Paul Lewis/MIAMI
Financial reform, regulatory liberalisation and growing competition are transforming the face of air transportation in Central and South America. As political barriers are lowered progressively, airlines from Mexico to Chile are searching for international partners and urgently needed infusions of capital to survive in the 21st century.
The need for far-reaching change was acknowledged at a recent gathering of Latin American airline senior management in Miami. "Probably in 10 years, there will be only a handful of airlines grouped in South America. It is going to be the only way to survive," predicts Frederico Bloch, chief executive of Grupo TACA.
While there is clear consensus on the need for continent-wide consolidation, the pace and direction that this takes is still debated. The issues centre on whether this will take the form of mergers or non-equity alliances at a regional level, modelled on TACA in Central America, or globally.
Colombian ACES chief executive Juan Emilio Posada says: "This is going to take place in a shape and form greatly influenced by north-bound equity alliances". Recent examples include Continental Airlines' purchase of a 49% stake in COPA of Panama and American Airlines' acquisition of a 10% holding in Aerolineas Argentinas.
Consolidation is driven by a growing need for additional capital from outside economically depressed South American. "Airlines in Latin America run a very low cash balance as they count on banks for lines of credit, which I think is a dangerous way to run a business. We're all drawing from the same pool of capital " says David Cush, chief operating officer of Aerolineas.
The Argentine carrier plans a $200 million recapitalisation and merger with Austral. Less fortunate is AeroPeru, which is grounded, and without aircraft, after a $62 million loss in the last year. The carrier claims to have halved its $174 million debt, but owners Delta Air Lines and Cintra of Mexico have decided to cut their losses and sell their 35% stakes for a "nominal value."
Peru, in many regards, has been the model of reform since 1991. Lima has raised the ceiling on foreign ownership of local carriers from 49% to 70%. It was the first South American nation to sign an open-skies agreement with the USA and was successful in securing a Category 1 rating from the US Federal Aviation Administration's International Airline Safety Assessment. All this begs the question of why AeroPeru failed to make the business fly.
Recently appointed chief executive Jaan Albrecht pins the blame on a combination of chronic undercapitalisation, failure to reach a codeshare agreement with Delta, and "negative relations" with the Peruvian Government.
The latter was soured by Lima's decision to grant cabotage rights to foreign carriers.
"This is the first country to my knowledge in the world to do this," notes Albrecht.
Other Latin American countries have taken a more cautious approach to liberalising air services with the USA. A pending open-skies deal with Chile depends on US approval and anti-trust immunity for LanChile's alliance with American. At the same time, Argentina is seeking a graduated implementation of open skies by 2003, fearing being swamped by competing US carriers.
The US airline industry, in the wake of Asia's economic implosion, has been turning its attention increasingly to the Latin American air-transport market, which is forecast to grow from 126 million passengers last year to 230 million by 2010. There has been a 21% expansion in overall US carrier capacity to the region, led by Continental and Delta as they challenge American's dominance.
Larger Latin American carriers with dominant market share are quickly finding global-alliance homes, with Varig joining Star, VASP partnering Continental, and LanChile and Aerolineas courting oneworld. Attention is turning to finding a solution to the continent's smaller carriers' problem of establishing critical mass.
Prerequisite ingredients for consolidation are in place, with the gradual lifting of ownership restrictions and the emergence of regional open-skies agreements within the Andean and Mercosur groups. "The more open countries are in terms of cabotage, the easier it will be for governments to approve such levels of consolidation," says Posada.
The stumbling block to a full merger in the short term are labour restrictions, suggests Bloch, who masterminded the equity integration of Aviateca of Guatemala, LACSA of Costa Rica, NICA of Nicaragua and TACA de Honduras into Grupo TACA.
"We're probably going to see more structures along holding company lines, because you can align economic interests perfectly and, at the same time, bypass labour constraints. I think we're going to see it happen quicker than we think."
Source: Flight International
