Three years after the merger of Avianca and Taca, the group is growing profitably, but the integration is not complete and infrastructure bottlenecks have to be cleared to ensure further growth.

Avianca, which will go to a single brand and drop the Taca name at the end of May, has emerged as one of the two big Latin American airline groups, along with the newly formed Latam Group. Given Colombia's politically and economically difficult past, and considering Avianca's bankruptcy restructuring in 2004, the turnaround is all the more remarkable. Following the announced departure of TAM Brazil, Avianca will also be the Star Alliance's sole partner in South America. And Bogota is its most important base.

CEO Fabio Villegas is about to launch the next stage of the group integration that will likely span another 2-3 years. Avianca has “come a long way already,” he says. In its initial integration phase, the airline went to a single administration (most functions are now based in Bogota), merged the frequent-flier programs into the Colombian carrier's “Life Miles,” and introduced joint revenue management and a combined network.

Overall, the first stage of the group building process was about increasing revenues. And it worked: In 2009, the two airlines together carried 15 million passengers; three years later, the figure has risen to 23 million. In the same time frame, revenues grew to $4.2 billion from $2.5 billion. The integration had a positive $219 million impact on operating profit even before specific cost-saving initiatives were launched.

AviancaTaca Holding recorded an 8.3% increase in sales in 2012, reaching 7.6 billion Colombian pesos ($4.2 million), and achieved an operating profit of 506 million Colombian pesos. Both capacity and demand grew by 10.3% last year.

Now Avianca is about to launch the second integration phase, in which it hopes to save another $150 million. While the two entities will continue to exist as separate companies (although operated under a single brand), Villegas wants to introduce more joint processes in operations and maintenance and harmonize the two airlines to allow quick reallocation of aircraft and crews where needed. An outright merger into one carrier with a single air operator's certificate is deemed unrealistic given the different jurisdictions in which it has to work.

Integration efforts are not limited to the Taca operation. Avianca has taken full control of Ecuador's Aerogal, which operates a dense domestic network and has some limited international exposure following the phase-out of its Boeing 767 operation last year. Aerogal will eventually also become part of the Avianca brand, once its information technology infrastructure is upgraded.

The investment comes at a time when uncertainty clouds the development of the important Ecuadorian domestic market. The move of all airlines to the new Quito airport, which is still difficult to reach from the city because the main roads are not opened yet, has meant a significant decline in demand for domestic air travel, and airlines are cautiously watching.

Villegas is also taking a cautious approach to possibly integrating more closely with Avianca Brazil, which uses the Avianca brand and is also owned by Avianca's parent company, Synergy Group Corp. “We have a lot of projects coming up,” he says, explaining that he is therefore concerned about the amount of management attention that would be required if the project were given higher priority. A merger is something “that has to be explored,” Villegas concedes, while pointing out that Avianca, unlike Avianca Brazil, has more than one shareholder, which must be involved in any action.

The Star Alliance is keenly interested in fast growth at Avianca Brazil in hopes that the carrier can at least partially replace TAM, which is leaving Star as a result of its merger with LAN to form the Latam Group. Avianca Brazil is in the process of phasing out its Fokker 100s and operates a mixed fleet of A318s, A319s and A320s.

According to Villegas, the two airlines are negotiating mutual recognition of their frequent-flier programs. But like Ecuadorian subsidiary Aerogal, Avianca Brazil still has work to do on the information technology side to become fully compatible.

Villegas says Avianca is not looking to add more airlines to its portfolio in the short term. “We have already achieved what we wanted to achieve, which was to diversify the risk over more than one market,” he says. Avianca formerly had just one hub, in Bogota, and now it has two others, in Lima and San Salvador, El Salvador. “To grow is good, but it is not enough,” Villegas says, pointing to examples of large airlines in Europe and North America that are still struggling. Nonetheless, he believes the group has “the option to do something else if it makes sense.”

Capacity constraints at Bogota's El Dorado International Airport are probably the most serious risk to Avianca's future growth. The facility's recently opened international terminal was designed to bring its capacity to 15 million passengers annually. But Villegas notes that Avianca “reached 21 million passengers last year.” While the international complex is “a huge improvement,” he says the airline still needs “a larger airport in order to continue growing.” Service levels at the facility are not where they should be, with 50% of departures from remote stands rather than direct gate positions. Air traffic control procedures are also a serious issue since the airport's two parallel runways are far enough apart to be operated independently.

In spite of the Bogota troubles, Avianca is aiming for strong growth, even if that entails adding capacity to secondary routes within and from Colombia as well as Lima, San Salvador and San Jose, Costa Rica. The airline is looking at extending leases on its A330-200s for several more years to further the expansion of its long-haul operation. Originally, Avianca intended to replace its A330 fleet with 10 Boeing 787-8s on order, but Villegas says it is now looking at ways to secure a stronger widebody presence in its key markets.

Avianca now operates just four aircraft types, down from 10 in 2009, and plans to simplify still more. The Fokker 50 fleet is to be replaced by 15 ATR 72-600s, the first of which will arrive in June, and the remaining Boeing 767-200Fs at its cargo subsidiary Tampa will be phased out. Tampa will take delivery of two more A330Fs this year, bringing its fleet to four and nearly doubling its cargo capacity. The A330F can carry 70 tons, compared to the 767-200F's 40-ton capacity.

The last of 10 A330-200s on firm order are scheduled to arrive before year-end. One A330 based in Lima to serve the Buenos Aires and Bogota routes will soon also be deployed to Miami. Villegas says that widebody base is likely to grow, but Avianca is still studying how many aircraft are sustainable in Peru.

It is slated to receive its first 787-8 in October 2014 and plans to base the 787s in San Salvador, Lima and Bogota. Villegas says the 10 A350-900s ordered by parent Synergy Aerospace will not be operated by Avianca. And the proposed Boeing 777X “is too big for us,” he says.

Europe is one target of Avianca's long-haul expansion. The airline is introducing twice-daily services from Bogota to Madrid and is eager to start services to London's Heathrow Airport. A lack of suitable slots there is keeping the plan on hold for now.

The first of 33 A320NEOs is to arrive in 2017, so Avianca is taking delivery of more “Sharklet”-equipped A320s to bridge the gap. In spite of the generally poor economics of the A318, Avianca plans to hold on to the aircraft for “as long as possible,” Villegas says.