(Bloomberg) -- Azul SA’s pursuit of a merger with Gol Linhas Aereas Inteligentes SA has gained momentum, with talks underway for a deal with the controlling shareholder of the rival Brazilian airline, according to people familiar with the matter.

In one scenario under consideration, holding company Abra Group Ltd. would contribute its Gol shares to Azul in exchange for a stake in the combined airline, one of the people said, asking not to be identified because discussions are still private. That type of transaction could appeal to Azul because it wouldn’t have to commit much cash, if any, another person said. 

Abra would retain full ownership of its stake in another Latin American airline, Avianca Holdings SA, in that scenario. Any deal would need to be approved by the companies’ controllers, creditors and shareholders, along with regulators. 

Shares of both Brazilian airlines gained on Bloomberg’s report, and trading in their shares was briefly halted in Sao Paulo. Gol climbed 8% to 1.48 reais, while Azul reversed losses, jumping as much as 2.2% to 10.70 reais.

Veja também versão em português: Azul negocia fusão com a Gol via troca de ações da Abra: Fontes

Bloomberg reported in March that Azul had hired Citigroup Inc. and Guggenheim Partners to explore a deal for Gol, which has been restructuring after struggling to cope with debt payments and fuel costs. The idea of the potential transaction with Abra Group has gained traction in recent weeks as discussions between the companies heated up, one of the people said. 

Read more: Azul Working With Citi, Guggenheim as It Mulls Bid for Gol

Azul and Gol are part of a trio of carriers — including Santiago-based Latam Airlines Group SA — that dominate air travel in Brazil, Latin America’s largest market. While both airlines service some heavily trafficked routes, Gol is more concentrated on flights between Sao Paulo, Rio de Janeiro and Brasilia, while Azul’s network to other cities is wider.  

Azul and Abra declined to comment. Gol didn’t respond to a request for comment. Regulators in Brazil and other countries would need to sign off on a deal. While merging Azul and Gol would reduce the number of major local carriers to two from three, Azul is optimistic that it could win approval, the people said.

Sao Paulo-based Gol filed for Chapter 11 bankruptcy protection after grappling with $2.7 billion in near-term liabilities and carrying out a dozen debt exchanges. Under the process, it has managed to increase its debtor-in-possession financing to $1 billion from $950 million. 

Avianca, which filed for Chapter 11 in 2021, is in a better position. The company’s bonds have handed investors a return of 26% in the past year, compared with an average of 6.6% for Latin American corporates during that period, according to a Bloomberg gauge.


--With assistance from Cristiane Lucchesi.

(Updates with trading in fourth paragraph)

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