Argentina's economic crisis has left it with only two major airlines, but other Latin players have their eye on a state-owned start-up that the government promises to sell
Argentina is starting to recover from the worst economic crisis in its history. Defaulting on its $141 billion public debt in December 2001, Argentina's peso lost two-thirds of its value, pushing more than half of its people into poverty. With six presidents in two years, this has not been a happy time for Argentina.
And it has been an equally hard time for its airlines. Domestic traffic plunged from 6.6 million passengers the year before the crash to 2.3 million in 2002. The weakest soon became victims. DINAR stopped flying in February 2002, raised enough capital to restart in March, but only lasted 18 more days. CATA filed for bankruptcy reorganisation. In April, LAPA - once Argentina's number two carrier - collapsed, followed in May by LAER. As Buenos Aires faced food riots, even the survivors staggered.
The new left-centre government of Nestor Kirchner took office amid this crisis with plans to save or create jobs and stimulate the economy. Argentina is still a basket case, but it is slowly starting to recover. Its lower peso has given inbound tourism a 27% boost, and its gross domestic product is growing at about 4%.
Two major airlines have survived this hell-and-back crisis: Aerolineas Argentinas and Southern Winds. A swarm of little airlines (see box over page) are also riding out the storm, mostly because they found relatively safe niches.
Aerolineas has emerged surprisingly well. Through the first three quarters of 2003 its traffic rose 48% from a year earlier, revenue rose a phenomenal 83%, and it converted a net loss of $87 million for the same period in 2002 into a net profit of $20 million. Southern Winds, which has not reported results, also did well on its new flights to Miami and Madrid.
Long-haul international flights set Aerolineas and Southern Winds apart from Argentina's smaller airlines. These two alone had the ability to earn hard currency revenue as a hedge against the peso's devaluation. They alone had the overseas flights to capitalise on their country's growing inbound tourism.
Bad timing
Southern Winds still lags well behind Aerolineas in the number of international routes, but it is the second designated carrier to the two most important countries - the USA and Spain. Unfortunately, when it gained these routes, conditions for starting international flights could hardly have been worse. The government awarded them only 15 days after the 11 September attacks, at a time when the country's own collapse was approaching. Before Southern Winds could launch Miami flights in 2002, the local crisis was at its worst and Washington had downgraded Argentina under its safety assessment programme to Category 2.
Determined, Juan Maggio, Southern Winds' founder and president, pressed ahead. No longer could his airline fly to the USA on its own, so it leased the Boeing 767s it had acquired for that route to Air Atlanta Icelandic, which wetleased them back to Southern Winds. Aerolineas challenged this deal, but it went ahead. At an annual penalty of $3.6 million - the extra cost to wetlease its own aircraft - Southern Winds now serves Miami.
The Category 2 downgrade also hurt Southern Winds more than Aerolineas. The latter already served the USA, and could keep flying its own aircraft so long as it did not change operations.
But a partial equaliser has come via a US sanction against Aerolineas over discriminatory airport fees. When Argentina's economic crisis forced it to cut the peso loose from its peg against the US dollar, US carriers landing in Buenos Aires continued to pay dollar-denominated airport fees. Aerolineas secured a court decree, part of a broader dispute about paying taxes in dollars or pesos, that allows it to keep paying in pesos.
Hence, with the peso's devaluation it now pays about a third of the fees charged other airlines. Responding to complaints, the US Department of Transportation has ordered Aerolineas to deposit the difference in a US escrow fund. At roughly $3,000 per flight, this is still less than a third of what it costs Southern Winds to wetlease its own aircraft, but at least the US penalties cut both ways now for the two airlines.
Within Latin America, Aerolineas and Southern Winds are competing on more routes. Southern Winds has gained route authority for flights to Bolivia, Brazil, Chile, Mexico, Peru and Uruguay, and it is already planning services.
So far, Southern Winds has no intention of matching the Aerolineas plan to create affiliate or subsidiary airlines in neighbouring countries.
Copying the LanChile and Grupo TACA franchise model, Aerolineas has applied for authority to create such airlines in Bolivia, Chile, Paraguay and Uruguay, and hopes to launch them early in 2004.
Domestically, Southern Winds and Aerolineas have pursued different strategies. From the moment Maggio formed Southern Winds in 1996 he wanted it to be Argentina's second international airline. He has kept this focus, and used the Southern Winds domestic network mostly to gain recognition and traffic feed for those foreign services.
Historically, Aerolineas has placed more emphasis on domestic traffic. For many years Austral, its wholly owned domestic unit, was the largest local carrier. It fell to an all-time low in 2001, however, when SEPI - the Spanish owner - and the airline's recalcitrant unions reached an impasse that almost killed Aerolineas.
Regional launch
After the Marsans group (also Spanish) took over late that year, injected capital, and made peace with employees, the domestic market share of Aerolineas/Austral skyrocketed from 17% to 87%. Some of that is due to the demise of domestic rivals, especially LAPA. With LAPA's bankruptcy, Aerolineas/Austral suddenly had no competition on 19 of its 34 domestic routes. Aerolineas now plans to absorb Austral, but launch a regional jet unit by March. Clearly it aims to remain strong in the local market.
The story might have ended there - crisis leads to consolidation, two strong airlines emerge, and Argentina's aviation moves on. But this ending is clouded by the prospect of a third carrier, formed from the nationalised fragments of LAPA and DINAR. The government vows to sell its new airline, named LAFSA (Spanish for Federal Airlines) by October 2004. Southern Winds is a logical and likely bidder. But other players from Bolivia and Chile, perhaps even Grupo TACA, see LAFSA as a long-awaited opening, an opportunity to create a local affiliate in one of Latin America's most important countries. As its 37 million citizens move towards recovery, all eyes are on the Argentinian market.
Three theories exist for why the government decided to create LAFSA, and thus keep alive the prospect of a third airline. One is that it did not relish the spectre of 850 airline employees - the staff of LAPA and DINAR - losing their jobs. Rather than wait for Aerolineas and Southern Winds to fill the vacuum left by the defunct carriers, rehiring laid-off staff as they grew, the government chose to create its own airline and to keep all the staff employed. This played well to the unions.
A second theory is that LAFSA is an indirect way to help Argentina's home-grown airlines, especially Southern Winds. The Kirchner government has entered a joint venture with Southern Winds whereby that airline agrees to expand its fleet and take over 10 LAPA and DINAR domestic routes reassigned to LAFSA. In return, the government is loaning former LAPA and DINAR employees now on the government payroll to Southern Winds and is paying $1 million a month towards its fuel bill. More than one Buenos Aires observer calls this a thinly disguised subsidy.
The third theory, not inconsistent with the first two, is that the government stepped in to stop Aerolineas from grabbing even more market share by capitalising on the loss of LAPA and DINAR. The Kirchner administration has been forthright about this. Its ministers for the economy and federal planning say that the "sole objective of [LAFSA] is to avoid a de facto monopoly on domestic routes".
When President Kirchner signed the joint venture, he declared: "We hope to see all companies do well, but we do not love monopolies."
Spreading benefits
Underscoring this, the government has awarded those LAPA and DINAR routes too thin for Southern Winds to serve with its Boeing 737s, to smaller carriers. Not only does this spread the benefits around, but it also blocks further expansion by Aerolineas.
Antonio Mata, chief executive of Aerolineas, has threatened to sue over this. He denies that his airline is a monopolist, claiming that its 87% domestic market share was not something Aerolineas sought. "We gained from the deficiencies of others," Mata says. "We have never had a monopoly attitude."
Southern Winds has started enlarging its fleet to operate the LAFSA routes suitable for jets. Its first acquisition was two former LAPA 737s. One entered service in November, the other is still in maintenance. In December, Southern Winds expected to take delivery of two other 737s from Brazil's Varig.
Critics say Southern Winds should be moving faster to build the fleet it needs for LAFSA's routes. They claim it is "cherry-picking" the best routes while using the government's free staff and fuel subsidy for its own benefit. Some former LAPA and DINAR employees, now employed by LAFSA, gripe that Southern Winds is favouring its own staff over them.
This may be the normal grumbling that goes with any major disruptive change, but it points to deeper worries about LAFSA's future. The Kirchner government, insisting it will not stay in the airline business, says it will sell the carrier by October.
But exactly what will it sell? Will LAFSA's assigned routes go with it? If Southern Winds puts additional aircraft on its own registry, which it must do at least until LAFSA is certified, what is left to own? As one local paper asks: "Who would buy an airline with 850 employees and no airplanes?"
Buenos Aires seems too preoccupied with launching LAFSA to think much about its sale. When that time eventually comes, will the government impose real limits on foreign ownership? After all, Spain's Marsans group owns 90% of Aerolineas. Argentina has accepted foreign ownership as a given ever since the mass privatisations of public utilities, airport management and Aerolineas in the 1990s. Buenos Aires would be hard put to insist now on LAFSA's local ownership, given what it already allows.
This almost ensures a bidding war for LAFSA. Besides the likely interest of Southern Winds, the owners of Bolivia's Aerosur could re-enter the picture. They may seek to revive the Aeroandina alliance they formed with LAPA before its collapse. LAFSA is, after all, LAPA reincarnate.
Grupo TACA could also see LAFSA as a local partner modelled after its affiliates in Peru and Ecuador.
But the bidder drawing all the attention is LanChile, which as recently as November restated its interest. LanChile says it can wait until the Southern Winds joint venture ends, but there is no doubt about its intentions. LanChile confirms it has proposed to Argentina's transport secretary that it would transfer six to 10 aircraft to LAFSA in exchange for "a majority stake".
With LAFSA's future up in the air, Argentina could either settle into the relative stability of a two-airline rivalry or, with heavy cross-border competition, become the stage for a raucous three-way tango.
Argentina's other airlines
American Falcon may be the largest of Argentina's other airlines. It operates two Boeing 737-200s and a pair of Fokker F28s on its own, plus another 737 on wetlease. Affiliated with Falcon Express, it is 41% owned by US investors. It launched charters within Argentina in 1995, wetleased aircraft to LAPA and DINAR during their last year of operation, and has since taken over some of DINAR's routes. It is negotiating the lease of three more 737-200s for local expansion, plus possible routes to neighbouring countries.
AeroVip was launched in the mid-1990s as a feeder for Aerolineas, operating as Aerolineas Express. After airport mogul Eduardo Eurnekian bought 20%, AeroVip switched its feeder service to LAPA. Since LAPA's demise last year, AeroVip has been independent. It now serves 19 cities, including two in Uruguay, with eight Jetstream 32s.
LADA rounds out the top three among other airlines. It is a state-owned, air force-operated carrier that has been around for 63 years. It offers scheduled Fokker F28 flights to 29 destinations, mostly in Patagonia.
At South America's southern tip, Patagonia may have more small airlines than any comparably sized place in the world, largely due to its rugged terrain and few roads. Several of these carriers serve remote towns on both sides of the Argentina-Chile border. The Argentina-registered airlines include Via Patagonia, AeroRed, Sapsa, and All Borders.
Northwestern Argentina also has Huayra Sisa, with two aircraft. Aerovias San Luis talks of starting flights with a single McDonnell Douglas DC-9.
The Cardinal name shows up on domestic routes. Cardinal operates as a charter and provides aircraft on short-term lease to other carriers.
report by david knibb in buenos aires
Source: Airline Business
