Please don't tell officials at the US Department of Transportation. But accessing Taca's Internet home page takes you past a flashing icon promising 50 per cent off American Airlines fares. There is enough dust still flying around the two carriers' proposed deal without sabre-rattling in cyberspace as well.
Federico Bloch's five-airline Taca Group is at a crossroads in its strategic development and few are prepared to predict where it will go next. Bloch's success in creating a close-knit alliance with revenues of over $500 million a year had been seen as the way forward for carriers in the region.
However, Bloch's desire for a strategic tie-up with American is viewed with ill-disguised alarm by his peers and has predictably thrown other US carriers into a fury. But Bob Booth, president of Miami-based consultants AvMan, rejects suggestions that the American tie-up has made Bloch unpopular in the region. 'No-one feels that Bloch is betraying the cause - in essence it is seen as self-defence,' he says.
El Salvador-based Taca can rightly claim to have led the industry pack in acquiring equity holdings in Aviateca (Guatemala), Lacsa (Costa Rica) and Nica. It also has a non-equity management agreement with Copa in Panama. But the link with American - which would replace a weaker arrangement with Continental - is the latest part of the US carrier's surge into the region which has seen it line up similar agreements with Avianca, TAM and ALM Antillean.
Bob Papkin, partner at Washington DC-based lawyers Squire, Sanders, believes the US opposition - particularly from Continental and United - reflects fears for the implications of American's planned raft of deals as much as the Taca transaction itself.
Taca and American announced their plans for a wide-ranging codeshare and marketing alliance in June 1996, applying for authority to launch codeshare services from 1 November last year.
This called for American to place its code on 149 weekly Taca Group services from nine US gateways to 10 Central American destinations, with Taca reciprocating on 126 weekly flights by American from eight Central American cities to US points. In the initial phase Taca also planned to provide marketing services to Sabre; promoting Sabre in the region and linking travel agents to the Sabre system.
American's dominance in the South and Central American markets led the two parties to shy away from seeking the anti-trust exemption now increasingly common in transatlantic alliances. With almost 70 per cent of the seats and traffic in the US-Central America market (see table) - and more on crucial Miami-Central America sectors - the pair clearly have a dominant position. A skilled diplomat, Bloch says that the US response will be noted with interest in Latin America. 'The relative lack of scrutiny of European alliances would sit uneasily with a lot of noise over Latin deals,' he says.
United and Continental have led the chorus of disapproval calling for the deal to be blocked and the DOT's decision to open formal proceedings into a codeshare deal for the first time - a move swiftly followed by the Justice department - testifies to the sensitivity of the transaction. 'Miami is clearly the most difficult issue for the regulators,' says Papkin. 'The issue is not the size. Under classic US anti-trust rules there is room for competition - this is where the open skies comes in. US carriers can say they can't enter but to say they are kept out is wrong.'
While opponents would like the deal canned, the real problem for DOT is the market concentration in Miami (see feature page 40). Bloch ducks suggestions that regulatory approval would be forthcoming if the partners dropped Miami services from the planned codeshare.
Unlike most existing codeshares, the deal will add significant services rather than entrench the pair in the Miami-Central American market. Taca says it will add services to Dallas-Fort Worth from San Salvador, Guatemala and San José, while American will launch operations to Panama from its hometown hub. Taca says the deal will also allow it to expand its online network to Canada, Europe and Asia.
'Miami is an unusual and unique situation,' says Michael Whitaker, vice president international relations at United. He says that while open skies offers access in theory, competitors' inability to make any money out of Miami in practice makes a mockery of claims that others are free to compete with American/Taca. United dropped its own attempt to build a Miami hub and, like Continental, has pulled back to focus services elsewhere.
Bloch brushes off assertions that keeping Miami in the deal would lead to higher fares. 'United and Continental are going to do nothing differently if we have an alliance with American,' he says. 'No consumer will not benefit from AMR/Taca.' Unsurprisingly, Whitaker disagrees: 'What happens is that the level of competition decreases; no-one is going to challenge them.' Bob Papkin, who represents Lacsa and Avianca, judiciously points out that American would be 'crazy' to raise fares with so much regulator attention on its future actions.
Aside from Miami, opponents fear the deal would entrench American's hold over South America since both sides are seeking beyond rights. However, unlike its application to codeshare with Avianca beyond Bogotá, American does not give details of sectors. But Bloch, eager to highlight potential benefits, claims that the cost of a Miami-San José-Santiago-Miami round-trip will fall from $1,800 to $800 with through fares offered on the American-Taca system. 'There is a big potential for American to market southbound services out of Latin America,' notes Papkin.
Taca's existing alliance with Continental is much more limited in scope and has the added drawback of Continental's refusal to offer through fares beyond Houston. The situation led to a stand-up (if good natured) slanging match between Bloch and Dave Grizzle, Continental's senior vice president corporate development, at a Miami conference in April organised by AvMan.
Continental, which is successfully building Houston into the second Latin American gateway, remains upset that its advances have been spurned by Taca in favour of American, a feeling shared by United which also sought to secure a looser codeshare. ' We compete with Continental at Houston with our hands tied behind our backs,' says Bloch. Grizzle defends the move as fair competition while Bloch contends that Central American traffic from the central US is already controlled by Continental; 'AMR will change that by adding Dallas,' says Bloch.
It is clear that DOT is taking a much more formal approach to reviewing the deal than previous applications and this could have implications for the British Airways/American tie-up. The deal is unlikely to be rejected in its entirety but both sides will probably have to make concessions.
The simplest action for the applicants would be to drop American's insistence on exclusivity, which bars other US carriers from alliances with Taca. While this is held up as anti-competitive by opponents, both sides suggest they would have little problem complying. The real difficulty is that similar carve-outs to those applied to transatlantic alliances such as United/Lufthansa may be inappropriate for the Central American market.
The inclusion of Sabre in the deal has also led to fears that it will weaken LatinPass, the 19-member frequent flyer programme designed to balance the effects of US carriers' FFPs in the region. Taca was at the forefront of setting up LatinPass and some see its defection as a blow. However, Bob Booth, who helped to create LatinPass, believes it will be strengthened by the Sabre tie-up. 'There is a realisation that the only hope is to strengthen LatinPass and keep it as a viable alternative,' he says.
The array of barbed comments fired at Taca includes one (from Continental) that it has overt influence over its partners' governments, limiting their scope to oversee the American alliance. 'What has kept the alliance together is mutual self-interest and [Bloch's] ability to keep people's faces free of mud,' says one source familiar with the carrier. 'But he has given [these countries] a flag carrier at the cost of freedom from political interference.'
This view goes straight to the heart of the open skies deals signed by the US with the five Taca group countries and Honduras in early May. 'The final goal of the US, to open up Latin America, is not going to be achieved by regulating codeshares but by letting countries act freely,' says Bloch.
Unsurprisingly, Bloch will not be drawn on the effect on the Taca Group of a dilution of their planned alliance. What is certain is that Taca has reached a new stage of its development. 'The cooperation has grown extensively from what was initially defensive; they are now becoming proactive and operating as a revenue generating group,' notes Art Ryan, associate at Chase Manhattan Bank.
The five partners are already coordinating a wide range of purchasing functions, including fuel and insurance, while their joint maintenance arm has a reputation for high quality. With or without American the Taca group will increase the coordination of its schedules and the carriers are already working with joint yield management and reservations systems.
Bloch is also building up the strategic management at group level and is keen to dispel the suggestion that everything flows from him. 'Five years ago it would have been difficult to identify a management team,' says Tom Gallagher, managing director at CIBC-Wood Gundy. 'But it's no longer the one-man show that it once was. In some ways the management of the airline is better than the airline itself.'
Bloch leads a team of Harvard and Stanford educated professionals. Ben Baldarez has been appointed group chief operating officer, in a move widely seen as allowing Bloch - who has a wide range of family business interests - to take more of a strategic role in Taca's future.
With or without a US partner, Bloch will need to determine the appropriate scale on which the Taca Group can compete. 'What would benefit Taca enormously is to develop a long-term plan,' notes one banker.
Source: Airline Business
