The annual meeting of Latin American chief executives in Miami raised some familiar themes about poor financial health and the dominance of US carriers. But this time they were heightened in the wake of 11 September
Some familiar concerns resurfaced once more as the tenth Latin American Chief Executive conference, a respected industry forum, got underway in Miami in May. The poor financial health of many Latin airlines and the frustrating lack of co-operation among the region's governments are recurring themes, as well as the ever uneasy relations with the dominant US neighbours north of the border. But this year, these issues were being played out against the backdrop of the 11 September attacks and the crisis which has followed.
Among the fall-out is the massive financial assistance being given by the US government to its crisis-hit industry. Latin carriers have long complained about the advantages held by their rivals. Concerns, for example, remain about the US International Aviation Safety Assessment programme which limits the operations of 23 Latin American airlines on US services, so allowing US operators to dominate on those routes. Now comes the aid package, which rankles with carriers south of the border. They view it as little more than a subsidy, pointing out that the USA has long opposed such government largess when handed out by others.
The aid, which cannot be matched by deficit-ridden Latin American governments, only widens the "already unacceptable competitive gap" between US and Latin operators, according to conference chairman and Washington lawyer Robert Papkin.
Costly new security requirements have only added to the woes of airlines which already suffer from a lack of capital, ageing fleets and a limited home market. Carriers such as Aerolineas Argentinas, Venezuela's Avensa and Brazil's grounded Transbrasil are still teetering on the brink of financial disaster.
Yet despite the gloomy economic picture and the setback-ridden history of the industry, Papkin sees positive developments for the long-term future. These bright spots include a promising strategic alliance between Colombia's money-losing carriers and the return of Lloyd Aereo Boliviano (LAB) to a Bolivian owner willing to restructure and invest in the airline. Also heartening are the positive financial performances of Grupo TACA, LanChile and Panama's Copa, proving that talented airline managers can make a difference.
In Colombia, the government approved the creation of Alianza Summa, a limited liability company to integrate the schedules and operations of ACES, Avianca and the smaller SAM. Without the move, says Juan Emilio Posada, former chief executive of ACES and the head of Alianza Summa, the mounting losses of the carriers foretold "a disaster waiting to happen". After lengthy planning, schedules were integrated on 20 May, with a plan emphasising "speed rather than perfection" to provide consumer benefits, get cash flowing and convince employees they are part of a viable organisation. The aim is to be profitable within two years, with synergies of up to $99 million a year.
But there are still hurdles. Because of the diverse histories, liabilities and relationships of 32-year-old ACES and 83-year-old Avianca, a complicated new structure will be difficult to maintain, Posada says.
Consolidation
Alianza Summa, for example, has a contract to represent the three airlines, and to provide them with goods and services, but suppliers still will still have to issue individual invoices to the three airlines. "I foresee a merger as the realistic solution down the road," Posada says.
Changes are also afoot at Bolivia's LAB under the leadership of Ernesto Asbun, who acquired a controlling interest from Brazil's VASP Airlines. He has begun a wide-ranging programme to rejuvenate the 77-year-old airline. When he arrived in December, half its fleet was grounded for want of spares, and it had a monthly operating deficit of $3 million.
All but one aircraft is now flying and, with co-operation from the workforce and a cost-saving programme, the monthly operating deficit has been reduced to $1 million. When it gets to zero - in the next few months, Asbun says - he will recapitalise the company.
Federico Bloch, Grupo TACA's chief executive, cited a drive to "eliminate complexity" as the most important element in his company's financial performance after 11 September. "That's why we were able to turn the corner so quickly and produce such good results in a short time," he says of the first-quarter profit. The carrier looked hard at everything "item by item" to streamline the operations of its companies. "Boy, did we find a lot of junk," adds Bloch.
Boeing 737s were grounded in favour of a standard Airbus A319/320 fleet, several management layers were eliminated, and vendors were reduced from 100 to around 20 principal suppliers. Grupo TACA is now opening Boston as its ninth US gateway.
The world economic recession was a factor before 11 September, says Enrique Cueto, chief executive of LanChile, and after it, cargo from the USA to Latin America - which represents 40% of LanChile's revenues - declined 30-40%. And because of the perilous Argentinian economy, LanChile experienced a 15-25% fall in Argentina-USA traffic, of which it used to carry 10%.
Despite these problems, Cueto says LanChile is and will remain profitable. He attributed the carrier's success to several factors - its decision to cut capacity but not services to passengers, a reduction in travel-agency commissions and, like Grupo TACA, a focus on cash-flow and the impact on profit of any decisions. "That's very important," he says. "Today it's not easy to take a dollar from our company. Try it." Another tool being used is "imagination", Cueto says. With overcapacity and excess aircraft, the carrier arranged a one-year, wetlease codeshare with Qantas to provide Santiago-Auckland-Sydney service with LanChile aircraft and crew. "This is a way we can use our aircraft and improve our position," he adds. "This is a short-term solution for a short-term problem."
Copa is also doing well, but chief executive Pedro Heilbron says the Panama carrier is "kind of blessed" by not being very dependent on the US market, which accounts for only 25% of its business. The airline cut capacity last June when it saw the economies of the region slowing down. It reduced capacity further after 11 September. The carrier already has financing in place for four new Boeing 737-700s it is taking this year. "We're doing what we need to do internally to run a good airline and to be profitable," he says.
But problems remain. "We have one big challenge and that's route rights and access to markets," Heilbron says. "It's difficult to plan future aircraft deliveries and growth when you don't know what markets you're going to be in." Panama's offer of open bilaterals in recent negotiations with Colombia and Mexico were unsuccessful, and it failed to gain "a single additional frequency".
Market access
Until the region's countries open their markets to each other, he says, Latin American carriers will not be able to "renew fleets, plan for the future or grow in the way we should, while US and European carriers take over the markets".
Cueto also supports the need for a larger "common-market" in the region. "We can't compete with US airlines; they have open-sky agreements with many of our countries," he says. "We have few open-sky agreements among us."
Grupo TACA's Bloch says co-operation among countries is inevitable, and thinks the easiest and quickest way to obtain a single market in Latin America would be to remove ownership rules. Grupo TACA, a strategic alliance that brought together the principal Central American airlines of El Salvador, Guatemala, Honduras, Nicaragua and Costa Rica under one corporate identity, is the foremost example of functional co-operation in Latin America.
Perhaps it happened in Central America first because it is small, Bloch says. "We're like a little experiment because we can do things that are much more difficult to do in the big countries." He added that public policy on liberalisation would be pushed forward by the private sector in larger countries as well.
On a smaller scale, Antigua-based LIAT has also successfully promoted regional co-operation, with the formation of an alliance with Air Caraibes of Guadaloupe and Winair of St Maarten to help reduce costs. Under the leadership of Gary Cullen LIAT has also developed an alliance with BWIA West Indies Airways, which owns a stake in LIAT, to promote co-operation and reduce costs. Echoing Bloch's words, the former Aer Lingus chief executive says that "even with a carrier as small as LIAT, it's amazing how complex things had become".
Source: Airline Business
