REBECCA RAYKO / MIAMI & PAUL LEWIS / SANTIAGO & PANAMA
Severe trading conditions as well as traditional problems are hitting Latin America carriers, but Copa and TACA show there are no solutions
Latin America's air transport industry is generally in poor financial shape - even flag carriers have not been immune to bankruptcy. Few airlines have been able to overcome internal and external challenges that have plagued the region over the past few years. There are exceptions, however, where carriers have nurtured success through a combination of liberalised air services, cross-border co-operation and investment and prudent planning.
Many of the problems Latin American airlines have faced, such as political unrest, economic instability and government interference, are still common and in some cases have worsened since 11 September. In recent years, several flag carriers, including AeroPeru and Viasa of Venezuela, have failed, while others, such as Aerolineas Argentinas, Avensa, and Transbrasil are on the brink of financial ruin.
Brazilian airlines have never been in a worse financial state, according to a recent report by BNDES, the country's national development bank. Of the five biggest carriers, only VASP was solvent at the end of last year. Both Transbrasil and Varig ended the year in the red, the former having been recently grounded and the latter reporting more than $200 million in losses -the worst result in the national carrier's75-year history.
The outlook is even more grim in Argentina, where efforts by bankrupt Aerolineas Argentinas and its new owner to rebuild have been hampered by the country's plunge into economic crisis. Many of the issues that have challenged the region's industry for years, such as high and seemingly arbitrary levies imposed by national governments, have become more acute since 11 September. Infrastructure charges are around 30% higher for local carriers than for their European and US counterparts, because Latin American governments consider aviation a luxury and taxit accordingly.
Aeropostal's Venezuelan chief executive Nelson Ramiz says landing fees imposed by his government have rocketed 500% this year for no apparent reason. Furthermore, the managements of many airlines are complaining that money raised often ends up supporting non-aviation causes. Speaking at an AvGroup Airline Conference in Miami in May, Juan Emilio Posada, Alianza Summa chief executive, said that whatever levies are imposed should be used to help infrastructure. Artificial levies on items such as landings, fuel charges, flight support and airway utilisation need to be stopped, he added.
Instability
The scars of economic instability have also hindered the growth of Latin American carriers by reducing the region's indigenous passenger base. Economic conditions are such that more than half the region's 450 million people fall below the poverty line. Recent studies show that less than 10% of the population use commercial airlines and that the overwhelming majority of passengers travelling between North and South America are US citizens.
As the financial health of Latin carriers has deteriorated over the last 15 years, the region has been left open to the onslaught of US competition. The replacement of weak US rivals, Eastern Airlines and Pan Am, by more aggressive and financially stable carriers such as American Airlines and United Airlines has eroded what little market share Latin carriers had established by the early 1990s.
With deeper pockets and their vast route networks in place, US airlines had nearly 60% of the Latin American market by 1990. Today, they still dominate the Latin American scene, with a 64.1% market share across the region.
While external factors have taken their toll on the region's carriers, internal ones are often equally to blame. Analysts have cited poor management decisions, improper fleet allocation, over-accommodating the needs of labour and poor customer relations among the myriad reasons why airlines are more prone to failure in this region. Carriers such as Aerolineas Argentinas, which have allowed internal infrastructure to grow uncontrollably after privatisation in 1990, have become easy prey to both low-cost domestic and international competition.
Safety has been another traditional hurdle for Latin American carriers. For the airlines in the 23 countries classified as Category 2 by the US Federal Aviation Administration's International Aviation Safety Assessment (IASA) programme, any expansion in services or additional aircraft on US routes remain on hold until their status has been upgraded. Latin American airlines in addition are complaining of new post-11 September challenges in the form of higher security costs and more restrictive regulations imposed by the USA, which are placing a heavier financial burden on the already struggling Latin American aviation sector.
Latin American airlines have been threatened with fines and increased landing fees if they fail to comply with the more stringent manifest information requirements. The USA has acted in a way that adversely affects Latin American airlines, says aviation lawyer Robert Papkin, whose firm Squire, Sanders & Dempsey represents several carriers in the region. Papkin believes the economic impact of US-imposed fees and regulations is more responsible for the region's recent losses than the capacity declines following the terrorist attacks of 11 September.
The economic assistance that the US government has offered its airlines is a source of contention among their Latin American counterparts, which view the federal government loan guarantees and war-risk insurance aid as anti-competitive subsidies. This assistance cannot be duplicated by debt-ridden Latin American countries and has served to widen the competitive gap between the two regions, according to Latin American chief executives.
Initiatives
In the face of the increasing challenges facing Latin American airlines, there has been a push for functional co-operation in the region. A number of initiatives have been introduced over the last few years, including the formation of LatinPass, the consolidation of the Grupo TACA in Central America and Peru and, most recently, of ACES/Avianca in Colombia (forming Alianza Summa).
The ground-breaking joint negotiation for Airbus aircraft by LanChile, TACA and TAM a few years ago is another example of the functional co-operation analysts would like to see more often - as are joint negotiations for fuel and services.
LanChile has been heralded by industry pundits as an example of how to get it right. This is in no small part due to the fact that Chile has had the fastest growing economy in the region for the last 10 years. But for some of the area's smaller and more impoverished nations, perhaps a better model to study would be either that of Panama's Copa or El Salvador's TACA in Central America. Neither carrier has been able to escape external factors such as Category 2 or the economic fall-out after 11 September, but both airlines remain financially robust and are set to emerge from this latest crisis even better positioned than before.
After suffering a loss last year, TACA plans to be back in the black by the end of this year, although it expects revenues to be down on last year's $700 million. The carrier has done what many others have been prevented from doing by social policies and strong labour unions - cutting its 6,000-strong workforce by around 10%. "The 11 September attacks made us take a hard look at what we are doing - and to be swinging back into profit during 2002 under the current environment and with smaller revenue tells you we're doing a tremendous job with costs," says Federico Bloch, TACA chief executive.
Copa outpaced both TACA and LanChile as the fastest growing Latin America/Caribbean operator in the period 1994-2000 and, despite being hit by high fuel prices, turned a profit last year and expects to remain in the black through this year.
The carrier did reduce its schedule after 11 September and has been vigilant in keeping capacity in check. Says Copa chief executive Pedro Heilbron: "Our secret has been to stay very focused - to fly where we're needed and stay away from other people's territories."
Consolidation
El Salvador-based TACA was the region's first carrier to start to break down the geo-political barriers that have hindered development, when in the 1990s it consolidated under one consortium the airlines of neighbouring Costa Rica, Guatemala, Honduras and Nicaragua.
Panama also came under the TACA umbrella until 1999, when Copa left the group as the result of selling 49% of its stock to Continental Airlines. The company has since further extended its wings, taking an equity stake in TACA Peru. It has also signed agreements with Lloyd Aereo Boliviano and Venezuela's second largest carrier, Aserca.
"The intention with these arrangements is not to always take an equity position. We're an airline that believes in co-operation, particularly in markets that are too thin. There are a lot of services that without co-operation are not viable," says Bloch.
TACA's move into Peru has brought it face to face with LanChile, which has backed its own local partnership LanPeru, but Bloch denies any suggestion of a sphere-of-influence conflict. "They flow traffic to and from Lima and the USA and have a lot of domestic services, which we don't have. We have instead established an intra-South American hub," he says.
Since parting ways with TACA, Copa has been busy trying to position Panama as the hub of the Americas, operating to more than 30 destinations in the northern and southern hemispheres. Key to this are a growing number of open skies agreements which now include Chile, Guatemala, Nicaragua, Peru and the USA. But efforts to extend this to Colombia and Mexico appear to have stalled. "We spent the last two weeks negotiating with Colombia and Mexico," Copa's Heilbron said in May. "Panama has offered open skies but has had no luck, not a single additional frequency from these two countries."
The FAA's decision to downgrade both El Salvador and Panama to Category 2 in 2000 and 2001, respectively, has undermined for now efforts by both Copa and TACA to build alliances with larger carriers outside the region. Copa has been forced to remove Continental's code from its flights, which, with a freeze on current services to the USA, is costing the airline $2 million a year. TACA was in the midst of seeking antitrust immunity for its codeshare with American Airlines, when the IASA action forced it to withdraw the application. Both carriers hope to be upgraded to Category 2 before the end of the year.
The other key to the two airlines' success is their decision to focus on a Southwest Airlines-type fleet structure, although they are considerably smaller in size. In 1999 Copa ordered 12 Boeing 737-700s, of which the final four are due for delivery in June, July, November and December with financing by Citibank and WestLB.
Copa is also looking to add between eight and 10 additional 737-700s or -800s to complete the replacements for its eight remaining 737-200Advs and provide capacity for growth.
The airline, which operates the aircraft on some of the longest 737 segments in the world, such as to Santiago and Los Angeles, is considering adding winglets to the new aircraft for extra range.
Simplicity
TACA accelerated the retirement of its legacy fleet of 737s, leasing out many to partner carriers such as Aserca. By the end of last year it boasted an all-Airbus fleet, which has proved to be a major cost saving. The airline now operates five A319s and 23 larger A320s, with an average age of three years. The carrier holds options on up to 24 more aircraft, some of which it will replace with older Airbus aircraft once current leases have expired. The airline has disposed of A300 freighters and has no intention of operating a widebody aircraft in the foreseeable future.
Bloch says: "We want to have the best service at the most cost-effective price, so we need to keep it simple and we need to start with one common fleet - that's what really drives your costs down. Our A320s are identical - same engines, spares and components. We're talking a degree of commonality much higher than evenat Southwest. This is the youngest in Latin America, second only to JetBlue."
Source: Flight International
