As Southern Winds prepares to become Argentina's second international carrier, the airline must tackle bigger rivals and the country's economic crisis
Juan Maggio, president and majority owner of Southern Winds, has been planning his airline's international debut for six years. From the moment he founded the carrier in 1996, his sights have been set on the end of Aerolineas Argentinas' foreign route monopoly. With route awards in hand, he is now about to make his challenge, but the obstacle he did not foresee - Argentina's political and economic tailspin - may be a still bigger challenge.
Five-year plans are suspect in an industry where next week can change everything, but Maggio had such a plan when he left the board of directors of the Buenos Aires-based carrier LAPA (Lineas Aereas Privadas Argentinas) in July 1996 and launched Southern Winds with his own money. He knew the route monopoly awarded to Aerolineas when it was privatised a decade ago would end in November 2000, and he knew that the government would want to designate a second airline to represent Argentina abroad. He set out to make Southern Winds that airline, right down to giving it a name foreigners would understand.
His plan was to start locally, build his base, and be ready when the foreign routes opened up. "Argentina is very different from the USA," Maggio explains. "In the USA you can be only a regional carrier and have 300 airplanes. You cannot do that here. A domestic airline in Argentina cannot survive without having international services."
Four other Argentine airlines were already chasing each other around nearly identical route maps that hubbed on Buenos Aires. Constantly undercutting each other, all were losing money. Aerolineas was losing the most, and the strategy of the others seemed to be to outlast it and then reap the benefits.
Rather than join that game, Southern Winds created a new hub in Cordoba, Argentina's second largest city and the most centrally located. It started building a fleet of Bombardier Dash-8 turboprops and CRJ regional jets, and a network that concentrated on thinner routes that bypass Buenos Aires. The Canadian aircraft manufacturer bet on Southern Winds' prospects and future orders by taking a small stake in the startup.
Wet-leasing income
Not all flights skirted the capital city. Southern Winds generated valuable cash flow by wet-leasing three regional jets to Aerolineas for the one-hour hop between Buenos Aires and Cordoba. This lasted three years. When Aerolineas began its collapse, Southern Winds acquired the route on its own.
As troubles grew at Aerolineas, so did the fortunes of Southern Winds. In the 1999/2000 fiscal year, when Aerolineas parked most of its aircraft and went into court-supervised reorganisation, Southern Winds doubled most operational results and boosted its domestic market share - based both on passenger traffic and revenue - to 30%.
"Using small aircraft on lower density routes and bypassing Buenos Aires is still our domestic strategy," says Maggio. "We are Argentina's biggest airline in terms of frequencies. We have almost doubled the frequencies that Aerolineas had for the past ten years."
But the Marsans group that has bought Aerolineas aims to regain its lost dominance, and is once more using low fares to do it. Yet another fare war is under way, and, like all airlines, Southern Winds is affected.
Carriers are allowed to charge 50% above or below a government-set fare, but Maggio claims that Aerolineas fares are beneath that band. "They are predatory," he charges. "But we are used to that in Argentina. We were born and grew in the middle of the country's recession and constant fare wars."
Maggio sees his domestic rivals as their own worst enemies. "Aerolineas and LAPA have always used a fare war as the only resource to get passengers. That's why they both are in [bankruptcy reorganisation]."
By contrast, Maggio invited in a partner and boosted the Southern Winds balance sheet. In December 2000, he sold 30% of the airline for a reported $30 million to local entrepreneur Eduardo Eurnekian, and then both of them paid in more capital.
Powerful partner
Eurnekian was already established as a prominent figure in Argentininan aviation, so much so that many wonder how antitrust authorities ever allowed him to accumulate such power. His road to prominence began in 1998 when he led a group of investors in buying Aeropuertos Argentina 2000, the concession that runs 30 of the country's largest airports. After investing in Southern Winds, Eurnekian bought control of LAPA and AeroVIP, and made an indirect but unsuccessful play for Aerolineas. Few in Argentina will openly admit it, but they fear that his control over airports could allow Eurnekian to favour those airlines in which he holds a stake.
Maggio describes his sale to Eurnekian in terms of seeking a partner, needing capital and wanting a partnership with the airports, because his airline relies on them so much.
"Eurnekian told me that he bought in because he liked the company," Maggio explains. "He could see from his perspective at the airports who was doing well and who was not."
Maggio can take credit for the strength of Southern Winds, but he could not have planned the disarray among his rivals. When the sun set on the Aerolineas monopoly and the government invited competing applications for those routes, three airlines applied - LAPA, AirPlus and Southern Winds. But, because LAPA was under court supervision and AirPlus was a subsidiary of a Spanish airline, Southern Winds was the only credible home-grown applicant.
The result was foregone. Last September, Argentina's civil aviation agency designated Southern Winds to fly regional routes to Bolivia, Brazil, Chile, Peru and Uruguay, and to launch overseas routes to Barcelona, Madrid, Mexico City, Miami, Milan, New York and Rome. With little fanfare, Southern Winds was given six months in which to become a full-fledged international carrier, a process due to be complete by 26 March.
Making the transition from a short-haul domestic airline to a long-haul international carrier might seem daunting, but not to Maggio. "Each of our airplanes takes off four times a day for a normal route in Argentina. We have 120 flights a day with 1,000 employees." On the overseas routes, he points out, aircraft have only one rotatation a day. "It doesn't add that much load to our company's operation. The international routes are a much bigger potential market...and we need the challenges.
He adds: "Our traffic is 85% business passengers. Business passengers prefer Southern Winds. They are the people who will fly on international routes."
Maggio's plan is to launch Miami first, followed by Madrid, and then New York and other cities in Spain and Italy. Latin America will come later. Once Southern Winds is airborne on its main routes, Maggio believes the government will sympathise if the company needs a short extension for the secondary ones.
All flights to Europe will depart from Buenos Aires. The airline will use both Cordoba and Buenos Aires as gateways to Miami, with daily flights from each. Maggio picked Cordoba for two reasons: it is already Southern Winds' hub, and Buenos Aires is like Tokyo, with domestic and international airports on opposite sides of a sprawling city.
With half of all Argentinians living in Buenos Aires and the other half looking for ways to avoid it, Maggio stresses: "We will not try to feed any Miami traffic through Buenos Aires."
Fleet planning is now the preoccupation. Southern Winds cannot seek foreign operating licences until it specifies aircraft, which means it must first conclude leases. The effects of 11 September changed the airline's fleet strategy from Airbus A340s to Boeing 767s.
"The aircraft market has changed so much," Maggio notes. "Fortunately it is now better for us. There are many more airplanes at better rates. The 767s were at a much higher price than now."
This buyers' market causes a dilemma. Maggio says: "Every day brings a better deal, so that makes you postpone the signing." All aircraft will be on dry leases, either operating or finance. And cockpit crew will not bea problem.
"We have 160 pilots," says Maggio. Certifying them on 767s, he claims, will be easy because the regional jets they now fly are more complicated. "To fly the first CRJs, we hired all (Boeing) 747 captains, and 30% of them did not pass, because these airplanes have a very sophisticated cockpit - all glass, very advanced avionics. It's easier to fly a 767 than to fly a CRJ."
US routes
This will not be the first time an Argentinian airline other than Aerolineas has flown to the USA. Before the flag carrier's monopoly expired, the government decided to allow other carriers to operate overseas routes which Aerolineas did not fly. LAPA thus launched a route to Atlanta in 1999. It failed.
Maggio is not deterred. "The only people who fly to Atlanta from Argentina are the Coca Cola guys. If you fly to Miami, you have a lot of people. If Atlanta was the only destination, I would have never started that flight."
When Southern Winds first crosses the Equator it will be very different, Maggio insists. "This is the first time in history that any Argentine airline other than Aerolineas has the routes to Miami, New York, and Europe."
True enough, but some things have not changed. Latin rivals continue to make a living by poaching Argentinian traffic, especially when the only local gateway is Buenos Aires with its tedious connection between Aeroparque and Ezeiza airports.
Lan Chile and the Brazilian carriers have exploited sixth freedoms from Argentina through their home hubs. Eurnekian, the airport guru and part owner of Southern Winds, is aware of this. He warns: "Hundreds of thousands of Argentinean passengers are bypassing Buenos Aires through Santiago and S‹o Paulo and we want them back."
Other things too have changed, and not all to Southern Winds' advantage. Aerolineas, with new owners, is staging a comeback. It is too soon to know how potent it will be, but almost any change will make it more effective. Maggio shrugs and points to polls that show a passenger preference for Southern Winds over all local rivals, including Aerolineas. But that may prove to be a false comparison because the Marsans group has only just started to make its mark.
On foreign routes, Southern Winds will also face rivals that are many times the size of Aerolineas. In the US market, for instance, American Airlines operates daily Boeing 777 service from New York, and twice-daily 777s from Miami. United and Delta also operate daily widebody services. The US Department of Transportation soon plans to open yet another Argentina-USA route case.
The chances of an unknown foreign airline with an unknown loyalty programme capturing much US-originating traffic are slim, but Southern Winds is discussing a codeshare pact and membership in a US carrier's frequent flyer plan. This carrier's identity remains under wraps, but it is one of the three US airlines that already serve Argentina. Southern Winds hopes to codeshare with this partner behind, between and beyond gateways. With this arrangement in mind, the carrier is targeting 20% of Argentina-USA traffic.
At 37, Maggio may be among aviation's youngest senior executives. Southern Winds' management team ranges in age from 34 to 60, including former high-ranking Aerolineas staff. Maggio concedes that youth and experience are "both good", but he likes to compare Southern Winds with Virgin Atlantic.
Unfortunately, like Virgin, Southern Winds may be victim to economic forces beyond its control; the carrier could hardly have picked a worse time for an international debut. Argentina is in economic shambles.
Four years of recession have toppled its government and brought near anarchy. Argentina has been cut off from credit after defaulting on $155 billion in foreign debt - the largest sovereign default in history.
After rejecting plans for a third currency, the interim government has disconnected the peso from its US dollar peg. Buenos Aires hopes to control the peso's inevitable devaluation and resulting inflation through a series of mechanisms, ranging from price controls to an automatic conversion of consumer loans from dollars to pesos.
Dollar costs
These might soften the blow to consumers, but airlines who are already committed to pay dollars for aircraft and fuel will not benefit. Almost half of Southern Winds' costs are in dollars. The peso's fall means they will rise at least 40%. Yet Maggio remains sanguine. "There has always been a crisis," he says. "We are used to them."
The only silver lining for Southern Winds is the prospect of Argentinian expatriates paying hard currency to fly home. With no other source of dollars or euros this would give it some foreign exchange hedge, putting it ahead of domestic rivals dependent on peso revenue - but this may not be enough.
Aerolineas can fare better because of its access through Spanish ownership to foreign capital. But it, too, will want that hard currency from inbound traffic. Southern Winds may be forced to play its nationalism trump card by claiming that Aerolineas, 92% owned by the Spanish, is not really an Argentinian airline. Already Maggio hints at this: "We have to offer an Argentine option."
But bigger still looms the question of how many Argentinians, faced with political and fiscal uncertainty, will fly overseas. Southern Winds is about to discover how difficult it is to succeed, especially in such turbulent times and, on an international stage. n
Source: Airline Business
