Chile's LAN is exploiting the turmoil in Argentina' airline industry with a well-tried policy of filling a vacuum by setting up a locally based carrier
Lan group chief executive Enrique Cueto wishes no-one ill. But as long as Latin America protects its weak airlines, he will ensure that LAN continues to use its now-famous techniques for moving in when those airlines falter.
LAN follows a pattern first perfected in Peru, then Ecuador and the Dominican Republic, of entering a country through local subsidiaries. Cueto explains: "As other airlines become weaker, we have more opportunity to arrange some type of co-operation or integration."
Argentina and Brazil have been the biggest and most strategic blank spots in LAN's network for years. A year ago Jorge Awad, LAN's president, declared Argentina a top priority. He predicted that LAN would enter Argentina before the year's end, by associating with a local airline, launching its own or convincing Buenos Aires to form a common aviation market with Chile.
None of those happened, mainly because LAN's proposed deal with a small Argentinian carrier, American Falcon, fell through. Still, LAN's interest in Argentina persisted. Last December Sebastián Piñera, a leading shareholder and LAN director, said: "LAN islooking 24 hours a day for new opportunities, with most attention on Brazil and Argentina."
That opportunity came early this year when Argentina's precariousaviation sector headed into its latest crisis. Through February and early Marchit was unclear whether the country would end up with three, two or only one major airline. Questions still remain, but it now looks increasingly certain that Argentina will have tworival airlines: the Spanish-owned Aerolineas Argentinas and a new carrier called LAN Argentina.
The seeds of this surprising change were sown in 2003 when aviation in Argentina nearly collapsed along with the country's economy. Under the Marsans group, Aerolineas managed to weather the storm, but Argentina's second tier was a shambles. Two of its larger carriers, Dinar and LAPA, failed. To avoid massive unemployment, the government created a paper airline named Lafsa (federal airlines), employed all 850 Dinar and LAPA staff to work for it, and arranged for another carrier, Southern Winds, to operate Lafsa's routes.
That furthered several government objectives – it kept the staff of two defunct airlines employed and the $1 million monthly fuel subsidy it paid Southern Winds to fly Lafsa routes helped prop up that carrier, keeping Aerolineas from gaining a total monopoly by default. The government insisted it would not own Lafsa forever, and in late 2003 it announced plans to sell it. That set off a scramble among potential bidders – LAN and Southern Winds among others.
But LAN backed out, citing concerns over a requirement that it hire all Lafsa's staff. Southern Winds, lacking the resources to buy Lafsa by itself, sought a partner. Talks between Southern Winds and LAN broke off almost as soon as they started and no one else emerged.
Sale postponed
The government never explained why it decided to postpone Lafsa's sale, but it was probably because Southern Winds was still too fragile to survive without subsidy, no other strong candidate emerged and Aerolineas was poised to boost its 85% domestic market share.
In any event, Argentina shelved Lafsa's privatisation early last year, renewed its contract for Southern Winds to operate Lafsa routes and raised the Southern Winds fuel subsidy to almost $3 million a month. Lafsa continued on as an airline without an operating licence or aircraft; its only assets being route awards and government-employed staff.
Aerolineas blasted this scheme, arguing that Lafsa was simply a pretext to prop up Aerolineas' only rival at the taxpayers' expense. But the programme lasted another year before a drug scandal finally brought it down.
In February, Southern Winds revealed that Madrid police had seized four suitcases of cocaine in unaccompanied baggage on a Southern Winds flight from Buenos Aires. Southern Winds protested its innocence, while its senior managers suggested someone was conspiring to hurt it. A political furore erupted over lax security at Buenos Aires Ezeiza airport. Several officials lost their jobs and a judicial inquiry started into who, besides three employees, was involved in the drug trafficking.
As the scandal deepened, the government grew uneasy about subsidising the subject of a criminal investigation. Late in February it cancelled its contract with Southern Winds, stopped the subsidy and undertook to prepare Lafsa for a prompt sale. For Southern Winds the subsidy loss and traffic drop due to adverse publicity were too much. It reduced operations and within weeks filed for court protection from creditors.
So long as the government had supported Southern Winds through the Lafsa arrangement, LAN could do little to enter Argentina. The crisis provoked by the drug scandal changed everything and gave LAN its chance. With Southern Winds in bankruptcy and no one flying Lafsa's routes, the paper airline faced an uncertain future.
LAN met Argentina's transport ministry and proposed to launch a locally based airline and restore stability to Argentina's skies. It proposed to buy Aero 2000, another Argentine paper airline. The carrier had no aircraft, but held domestic routes and charter authority to neighbouring countries. Unlike Lafsa, it also had an operating licence.
According to local reports, LAN may have even helped form Aero 2000 last year as a potential launch platform after talks broke off with American Falcon.
LAN's offer attracted quick attention because it proposed to employ Lafsa's staff for three years – similar to one of the conditions Buenos Aires had set for Lafsa's sale.
Aerolineas and some Lafsa unions still complain about a lack of transparency in LAN's deal with the government, but it covers at least these points:
* LAN will be allowed to buy 49% of Aero 2000 and operate it within and beyond Argentina under the name of LAN Argentina;
* two Argentinian lawyers will own the rest;
* LAN will guarantee employment for Lafsa staff for three years, hiring all 850 of them immediately, rather than on a phased-in basis as initially proposed. It will also employ staff from another small grounded carrier.
In return, the government has cancelled the sale of Lafsa, agreed to convert Aero 2000's charter authority into scheduled authority and will grant it additional routes.
Other details remain unknown: what routes will be granted; whether Lafsa's unions will accept the deal; and what will happen to Southern Winds. LAN has proposed a 90-day "co-operation agreement" with Southern Winds. But it also proposes to launch its own domestic operations using six Boeing 737-200s as early as May, with international flights starting in August.
The fate of Southern Winds
Eventually, it will replace the 737s with Airbus A320s. With Southern Winds flying six old 737-200s on local routes, its successful reorganisation in the face of such new competition looks doubtful. A more likely prospect is the integration of Southern Winds into LAN Argentina, and there is already talk of that.
LAN has not said why it chose to launch its own airline rather than buy Lafsa. After all, it plans to hire Lafsa's staff. But Lafsa has no operating permit, whereas Aero 2000 does. Moreover, Buenos Aires planned to keep a golden share when it sold Lafsa; LAN will avoid that. Finally, with Lafsa simply disappearing under the plan now adopted, LAN faces no rival bidders as it would in a Lafsa sale.
No one talks specifically about reciprocity, but everyone sees the parallel between allowing LAN into Argentina and the launch in Chile last December by Aerolineas del Sur, owned by the same Marsans group that owns Aerolineas Argentinas.
Aerolineas would not have chosen the imminent launch of LAN Argentina as a prelude to its own share offering. However, the Marsans group still plans to sell up to 45% of Aerolineas in June or July. New capital is even more critical, Marsans stresses, in light of LAN's imminent arrival.
There is nothing like a crisis to change the competitive landscape.
Source: Airline Business
