27         2.01         53,217         29.8   

Third quarter

     4,300         3,850         2.39         2.14         117,263         65.2   

Fourth quarter

     4,705         4,060         2.61         2.25         85,172         47.2   

2013:

                 

First quarter

     4,645         4,370         2.59         2.44         88,000         49.1   

Second quarter

     4,465         4,120         2.40         2.21         91,672         49.2   

Third quarter

     4,195         3,680         2.20         1.93         53,731         28.2   

Fourth quarter (through October 17)

     4,015         3,855         2.13         2.04         11,860         6.3   

 

* COP converted to US$ with the average exchange rate of each period.

The following table sets forth for each of the most recent six months and for the current month the high and low closing prices and average daily trading volumes in Colombian pesos of our preferred shares on the Colombian Stock Exchange as reported by the Colombian Stock Exchange.

 

     Preferred Shares      Preferred Shares      Preferred Shares  
     High      Low      High      Low      Volume  
     (in COP/share)      (in US$/share)      (in COP millions)      (in US$ millions)  

March 2013

     4,640         4,495         2.56         2.48         29,555         16.3   

April 2013

     4,465         4,250         2.44         2.32         33,600         18.4   

May 2013

     4,435         4,145         2.40         2.24         40,802         22.1   

June 2013

     4,375         4,120         2.29         2.16         17,269         9.0   

July 2013

     4,145         4,025         2.18         2.12         23,720         12.5   

August 2013

     4,195         4,035         2.20         2.12         12,515         6.6   

September 2013

     4,025         3,680         2.10         1.92         17,496         9.1   

October 2013 (through October 17)

     4,015         3,855         2.13         2.04         11,860         6.3   

 

* COP converted to US$ with the average exchange rate of each period.

Trading in the Colombian securities market

Prior to 2001, there were three stock exchanges in Colombia: the Stock Exchange of Bogota created in 1928, the Stock Exchange of Medellin (1950) and the Stock Exchange of Occidente (1970).

After the limited economic growth during the 1980s, the economic expansion of the 1990s resulted in the Colombian capital markets growing at unprecedented rates, as indicated or measured by listed company’s market capitalization, the total value traded in the stock markets and the total amount of outstanding domestic public and private bonds.

Such rapid growth has resulted in the increased regulation of the Colombian capital markets. In addition, such growth precipitated the merger of the Stock Exchanges of Bogota, Medellin and Occidente into the Colombian Stock Exchange in July 2001.

 

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The Colombian Stock Exchange indices handles relatively minor trading and liquidity compared to stock exchanges in major financial centers. In addition, very few issuers represent a disproportionately large percentage of market capitalization and trading volume on the Colombian Stock Exchange. The Colombian Stock Exchange is subject to the inspection and supervision of the Colombian Financial Superintendency.

On November 22, 2010, the Colombian Stock Exchange completed its equity markets integration process of the Latin American Integrated Market (Mercado Integrado Latinoamericano), with the equity stock markets of Chile and Peru, which allows integrated trading and settlement. The Latin American Integrated Market is the leading market in terms of number of issuers (approximately 554 as of December 2012), the second in terms of market capitalization and the third in terms of volume in Latin America.

The total value of equities traded on the Colombian Stock Exchange during 2012 was COP 71.4 trillion (including spot and repurchase and securities lending transactions). Spot transactions over equities traded during 2012 was COP 45.9 trillion with a daily average of COP 188 billion, representing a nominal increase of 15.8% from the daily average value of equities traded in 2011. Both debt and equity securities are traded on the Colombian Stock Exchange, including stocks and bonds of private sector corporations, although the vast majority of securities traded are fixed income government debt securities.

The table below sets forth certain year-end information concerning equity securities listed on the Colombian Stock Exchange since 2007.

 

     2012      2011      2010      2009      2008      2007  

Number of listed companies

     82         83         86         87         89         90   

Market capitalization (in trillions of COP)

     484         404         418         287         196         205   

 

Source: Colombian Stock Exchange.

At December 31, 2012, the ten companies with the largest market capitalizations on the Colombian Stock Exchange represented approximately 90% of the total market capitalization of all companies listed and the ten most actively traded stocks on the Colombian Stock Exchange during the year 2012 represented 45% of the total trading volume during that period. Annual trading values of equity securities by exchange are set forth in the table below.

 

Annual Trading Values of Equity Securities (in trillions of COP) Year Ended December 31,  

2012

  2011     2010     2009     2008     2007  
71     68        54        40        40        32   

 

Source: Colombian Stock Exchange.

Price movements in the Colombian equity market are reflected in the indices of equity securities traded on the Colombian Stock Exchange. The Colombian Stock Exchange has different market indices including: (i) the Stock Capitalization Index (COLCAP), (ii) the Stock Liquidity Index (COL20) and (iii) the General Index of the Colombian Stock Exchange (IGBC).

Our preferred shares are included on the COLCAP and IGBC indices.

The COLCAP is a capitalization index that reflects changes in the prices of the 20 most liquid shares of the Colombian Securities Exchange (BVC), where the weight of each share in the index is determined by the corresponding value of the adjusted market capitalization (company’s float multiplied by the last price of its share). The selection function is the measure of liquidity used by the BVC to determine the shares that make up the COLCAP basket. Information on volume, turnover and frequency of each of the eligible shares is required to calculate this function. Recomposition of the index consists of the selection of shares that will make up the share basket of the index for the following year. During the recomposition process, the weight in the index of each

 

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share selected for the following quarter is also determined. The COLCAP recomposition is carried out after market closing on the last business day of October and will be in force from the first business day of November of the same year to the last business day of October of the following year. Index rebalancing consists of determining the weight of each share in the basket. COLCAP rebalancing is carried out on the last business day of the months of January, April and July each year. Rebalancing results in the adjustment of the weights of the shares that make up the index to reflect the changes in the adjusted market capitalization of each share. Under certain conditions, shares can be added to or removed from the index during a rebalancing period. Given its replicable index construction, the COLCAP has become the relevant benchmark for the Colombian stock market.

The IGBC is an index comprising stocks that meet certain frequency and turnover criteria. The weight of the shares in the index basket is determined by the amount of shares traded of each constituent. It has 7 sector indices associated with its methodology (Agricultural, Retail, Financial, Industrial, Investment Companies, Public Services and Other Services).

Regulation of the Colombian securities market

Regulatory authorities

The Colombian stock market is regulated by the Colombian Congress and by the Colombian government through the Ministry of Finance and Public Credit and the Colombian Superintendency of Finance. The Colombian Government is responsible for the overall economic policy making in Colombia. Pursuant to Article 150(19)(d) of the Colombian Constitution, the Colombian Congress must determine the principles, criteria and objectives that the National Government of Colombia must observe when regulating all financial activities. Also, under Article 189(24) of the Colombian Constitution, the national government of Colombia must regulate, supervise and control institutions in the financial, insurance and securities industry.

The responsibilities of the Colombian government include the adoption of rules and regulations pertaining to, among other things, the public offering of securities; the operation and administration of the Integral Information System of the Securities Market, and the procedures for registration of securities, the establishment, operation and dissolution of infrastructure providers (such as central securities depositories and stock exchanges, among others), the disclosure obligations of periodic and relevant issuers of securities that are registered in the National Register of Securities and Issuers, regulation of market intermediaries, and establishing transparent criteria and best practices of negotiation.

On July 8, 2005, the Colombian Congress enacted the Colombian Securities Market Law (Ley del Mercado de Valores, Law 964 of 2005). Pursuant to Law 964 and Decree 663 of 1993, the Ministry of Finance and Public Credit is the governmental agency in charge of regulating the financial, insurance and securities markets. Direct supervisory authority of the financial, insurance and securities markets has been entrusted to the Colombian Superintendency of Finance.

Regulatory framework

Law 964 of 2005 provides the principal legal framework that governs the Colombian securities market. The primary scope of Law 964 is to promote the efficiency, transparency and integrity and the development of the Colombian securities market. Law 964 also sets forth certain corporate governance standards for listed companies and issuers, such as the requirement that at least 25% of the board members be “independent” directors (as defined in Law 964), that the company maintain an audit committee with at least three board members, including all independent members, and that the company’s legal representatives adopt and implement internal control procedures and adequate mechanisms for disclosure of information and certify the truthfulness of the financial and other relevant information disclosed to the market.

In order to comply with the foregoing disclosure obligations, issuers must disclose relevant information through the Colombian Superintendency of Finance’s website as soon as the event to be disclosed has occurred or as soon as the issuer knows of its occurrence.

 

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As a general rule, pursuant to Decree 2555, as amended, any transaction involving the sale of publicly traded stock in an amount of Colombian pesos equivalent or superior to 66,000 Units of Real Value (Unidades de Valor Real), an index calculated by the Central Bank of Colombia on a daily basis based on the monthly fluctuation of the consumer price index (índice de precios al consumidor) (equivalent to Ps.13,474,434.6 as of January 31, 2013), must be effected through transaction modules subject to the inspection and supervision of the Colombian Superintendency of Finance. Trading transactions of securities of non-Colombian companies outside Colombia are generally exempt from this requirement. Stock transfers originated in operations different from buying or selling or conducted between two parties who are acting for the same beneficial owner are exempt as well, but must be informed to the Colombian Superintendency of Finance five days prior to the transaction. Decree 2555 expressly prohibits any issuer from registering such transactions which do not comply with these requirements in its share registry.

Regulation of the Colombian Stock Exchange

Trading on the Colombian Stock Exchange is subject to specific private regulations issued by the Colombian Stock Exchange, particularly the General Rules of the Colombian Stock Exchange, as amended from time to time, the Regulation Letter (Circular Única de la Bolsa de Valores de Colombia), as amended from time to time, and Decree 2555 of 2010. These rules mainly govern listing and trading activities in the Colombian Stock Exchange. In particular, they include (i) listing requirements, (ii) suspension and/or cancellation of the securities listed with the Colombian Stock Exchange, and (iii) admission requirements for broker-dealers.

Prior to 1992, settlement procedures for trades on the Colombian Stock Exchange occurred through physical delivery of the securities and were regulated by the Colombian Stock Exchange. Deceval was established in 1992 as a centralized securities depository and clearing facility for securities of private issuers in charge of administering the transfer and registry of securities and facilitating the exercise of economic and political rights of securities holders. Deceval formally began operations in 1994 and its activities are regulated by Law 964 and Decree 2555, as amended. Settlement procedures could then be made either through physical delivery or in book-entry form. Except for some specific public auction procedures, since 2001 the settlement of securities transactions on the Colombian Stock Exchange is customarily made at T+3 through Deceval’s book-entry system. There also exists in Colombia a limited clearing facility through the Colombian Central Bank for government-issued or government-guaranteed securities. In addition, by means of Resolution No. 0093 of 1995, in 1996 the Colombian Stock Exchange implemented an electronic system in order to access the information related to both the stocks and their issuers and the quantities and prices of each offering, demand and transactions traded on the exchanges (Sistema Electrónico Transaccional).

 

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USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $219.5 million (after deducting underwriting discounts and estimated transaction expenses payable by us). This amount assumes an offering price of $18.50 per ADS (the midpoint of the price range set forth on the cover page of this prospectus). We expect to use substantially all of the net proceeds to finance our fleet modernization plan, including our proposed acquisition of Airbus, Boeing and ATR aircraft described in “Business—Aircraft,” and any remaining amounts for general corporate purposes. We also expect to finance our fleet modernization plan with a combination of cash generated from operations, bank loans, export credit agency financings, capital and operating leases and other forms of financing that may be attractive from time to time.

We will not receive any proceeds from the sale of ADSs by the selling shareholders.

 

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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED SHARE DIVIDENDS

Our ratio of earnings to fixed charges and preferred share dividends for the periods indicated, using financial information calculated in accordance with IFRS, were:

 

     Historical      Unaudited Pro forma  
     Six Months
Ended
June 30,
     Year Ended
December 31,
     Six Months
Ended
June 30,
     Year Ended
December 31,
 
     2013      2012      2011      2013      2012  

Ratio of earnings to fixed charges and preferred share dividends(1)(2)

     2.28x         1.37x         1.63x         2.03x         1.14x   

 

(1) For purposes of computing our consolidated ratio of earnings to fixed charges, earnings consist of profit before income taxes, interest expense (net of capitalized interest), the portion of rental expense representative of interest expense and amortization of previously capitalized interest. Fixed charges consist of the sum of interest expense, the portion of rental expense representative of interest expense, the amount amortized for debt discount, premium and issuance expense, interest capitalized and preferred dividends paid in each period.

 

(2) The pro forma ratio of earnings to fixed charges and preferred share dividends has been computed assuming that dividends amounting to $4.0 million for the six months ended June 30, 2013 and $3.0 million for the year ended December 31, 2012 were respectively paid on the preferred shares issued in connection with this offering as if they had been outstanding since January 1, 2012.

Additionally, the pro forma ratio of earnings to fixed charges includes the adjustments to the pro forma profit before income tax described in the section “Unaudited Pro Forma Consolidated Financial Information”. The unaudited pro forma profit before income tax for the six months ended June 30, 2013 and the year ended December 31, 2012 has been adjusted to illustrate the effect of (i) our issuance in May 2013 of $300 million in aggregate principal amount of 8.375% Senior Notes due 2020, or the Senior Notes, (ii) $213.3 million of debt we incurred between December 31, 2012 and October 9, 2013 in order to finance four new aircrafts, (iii) other net debt we incurred between December 31, 2012 and September 30, 2013, (iv) additional lease commitments for new aircrafts, and (v) amortizations of debt we have made during the aforementioned periods, in each case as if these transactions had occurred on January 1, 2012. These adjustments result in additional aircraft rentals amounting to $6.1 million, and $21.8 million for six months ended June 30, 2013 and the year ended December 31, 2012, respectively, and additional interest expense amounting to $10.1 million and $31.9 million for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. The additional aircraft rentals include implicit interest amounting to $3.3 million and $11.8 million for the six months ended June 30, 2013 and the year ended December 31, 2012, respectively.

 

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DIVIDENDS AND DIVIDEND POLICY

The payment of dividends on our shares is subject to the discretion of our shareholders. Under Panamanian law, we may pay dividends only out of retained earnings or capital surplus. So long as we do not default in our payments under our loan agreements, there are no covenants or other restrictions on Avianca Holdings S.A.’s ability to declare and pay dividends. Our articles of incorporation provide that all dividends declared by our board of directors will be paid equally with respect to all of the preferred shares and common shares. Our articles of incorporation also provide that our preferred shares have a right to a minimum preferred dividend that will be paid on a preferential basis over the dividend corresponding to our common stock. See “Description of Capital Stock—Preferred Shares—Minimum Preferred Dividend.”

Our shareholders have adopted a dividend policy that provides for the payment of annual dividends equal to at least 15% of our annual distributable profits (defined below). “Annual distributable profits” are defined in our by-laws as our annual profits (after taxes), minus amounts used to offset losses of previous fiscal periods, minus amounts necessary to fund legal and other reserves, if any. Panamanian law does not currently provide for a required legal reserve.

Holders of the preferred shares and ADSs will be entitled to receive a minimum dividend to be paid preferentially over holders of common shares, so long as dividends have been declared by our shareholders at their annual meeting. If no dividends are declared, none of our shareholders will be entitled to any dividends. If dividends are declared and our annual distributable profits are sufficient to pay a dividend per share of at least COP 50 per share to all our holders of preferred and common shares, such profits will be paid equally with respect to our preferred and common shares. However, if our annual distributable profits are insufficient to pay a dividend of at least COP 50 per share to holders of our preferred and common shares, a minimum preferred dividend of COP 50 per share will be distributed pro rata to the holders of our preferred shares, and any excess above such minimum preferred dividend will be distributed solely to holders of our common shares. See “Description of Capital Stock—Preferred Shares—Minimum Preferred Dividend.”

A majority of our common shareholders may, in their sole discretion and for any reason, amend or discontinue the dividend policy. Future dividends with respect to shares of our common 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 our board of directors may deem relevant. See “Risk Factors—Risks Relating to the ADSs and Our Preferred Shares—Our controlling shareholders have the ability to direct our affairs and their interests could conflict with those of our ADS holders.”

Avianca and certain of its subsidiaries are parties to bonds, leases and loan agreements that restrict their ability to pay dividends or make distributions to us. For a description of such restrictions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt and Other Financing Agreements.”

On March 21, 2013, an annual dividend of COP 75 ($0.04) per share was declared at our general shareholders meeting which was paid to shareholders of record on April 28, 2013 and represented an aggregate dividend payment of COP 67,598 million ($36.9 million), payable to the holders of the preferred and common shares.

On March 30, 2012, an annual dividend of COP 50 ($0.03) per share was declared at our general shareholders meeting which was paid to shareholders of record on April 27, 2012 and represented in an aggregate dividend payment of COP 45,064 million ($25.6 million), payable to the holders of the preferred and common shares.

Prior to the March 2012 dividend payment, we had not paid a dividend since the combination of Avianca and Taca in 2010.

 

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DILUTION

If you invest in our ADSs in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per ADS and the net tangible book value per ADS after this offering. At June 30, 2013, we had net tangible book value of $582.6 million, corresponding to a net tangible book value of $0.65 per share of capital stock (including common shares and preferred shares) or $5.20 per ADS (using the average of buying and selling rates as reported by the SFC at June 30, 2013 for Colombian pesos into U.S. dollars of COP 1,929.0 per US$1.00 and the ratio of preferred shares to one ADS).

After giving effect to the sale of ADSs that we are offering at an assumed initial public offering price of $18.50 per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value on an adjusted basis as of June 30, 2013 would have been $6.53 per ADS. This amount represents an immediate increase in net tangible book value of $1.33 per ADS to our existing shareholders and an immediate dilution in net tangible book value of $11.97 per ADS to new investors purchasing ADSs in this offering. We determine dilution by subtracting the as adjusted net tangible book value per ADS after this offering from the amount of cash that a new investor paid for an ADS.

The following table illustrates this dilution:

 

Assumed initial public offering price per ADS

      $ 18.50   

Net tangible book value per ADS as of June 30, 2013

   $ 5.20      

Increase per ADS attributable to this offering

   $ 1.33      
  

 

 

    

As adjusted net tangible book value per ADS after this offering

      $ 6.53   
     

 

 

 

Dilution per ADS to new investors in this offering

      $ 11.97   

A $1.00 increase (decrease) in the assumed initial public offering price of $18.50 per ADS (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) the as adjusted amount of each of cash, cash equivalents and short-term investments, share capital, total equity and total capitalization by approximately $12.5 million, assuming that the number of ADSs offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional ADSs in full:

 

   

the percentage of our outstanding capital stock held by existing shareholders will remain the same except for the percentage of our outstanding capital stock held by Kingsland that will decrease to approximately 11.2% of the total number of our outstanding capital stock outstanding after this offering; and

 

   

the number of preferred shares held by new investors will increase to 250,561,168, or approximately 25.0% of our total capital stock outstanding after this offering.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents, short-term debt, long-term debt and total capitalization as of June 30, 2013 (i) on an actual basis, (ii) as adjusted to reflect the change in our indebtedness from July 1, 2013 as described in “Summary—Recent Developments—Indebtedness”, and (iii) as adjusted to reflect the effect of the sale of the ADSs in this offering at an assumed offering price of $18.50 per ADS (the midpoint of the price range set forth on the cover page of this prospectus), after deducting estimated underwriting discounts and commissions and offering expenses payable by us. You should read this table in conjunction with “Selected Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. None of our financial indebtedness is guaranteed by an unaffiliated third party.

 

     As of June 30, 2013  
     Actual      As
Adjusted
     As Adjusted
for this
Offering
 
     (in US$ thousands except share data)  

Cash and cash equivalents

     614,185         557,696         777,232   

Indebtedness:

        

Short-term indebtedness

     302,742         302,725         302,725   

Long-term indebtedness

     1,860,445         1,909,249         1,909,249   
  

 

 

    

 

 

    

 

 

 

Total indebtedness

     2,163,187         2,211,974         2,211,974   

Shareholders’ equity:

        

Common stock

     92,675         92,675         83,225   

Preferred stock including shares represented by the ADSs

     19,448         19,448         41,398   

Additional paid-in capital on common stock

     263,178         263,178         236,342   

Additional paid in capital on preferred stock

     269,598         269,598         503,470   

Retained earnings

     255,809         255,809         255,809   

Revaluation surplus

     25,418         25,418         25,418   
  

 

 

    

 

 

    

 

 

 

Total equity attributable to us

     926,126         926,126         1,145,662   

Non-controlling interests

     8,734         8,734         8,734   
  

 

 

    

 

 

    

 

 

 

Total shareholders’ equity

     934,860         934,860         1,154,396   
  

 

 

    

 

 

    

 

 

 

Total capitalization

     3,098,047         3,146,834         3,366,370   

 

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SELECTED FINANCIAL AND OPERATING DATA

The following tables present selected consolidated financial and operating data as of the dates and for the periods indicated. We prepare consolidated financial statements in accordance with IFRS in U.S. dollars. You should read this information in conjunction with our consolidated financial statements prepared in accordance with IFRS, together with the notes thereto, included in this prospectus, “Presentation of Financial and Other Information” and “Management’s Discussion and Analysis of Results of Operations and Financial Condition.”

The selected consolidated financial information as of January 1, 2011 (the date of our transition to IFRS) and December 31, 2011 and 2012 and for the years ended December 31, 2011 and 2012 has been derived from our audited consolidated financial statements prepared in accordance with IFRS included in this prospectus. The selected consolidated financial information as of June 30, 2013 and for the six months ended June 30, 2012 and 2013 have been derived from our unaudited condensed consolidated financial statements prepared in accordance with IFRS included in this prospectus. Our results of operations for the six months ended June 30, 2013 are not necessarily indicative of our results to be expected for the year ended December 31, 2013 or for any other period.

On December 11, 2012, our board of directors approved our adoption of IFRS. We used a transition date of January 1, 2011, and therefore our consolidated financial statements as of and for the year ended December 31, 2012 were our first annual audited consolidated financial statements required to be prepared in accordance with IFRS. We have not prepared any financial information in accordance with IFRS as of or for any prior periods. For periods prior to 2012, we prepared our audited consolidated financial statements solely in accordance with Colombian GAAP.

IFRS 1—First-time Adoption of International Financial Reporting Standards governs the adoption of IFRS and first time preparation of consolidated financial statements and provides for certain exceptions and exemptions. See Note 33 to our audited consolidated financial statements for a description of how the transition from Colombian GAAP to IFRS affected our reported financial position and financial performance as of and for the periods covered.

 

    As of June 30,     As of December 31,     As of
January 1,
 
    2013     2012     2011     2011  
    (Unaudited)                    
    (in US$ thousands)  

BALANCE SHEET DATA

       

Assets

       

Current assets:

       

Cash and cash equivalents

  $ 614,185      $ 402,997      $ 288,726      $ 274,171   

Restricted cash

    4,923        6,547        1,815        7,753   

Available-for-sale securities

    19,027        19,460        —         6,500   

Accounts receivable, net of provision for doubtful accounts

    319,648        202,962        186,353        161,349   

Accounts receivable from related parties

    30,301        29,427        7,836        9,716   

Expendable spare parts and supplies, net of provision for obsolescence

    51,954        48,796        45,235        48,079   

Prepaid expenses

    51,807        54,512        51,603        43,333   

Assets held for sale

    3,631        9,832        28,339        9,091   

Deposits and other assets

    70,944        105,028        295,609        194,102   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    1,166,420        879,561        905,516        754,094   

Non-current assets:

       

Available-for-sale securities

    11,168        13,165        30,052        25,123   

Deposits and other assets

    227,383        221,558        221,712        181,644   

Accounts receivable, net of provision for doubtful accounts

    69,041        64,540        41,755        34,950   

Accounts receivable from related parties

    22,644        24,001        56,167        55,890   

Intangible assets

    352,231        344,908        340,496        331,515   

Deferred tax assets

    34,699        73,644        70,513        76,693   

Property and equipment, net

    2,911,146        2,699,546        2,309,477        2,156,795   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

    3,628,312        3,441,362        3,070,172        2,862,610   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 4,794,732      $ 4,320,923      $ 3,975,688      $ 3,616,704   

 

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    As of June 30,     As of December 31,     As of
January 1,
 
    2013     2012     2011     2011  
    (Unaudited)                    
    (in US$ thousands)