In June Pinera paid US$20 million for his controlling stake in a company with a total capital of $82 million. By August he had received $22 million for his Ladeco shares plus the LanChile stake. Not a bad exchange for the controlling interest in a carrier that lost $8.5 million in 1994 and has accumulated $32.3 million in losses since 1990. The carrier is however on target to break even in 1995.
'That first deal [in June] was made in anticipation of the antimonopolies commission ruling and they were ready to move in the case that it came down in their favour,' says one Chilean aviation observer.
LanChile's chief executive officer, Enrique Cueto, says Pinera 'chose to take the risk' and 'will receive a premium for that operation'. With a smile he acknowledges that LanChile would prefer a Chilean to a Spanish state owner, a thinly veiled reference to Iberia's 35 per cent holding in Ladeco. The Spanish flag has resisted the proposed acquisition of Ladeco and filed a complaint with the Chilean antimonopolies commission concerning the latest decision. Iberia apparently had supra majority rights despite its minority stake but there was doubt about its ability to veto the agreement.
Cueto points out Iberia's main concern is the impact in the Andes region and the effect the combined power of the two Chilean carriers will have on Aerolineas Argentinas, in which it has an 83 per cent holding. 'I think it is more Aerolineas than it is Iberia because the investment in Argentina is huge compared to the investment in Chile for Iberia. I don't know if they are happy with a stronger Chilean carrier,' he says.
Already LanChile alone is becoming a strong competitor. In 1993 the carrier recorded a profit of US$324,000 on revenues of $318 million. By the end of 1994 that had jumped to $6.3 million on $406.8 million and in the first half of 1995 the carrier made $8.3 million. Cueto predicts the full year figure for 1995 will be at least a three-fold increase over 1994.
The first six months are the carrier's traditional high season, which this year have been very strong. Revenue passenger kilometres have nearly kept pace with available seats, increasing 31 per cent in line with capacity growth of 32 per cent.
Ernesto Videla, vice president passenger marketing and sales, says part of this growth relates to the increase in business traffic. Business class travel on European routes is up 30 per cent, with the US up 31 per cent, and the US and Europe together accounted for 57 per cent of LanChile's RPKs in the first six months of 1995. Domestic RPKs accounted for 25 per cent, regional 10 per cent, and the south Pacific operations 8 per cent.
The improved figures are the result of changes implemented by Cueto and Videla since SAS sold its 42.1 per cent stake and the Cueto family gained a controlling 38.7 per cent interest in LanChile in February 1994. Cueto puts the rapid improvement down to a number of things coming together simultaneously, as well as to a bit of luck.
Cost cutting efforts immediately focused on the need for fleet standardisation: the carrier is changing its three Boeing 767-200s for 767-300s, of which it already has three. On his arrival Cueto says there were four B767 variations - one had General Electric engines, one Pratt & Whitney, and there were -300s and -200s. By July 1996 there will be five 767-300s with the same engines and seat configurations.
Coming from the cargo airline FastAir, now a subsidiary of LanChile in much the way Ladeco will be, Cueto quickly saw that vital cargo revenue opportunities were being lost. Cueto sees cargo as vital to profitability. 'Cargo is important. It gives us the oxygen for cost reduction in passenger areas where it is more difficult and complex to cut costs.'
Last year cargo, which includes FastAir and LanChile Cargo, accounted for 22 per cent of gross sales, and this should increase to an estimated 28 per cent this year. Optimising aircraft utilisation and scheduling without incurring new costs will increase cargo revenue by $20 million in 1995, Cueto estimates. For example, cargo loads can be changed in Lima, the stopover for the carrier's US flights, with new cargo being taken on board for the Lima-Miami leg.
Between them FastAir and LanChile Cargo control about 80 per cent of the cargo market in and out of Santiago. And their continued separate existence keeps shippers happy, says Cueto: 'In general the consolidators and agents like to have alternatives. They have a choice and they can get a better price.' Whether two subsidiaries owned by the same parent amounts to a choice is debatable, and this philosophy of price competition will be further tested by the Ladeco takeover.
In other areas common sense business decisions were needed to bolster the carrier's bottom line. In 1994 LanChile was operating one stop services twice a week to Miami and losing business heavily to the competition's direct services. Now, says Videla, the carrier flies non stop. Its agreement through Miami to New York with Carnival Airlines was not working either, says Videla. With 75 per cent of the passengers being Chilean, the 'Chilean experience' was lost with the change of aircraft in Miami, he explains. LanChile is now experiencing 35 per cent traffic growth to New York by operating the service itself, he adds. Similarly, flights to the US west coast were departing during the working day while most business people prefer to fly overnight, says Videla. The schedule has now been altered to accommodate this.
Despite the improvements, Cueto is still cost conscious and says LanChile's cost per available seat mile of 8.5 cents needs to be reduced. While relatively small, domestic carrier National holds 15 per cent of the Chilean market and Cueto believes that it may be a future threat (see box).
'LanChile must continue to reduce its costs in all operations to be a participant in the future,' says Cueto. But the number of employees - some 2,500 - is not scheduled for reduction, as revenue passenger km have grown by over 50 per cent in the past year, helped by the carrier's additional frequencies to existing destinations.
Cost reduction through behind the scenes synergies will be one benefit of the Ladeco takeover: the antimonopolies commission ruling stated that the two carriers must remain at arms length and continue to compete in the domestic market.
The link-up will enable LanChile to double its fleet size. 'We [will] have the biggest savings in maintenance: we have the same type of aircraft so, if we work together, we will have four times the reduction of operational costs,' says Cueto.
Economies of scale will play a role with the B737 fleet, of which LanChile has seven 737-200s and Ladeco 10. Ladeco also has two 757s, which Cueto says could be leased out if they do not fit with whatever routing decisions are made.
But in the eyes of the travelling public it seems, the carriers will maintain their own identities. 'We will position both companies in different [markets]. We have been the company for business passengers. Ladeco has been the one for families and tourists,' says Videla. The carriers plan to stagger their services over the daily schedule instead of both flying at the same time, offering greater passenger choice, says Cueto.
Another major benefit from the Ladeco takeover will be greater access to the South American market. Despite moves towards open skies in the region, relatively strict bilateral agreements with many South American countries mean that LanChile and Ladeco share out the available routes. LanChile serves Peru, Venezuela and Argentina, while Ladeco serves Paraguay, Ecuador and Columbia, and the carriers share routes to Brazil and Uruguay. With codeshares on all flights, LanChile will be able to offer a more comprehensive service to the traveller from Europe or the US, who will often go on to another South American country to justify the long flight to the continent. 'To offer a complete service, we need to be able to fly to all the biggest points in South America,' says Cueto.
Chile, Argentina, Uruguay, Paraguay and Brazil are currently working on a commercial trading agreement known as Mercosur, which is supposed to cover the air service agreements of those countries. But Cueto says it will be some years before this is a reality. Private companies in the southern cone, as it is known, are 10 years in advance of the governments in matters of lifting trading barriers and operating in market economies, he says.
Outside South America, codeshares with Ladeco will give LanChile access to Ladeco's Caribbean operations. 'This will increase our destinations and we can coordinate our aircraft and traffic rights better between the Caribbean operations and the US,' says Cueto.
About two years ago, under different managements, the Chilean carriers were denouncing the attack by US carriers United and American Airlines on their markets. The present US-Chile bilateral, which expires in November 1996, allows American two daily flights plus another flight during high season and United one daily flight. Together LanChile and Ladeco have the same rights as the two US carriers, while in November United and either LanChile or Ladeco will be able to add another daily flight with one stop.
The US accounts for 40 per cent of the carrier's revenue passenger kilometres, and LanChile cannot afford to be complacent. Cueto emphasises that the way forward is to increase operations step by step. 'Today we have a different scenario than we had a year or two ago. In general the airlines are more cautious about profits than about the market share,' he says.
However, the figures show that LanChile has attacked the marketplace in true US style. In 1994 American had 34 per cent of the US-Chile market, and LanChile had 22 per cent. Of the four carriers, including United and Ladeco, LanChile was fourth in the Miami market, the main US hub for all South American operations. In the first half of 1995, LanChile had pulled up to 26 per cent market share and American had fallen to 32.5 per cent, claims Videla. Perhaps more importantly, while the US-Chile market has grown 19 per cent, LanChile has grown 38 per cent.
Videla says the carrier is using New York and Los Angeles as connection points to the Far East and will add a fourth flight to Los Angeles in December for this purpose. LanChile also hopes to add a third flight to New York via Lima. The carrier's only Asia-Pacific services are currently Easter Island and Papeete, Tahiti. Air New Zealand has just signed a codeshare with LanChile to carry passengers from Papeete on to Auckland and Sydney. LanChile is currently looking for an Asian partner, but Videla believes the carrier still needs to work hard on its service levels, before approaching the larger carriers.
For the moment the carrier's growth strategy centres on increasing frequencies rather than on opening new routes, says Videla. In Europe average load factor on the Madrid route is 65 per cent and, with 19 per cent of Europe-Chile traffic, Videla says LanChile is the market leader. The carrier now plans to add a fourth weekly flight to Madrid, continuing on to Frankfurt, in December.
In the region LanChile has increased its flights to Bolivia from four to 10 a week, reflecting in part business traffic between the two countries, says Videla. The carrier has also added a flight to Peru, taking its frequencies to seven a week, and now operates only B767s on its three daily services to Buenos Aires, instead of the mixed B767/B737 service it flew last year.
LanChile now needs to turn its attention to Ladeco, its newest subsidiary, and Cueto says cooperation must be in place within a year.
Ladeco's recent history has been primarily about growth. In the past five years the carrier has grown 20 per cent year on year, says Alejandro Rivera, the carrier's chief financial officer. This year the carrier consolidated its growth and for the first time in five years is scheduled to break even, with revenue growth of 10 per cent. Last year the carrier lost US$8.5 million on revenue of $232.4 million.
Cueto agrees that continuous growth has hurt Ladeco's bottom line, but says there have been other problems, such as the continually changing senior management. 'Ladeco has a good service reputation, and in the domestic market it has profits. [But] they need continuous administration. They have had five general managers in the past five years; that is difficult,' says Cueto.
Cueto's strong belief in the importance of cargo comes through as he discusses Ladeco. Ladeco was using two B757s on Santiago-Miami-New York, which Cueto says is not adequate for cargo. 'Chile is an important point for cargo operations with US. The difference between Ladeco and LanChile is that every night we are flying from Santiago to Miami with 20 tons of cargo in a 767. Cargo helps give an important profit on that route. This is Ladeco's problem,' says Cueto.
However with Ladeco about to break into the black, Cueto seems relaxed about the latest addition to LanChile's family. And Rivera says Ladeco's employees have been waiting for the takeover for over a year, and that while there is some anxiety, most are waiting to see how the situation plays out.
LanChile's main interest is in Ladeco's strength in the regional market, which accounts for 55 per cent of its traffic. However its 15 per cent Caribbean and 30 per cent domestic traffic will also be welcome additions to LanChile's growth.
What now remains to be seen is how effectively two carriers owned by the same company will compete for passengers in the Chilean domestic market: the effects of a similar antimonopolies commission ruling in Mexico had disastrous results for both Mexicana and Aeromexico. However, as domestic traffic currently accounts for only a third of Ladeco's business and a quarter of LanChile's, the economies of scale elsewhere may offset the potential antithesis between two competing entities with common ownership.
The carrier first entered the regional South American market in 1994, serving Asuncion, Paraguay from Santiago and Iquique.
National's fourth B737 will be flying from Iquique in northern Chile to Mendosa in Argentina, and Arequipa and Tacna in Peru, by the end of 1995. The carrier is also applying for rights to La Paz, Bolivia for the start of the South American summer season. The carrier's interest in Bolivia is twofold, however, as at presstime it was bidding for 50 per cent stake of Lloyd Aereo Boliviano (LAB). This would give National room for growth, as its route rights out of Chile are currently difficult to come by.
Ottone says the LanChile-Ladeco alliance is 'unfair', but after four protests to the Chilean monopolies authorities and the latest favourable ruling, he is resigned to the fact that the major carriers will succeed. Ottone says National's growth plan will take advantage of the next six months while the two majors sort out their business. 'They will eventually attack us strongly, but we do not care. Our costs allow us to reduce prices. If they want a fare war, they will have it,' he says with bravado.
The carrier offers a full catering service on board, but says its costs are kept low by virtue of running its own catering company which also does third party work for LAB and Cubana. The carrier performs its own C-checks, timing the servicing so that all aircraft come in at the same time and freelance mechanics can be contracted in to do them all together.
The carrier's capital base is an estimated $17-20 million and the stock is held equally by Chilean businessmen Carlos Musieg and Abraham Uauy. In 1994 National carried 333,000 passengers and earned revenues of about $34 million.
Source: Airline Business
