Paul Lewis/SANTIAGO Guy Norris/BUENOS AIRES
Chile and Argentina offer contrasting pictures of the state of civil air transport in South America. The former is held up as a textbook example of successful deregulation, having embraced open skies and fostered a financially robust airline industry eager to expand. The latter has yet to reap the benefits of reform, and its airlines face almost as much uncertainty as they did a decade ago.
Santiago has led the region in adopting market-friendly policies and, despite the recent economic hiccup, still hosts arguably the most successful South American flag carrier. LanChile is the only airline on the continent to be listed on the New York stock exchange and, at the end of last year, made a $47.6 million profit while others continued to haemorrhage red ink.
Chile leads in liberalisation
"There is some kind of political assumption that regulations ensure you have a healthy airline industry. What tends to happen is the reverse. Chile has been liberal and developed a strong domestic and international airline industry. We're the only airline in South America that is making money," says Kryl Acton, LanChile senior vice-president for strategic development.
This is underpinned by a triple B credit rating from consultants Duffs and Phelps and the airline's ability to raise international financing for its planned fleet of seven Airbus Industrie A340-300s and twenty-five A320s. It has also served to make LanChile an attractive local partner for a global alliance and a source of investment capital for cross-border airline ventures.
In October, Chile became the third South American nation to sign an open-skies treaty with the USA, after Peru and Argentina, and the first to implement the agreement for passenger and cargo services. This cleared the way for LanChile to finalise an alliance with American Airlines and, in doing so, to open the door to full membership of the oneworld global partnership.
"We're in the process of implementing oneworld and this will be completed in the course of the year," says Acton. Full membership will give LanChile greater latitude to cut costs and bolster revenue through improved access to traffic to and from Asia and Europe, in addition to North America.
LanChile's chief domestic competitor, Avant Airlines, has similarly been quick to exploit Chile's open-door policy by forging its own marketing alliance with Continental Airlines. This encompasses codesharing between Chile and the USA, domestic services beyond Santiago and participation in the One Pass frequent flier programme.
In December, Avant extended the partnership to Copa of Panama, 49% of which is controlled by Continental. "This gives us additional access to the Caribbean and, if Copa passengers want to go to say, Concepcion, they have to fly with us," explains Avant executive vice-president Fernando Fernandez. It is seeking a European partner, with Italy's Alitalia the "preferred choice," he adds.
The airline is 90% owned by the Diez Group and is a logical extension of the company's diversified interests in catering, bus transport and real estate. Following its troubled absorption in 1998 of the larger National Airlines, Avant has eight Boeing 737-200s and one 727 and claims a 30% share of Chile's 3 million passenger market.
Both Chilean carriers have their eyes on the potentially lucrative Argentine market, where a relatively liberal bilateral agreement is in place. Avant operates daily to Mendoza and has discussed co-operation with local Argentine regional carrier Southern Winds.
"The Argentine market is really important to us, as it's bigger than Chile and there's a lot of demand. We're studying a lot of opportunities, but first we've to decide whether we use a local partner or just go to the nearest destinations on our own," says Fernandez.
No beyond-rights
LanChile also operates to Mendoza, as well as to Cordoba, which geographically is closer to the carrier's main Santiago hub than Buenos Aires. There are no beyond-rights to third countries, however, which would allow the Chilean carrier to fly from, for example, Buenos Aires to Europe. "The aviation industry in Argentina is clearly not as healthy as it might be and we're interested in participating actively in that market. But do you do that via LanChile, via an alliance with an Argentina-based carrier or a via new start-up carrier? I don't think the road forward is yet clear," says Acton.
LanChile had hoped to build on its cargo-sharing agreement with Aerolineas Argentinas, to include passenger services and a possible equity purchase, as part of an AMR-led restructuring initiative. This has been undermined by the fall-out between the carrier's former American Airlines management and its majority Spanish owners, however.
As a result, Buenos Aires has put on hold ratification of an open-skies agreement with the USA and with it possible Aerolineas membership of oneworld. It has also suspended a 1994 decree which opened the door to foreign ownership and control of Argentine carriers in an apparent move to head off a proposed LanChile-backed start-up, LanArgentina.
Even before Buenos Aires took this latest action, LanChile was hinting at anticipated regulatory hurdles ahead. "It's one thing to own something, but the thing you own needs to have rights - without which it's not a very interesting entity. You need to know what markets are available and where are you going to be able to compete successfully," says Acton.
In this respect, LanChile has enjoyed more success in Peru, where it has joined local businessman Lorenzo Souza and taken a 49% stake in LanPeru. The carrier leases two 737-200s from its Chilean partner. In the eight months since it started flying it claims to have taken control of 30% of traffic on the main Lima to Cusco and Arequipa routes, which together represent half the Peruvian market.
LanPeru is bidding for bankrupt AeroPeru's international routes, but faces competition from Grupo TACA-backed TACA Peru, TANS and Aerocontinente. "We've applied for a variety of rights between Peru and other parts, such as Lima-Buenos Aires, but our main focus is on consolidating the domestic and Lima-Miami operations," says Acton.
The carrier was given permission last November to launch a daily service from Lima to Miami, using a wet-leased LanChile Boeing 767-300ER. The Chilean carrier also operates in its own right daily services from the Peruvian capital to Los Angeles and New York as an extension to its Santiago-Lima route.
In an interesting twist, Aerocontinente is seeking government permission to set up an operation in Chile with a local partner. Avant has voiced concern, but LanChile, perhaps mindful of its Peruvian interest, has no objections in principle. "If someone has market access, they have market access and, provided that people are subject to the same rules and regulations, we're not about to change our tune," says Acton.
The move towards freer cross-border investment and the US-led open-skies initiative is precipitating a long-overdue fundamental shake-up of South America's airline industry. Chile has clearly shown that those able to embrace change early on will profit the most. Those that ignore the call to reform do so at their peril.
"The airline industry in Latin America will arrive at a position by, say 2010, where they will be seen as equivalents to airlines from other parts of the world. This is as opposed to now, where in many cases they are seen as poor relations. Airlines will either get healthier or disappear," says Acton.
Argentina fights back
In late 1992, at deregulation's outset, Argentina boasted a commercial transport fleet of just over 50 aircraft operated by five airlines, mostly serving a travelling domestic market of 2 million. By last year, this had mushroomed to 8 million passengers a year, carried by nine airlines with more than 100 aircraft. As fleets continue to expand, the question is raised of how much more growth can be sustained.
Much of the change in the airline industry reflects the dramatic sociopolitical upheavals that swept through the country in the aftermath of the Falkland Islands/Malvinas conflict in the early 1980s, the subsequent rise of democracy and the Peronist government's eventual fall.
In the 1990s, airlines saw not only liberalisation from tight government control, but also new opportunities as Lineas Aereas del Estado, a quasi-military branch of the Argentine air force, relinquished services to more than 30 destinations in the country's southern expanses.
Having enjoyed relative stability compared with many Latin neighbours, Argentina spent the last two years of the 20th century fighting its way out of a full-blown recession that was largely linked to Brazil's devaluation of the Real. The tough reforms instituted by Fernando de la Rua's new alliance government appear to be working, at this early stage, aided by a $5 billion International Monetary Fund injection.
Most affected by these upheavals is national carrier Aerolineas Argentinas. Saddled with an inefficient, unwieldy corporate structure from its long period of state ownership, the airline has fared badly since 1990, when it was privatised by the government of Carlos Menem. Fighting its top-heavy legacy and the rapid rise of domestic competition, the airline was rescued from almost certain bankruptcy by Iberia and a Spanish state holding company, Sociedad Estatal de Participaciones Industriales (SEPI), but it continued to lose an estimated $1 billion following privatisation.
American Airlines parent AMR bought 8.5% of Aerolineas and took over its management from Iberia in 1997, but losses continued to rise, to an estimated $120 million last year. By January, the situation had become critical and the Argentinian Government warned that the carrier was likely to go bankrupt and would not be bailed out with public money.
Last month, in what amounted to a coup d'état, SEPI rejected a restructuring plan put forward by AMR, and dismissed the former American Airlines executives who were running the carrier. In expectation of significant changes still to be announced as Flight International closed for press, the group named Mario Sruber, general manager of Aerolineas' sister company Austral, general manager. The move heralds the final merger of Aerolineas with Austral, and the combination of the carriers' operations to form a a fleet of 56.
In the meantime, SEPI has announced plans to pump a further $70 million into the airline through Andes Holdings, in which it holds a 42% share. Other stakeholders in Andes include Merrill Lynch, with 49%, Bankers Trust (9%), as well as Iberia and American, each with 10%. Together, Andes Holding has 80% ownership of Interinvest, which in turn has an 85% stake in Aerolineas. The remaining 15% is owned by the airline's employees and the government. SEPI, meanwhile, remains committed to the disposal of its Interinvest holding, but cannot do that without restructuring the airline and dealing with its $800 million debt.
While other potential management teams, such as one offered by Continental, wait in the wings, Aerolineas' restructuring is under way. Despite the problems, flight operations vice-president Juan Ardalla is optimistic that the airline has the basic ingredients for success. "Three important things make up an airline: people, systems and its fleet. We have a very good team of people and will have more than 1,000 pilots when the two airlines are merged," he says.
"The fleet is our weakest point. It needs to be renewed and rethought," he adds. "We need to know what to do with the [Boeing] 747. It's an excellent aircraft and we love it, but fuel prices are rising and it is affecting our costs, so we have to think about a replacement."
The airline has begun to phase out the first of its nine 747-200s, and expects to focus use of its remaining aircraft on two major trunk routes: to Miami (for cargo), and Madrid (for passengers). Having passed over the Boeing 777 for the Airbus A340, Aerolineas is enthusiastic about the European aircraft. "Both are excellent aircraft-but, in these decisions, the financial considerations are also important," Ardalla says. Aerolineas initially began using four ex-Cathay Pacific A340-200s on lease, and had planned to take early this year two -300s originally destined for Philippine Airlines.
One of the most important AMR-inspired decisions - the purchase of up to six A340-500/600s - may be first to be affected by the restructuring. "A decision is to be made this year, and I imagine we will want to bring in more -300s instead to speed up the phase-out of the 747s," says Ardalla. The carrier's original plan to have 12 A340s, ranging from -200s to -600s, could therefore be revised to consist only of -200/300s and then only -300s, he adds.
"The A340 is proving to be good aircraft for us, particularly on routes to Rome, Paris, New York and Auckland," says Ardalla. The carrier says it also needs a smaller 250-seat aircraft, such as the 767-300ER, to complete the international long-haul route fleet. On their way out are Aerolineas' two Airbus A310s, which may be exchanged for A300-600Rs.
Aerolineas plans to build its combined domestic fleet around in-service 737-200s and 11 ex-British Airways aircraft. The ex-BA 737s are replacing Austral's McDonnell Douglas DC-9s and MD-80s, and will help form the backbone of the newly combined service from April. Having seen the 737-700 in service with its domestic competitor, Lineas Aereas Privadas Argentinas (LAPA), Aerolineas seems impressed.
"As soon as we can fix the financial problems, we must think of updating our domestic fleet, and the [Boeing] Next Generation is something we are thinking about," says Ardalla. The airline is also looking at the A320 and has expressed interest in the 717-200 as a potential one-for-one replacement for Austral's DC-9s, plus other 100-seater-sized routes being examined. "We are looking at it carefully, and we will initiate a formal study into that aircraft," says Ardalla.
Young and aggressive
Perhaps the biggest single beneficiary of the trouble besetting Aerolineas is the young and aggressive LAPA. Started by Andres Deutsch as a small charter operator in the mid-1970s, LAPA took advantage of deregulation and Aerolineas' apathy to grow quickly as a self-styled "Southwest" clone. The airline is the second largest in the country, has the youngest mainline fleet in Latin America and has sustained profitable, steady growth despite the effects of the recession and the fatal crash of a 737-200 last year.
"The opposition's [Aerolineas Argentinas] big mistake was to ignore us and, by the time they noticed us, it was too late and we had achieved critical mass," says LAPA managing director Ronnie Boyd. "We have operated on a break-even basis, and we have been able to touch 48% of the market. So, we have been able to grow, while Aerolineas has operated well below break-even, and generated huge losses on the same market."
Boyd believes that LAPA's future will depend on establishing "integrated operations" with other airlines. "At the moment, we have way too many seats and too many players for an 8 million passenger market. It could be served handsomely by one carrier with 45 aircraft, but now you have Aerolineas Argentinas [and Austral], LAPA and other minor players like Dinar and Southern Winds."
LAPA is to double its fleet of 737-700s to 20 by the end of next year as it begins to phase out its elderly -200s. The airline, which also operates a pair of Boeing 757-200s and a single 767-300ER on long haul, predominantly charter, flights to Brazil, the Caribbean and the USA, is studying converting some of these routes into scheduled operations. The move, if sanctioned, could lead to acquiring another 767 and possibly larger-capacity 737-900s.
Also sharing the busy Aeroparque Airport ramp is Dinar. The Salta-based airline thrives on a self-created niche of regional services out of Buenos Aires to northern Argentina, and is gradually expanding its fleet. Acquisitions this year include a DC-9-34 configured for 106 passengers, and an MD-82 with the same cabin configuration as its MD-81s.
Another growing niche operator is Cordoba-based Southern Winds, a start-up regional that is expanding quickly with Bombardier Canadair Regional Jets (CRJs) and de Havilland Dash 8s. "We will have 12 aircraft by the middle of this year," says Southern Winds general manager Christian Maggio.
From its modest start in 1996, Southern Winds has rapidly grown to serve 20 destinations from Cordoba and Buenos Aires with almost 100 flights a day. The sheer length of Argentina, and the distances between secondary cities, has lent itself to the economics of 50-seat jet operation, adds Maggio - "particularly from Buenos Aires. There are lots of routes that can be best served by a 50-seater, and not by a 737".
The carrier is analysing the stretched Dash 8-400 and the CRJ-700 and -900 jets. It says: "There are routes for both those types here as well, although we have not ordered anything yet. But we are interested in having the 70-seater particularly as it has perfect performance for quite a few routes." It sees potential for 18 CRJs, although it believes that a codeshare arrangement in the works with Aerolineas could see the fleet eventually expanded to "30 at least".
Southern Winds appears to be the vanguard of a regional revolution in Argentina. This, along with the radical changes under way at Aerolineas Argentinas and the continuing expansion of LAPA, makes Argentina an increasingly important barometer of the health of commercial aviation in Latin America.
Source: Flight International
