Aires to take A320s and resume expansion by early 2012

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LAN expects to resume expansion and place Airbus A320 family aircraft at its new Colombian subsidiary Aires by the end of this year or early next year.

The Chilean airline group also expects Aires, which was highly unprofitable when it was acquired by LAN in November, will be break even by early 2012. LAN executives told analysts today it is now focusing on stabilising Aires and once this phase is complete, fleet and network expansion will resume. Aires will also be rebranded LAN Colombia within the next year.

Aires currently operates a fleet of nine Boeing 737-700s and 15 Bombardier Dash 8 turboprops, primarily domestically as all but one of its international services was cut by LAN earlier this month. LAN's narrowbody fleet consists entirely of A320 family aircraft, with over 60 of the type in service and more than 80 additional aircraft on order.

LAN passenger division VP Luis Eduardo Riquelme told analysts in a 26 January conference call that LAN intends to have Aires also operate A320s, explaining the "idea" is for the entire group to have a common narrowbody fleet. "The timing depends on the commitments the company already has," Riquelme says, referring to the leases Aires currently holds on its 737s and Dash 8s.

But he adds regardless of how long it takes to replace Aires' current aircraft, LAN will use A320s to start growing Aires' fleet later this year or early next year.

Riquelme says the first A320s to be operated by Aires will likely be the three A320s used by AerOasis on certification flights. LAN since the middle of last year has been helping AerOasis with the certification process, which is now in the final stages, and has an option to acquire the carrier once it is certified.

Riquelme says of one of AerOasis' A320s is now being operated within the LAN network in other South American countries and AerOasis' other two A320s "are in the process of moving to the rest of the group". But he says these three aircraft "will go back to Colombia once the conditions are there to start growing. Basically those planes will be used in other parts of the network until Aires is in good condition to receive new aircraft and have the crews and everything that is necessary to add those aircraft to the current fleet."

Riquelme calls Aires' exit from the international market with the exception of the Bogota-Fort Lauderdale route temporary. "The idea with Aires is to first stabilise and then grow," he explains. "We expect we will be able to restart international operations - some of them or all of them - during this year and then grow by the end of this year or in 2012."

Riquelme says LAN is now working on several items which need to be resolved for Aires to have a profitable international operation. One of these issues is distribution and having Aires carry the LAN code and take on the LAN name. "We expect that will happen by the end of the year or 2012," Riquelme says.

LAN CFO Alejandro de la Fuente told analysts the airline group does not expect a positive contribution from Aires this year. "We expect to reach break even numbers in 2012," de la Fuente says, adding eventually Aires will have similar margins as LAN's other short-haul operations in Argentina, Chile, Ecuador and Peru.

While Aires is now unprofitable, de la Fuente says the acquisition was an "important milestone" for LAN as it furthers the company's goal of being established in all major South American markets. Aires is the second largest domestic carrier in Colombia, which is the second largest market in South America.

"The Colombian market is very relevant in South America with over 12 million domestic passengers and with a traffic growth opportunity," de la Fuente says. "LAN's immediate focus is on restructuring the Aires operation with the objective of implementing LAN's safety and service standards."

He adds: "Once this process is completed the Colombian operation will become known as LAN Colombia and we'll focus on implementing our low-cost model in the domestic passenger operation. We also see significant potential in the development of long-haul routes from Colombia and an integrated passenger and cargo operation."

LAN already has a cargo carrier in Colombia which it launched in 2009.

de la Fuente says Aires will be included in LAN's income statements starting with the first quarter of 2011. As of the fourth quarter of 2010 Aires was already included in LAN's balance sheet, accounting for $87 million in net liabilities and $94 million in goodwill.