For an airline chief who oversees Latin America’s biggest airline group, Enrique Cueto’s office on the 19th floor of a building in Santiago’s Las Condes neighbourhood is surprisingly modest. Aircraft models and family photographs line the cramped shelves behind his glass-topped desk, and the window looks out to the Araucano park across the street. The only indication of Cueto’s 30-year illustrious career in the airline industry is the wall beside his desk, adorned with framed newspaper articles and magazine covers bearing his photograph.
In those 30 years, the Latin American airline industry has gone through several rounds of consolidation. Carriers have merged, many have folded, and yet more new airlines have sprung up against a backdrop perpetually clouded by concerns over government regulation and infrastructure challenges. But few airlines have made the same sort of headlines that LAN and TAM did three years ago, when they announced their plans to merge to become LATAM Airlines Group.
With local affiliates in seven markets – Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay and Peru – LATAM is Latin America’s largest airline. The merged carrier posted $13.3 billion in revenues in 2012, placing it among the world’s top 20 airlines by revenue. But one would be wrong to assume that Cueto is resting on his laurels. Consolidation has its pains, as he would find out during the first year of LATAM, which closed its merger in June 2012.
Severe depreciation of the Brazilian real and sky-high fuel prices in Brazil were among some of the issues Cueto encountered head on in the first year of LATAM’s merged operations. "These issues were more difficult than we expected at the beginning," says Cueto. Other challenges that LATAM faced in Brazil included the continued slowness in sales of Europe-bound flights as well as competitive capacity mounted by US airlines to the South American country. "The results were below our expectations," Cueto says of the first year of operations in the Brazilian market.
When LAN and TAM merged, Cueto inherited a Brazilian carrier that was growing at about 10% a year, a rate that he knew was not sustainable as the market grappled with overcapacity. Cueto oversaw a series of actions to bring rationality back to the domestic Brazilian market, including significant capacity cuts. Available seat-kilometres were lowered by 1% in 2012, and they will go down by at least 7% this year. As a result, load factors went up to about 80% from a range of 60% to 65%. “We increased our RASK [revenue per available seat-kilometre] and now we feel really comfortable about how we are managing the domestic Brazil market which is around one-third of our ASKs,” says Cueto.
He reduced the frequency of TAM’s flights to Europe and bumped up flights to the USA and replaced the Airbus A330s on TAM’s international flights with Boeing 767s, which have lower operating costs. The 767s, configured with lie-flat seats in business class, also offer an improved product on these routes.
Aircraft and capacity aside, Cueto was confronted with the task of melding two different airline cultures together. "When we announced the merger, some part of the management team in TAM preferred to leave the company, they didn’t think it was a good idea," says Cueto. "And things happen. We had the same experience in LAN."
Changes soon followed, and Cueto says 80% of TAM’s management is new, with many executives hired from outside the carrier. He believes that TAM’s current team, a mix of experienced airline veterans and fresh blood from outside the industry, is the right formula the carrier needs to move forward. "With this new group of people, we feel happy. We really feel comfortable."
Now that LATAM has a firm grasp on the domestic Brazilian market, Cueto is looking to the next big development – a new terminal at Sao Paulo Guarulhos airport that could create the combined airline’s biggest hub besides Lima. The new terminal is expected to ease the airport’s trademark congestion, and presents a "big opportunity" for LATAM, Cueto believes. "For many years, the Guarulhos airport has been saturated. If you tried to create a hub there, you will realise it’s impossible."
But the new terminal, which is hoped to be ready before the 2014 World Cup, will help change that. "It is going to increase the number of operations per hour," says Cueto. "You have a huge amount of local traffic, and we will have the opportunity to connect to all the LAN affiliates in Argentina, Chile, Peru, Colombia and others. Plus, you have the domestic Brazilian traffic."
Being able to create a large hub at Sao Paulo will help put in place a vital piece of the puzzle in the integration of LAN and TAM’s networks. With a strong hub in Sao Paulo, LATAM will feed to it regional traffic from its LAN affiliates and from other cities in Brazil. This will help the airline group compete more effectively with foreign carriers, such as those in Europe.
"If you don’t have some feeding, some connectivity, some hub in that place, it’s impossible to compete with European carriers who are flying from their hub in London or Paris… We were flying from Rio to Paris, without an agreement with Air France. Those flights were difficult to sustain in the long term because you don’t have a strategic competitive advantage to do that," says Cueto.
Having a strong hub in Sao Paulo will also help make LATAM the top carrier that airlines outside the region would want to partner with, Cueto believes. Despite LATAM’s powerhouse status in Latin America, Cueto has no illusions about his airline’s position in the world. "We are not going to be the main player in long-haul operations," he says. "We prefer partnerships, to give passengers the best way to be in any part of the world in the best form."
The main point of the merger with LAN and TAM, he reiterates, is to create "a very strong airline in one continent". Cueto points out that the best way for a passenger travelling from say, Chile to China, is still through Europe. "We don’t have any advantage in this area… so our strength must be the intra-South American traffic," he says.
LATAM’s objective is intricately linked to its decision to group all of its airlines under Oneworld, announced in March. LAN was already in Oneworld before it merged with TAM, which was a Star Alliance airline. Conditions imposed upon the merger required LATAM to be in a different alliance from the other major Latin American airline, Avianca, which became a Star Alliance member in June 2012.
While LATAM had the option of being an airline unaffiliated with any alliance, Cueto says American Airlines’ membership in Oneworld sealed the deal. American has a hub in Miami, which is considered the traditional gateway to Latin America from the USA.
"By far, for the Spanish speaking countries, Miami is the main gateway for the Latin American people," says Cueto. "Who goes to Houston to connect? Miami has one name. American. So if you look at connecting traffic, distribution, and offering our passengers more destinations, Miami is the best place to do that."
For Cueto, it was "difficult to understand what happened" with the US Department of Justice’s challenge against the American Airlines-US Airways merger, but a settlement has since been reached. "If they merge with US Airways, we will have a conversation with them on that, and we will be very happy to co-operate and partner with them too," he says.
Despite the Oneworld affiliation, Cueto is not closing the door on partnering with airlines that are not in the alliance. LATAM has codeshare agreements with non-Oneworld airlines, such as Aeromexico and Alaska Airlines, and Cueto does not rule out more of such partnerships.
But while Cueto is open to partnering with other carriers, he remains certain of one thing – LATAM does not plan to bring another airline into its fold. “I think there will be more consolidation in the region,” says Cueto. “But we don’t plan to be a part of it.”
In his 30-year airline industry career, Cueto has often spoken out vocally against government intervention and protectionism in the aviation sector. While he says that certain governments in the region have made necessary changes in recent years, he believes there remains much work to do.
LATAM knows a thing or two about dealing with protectionist actions in the countries it operates in. Earlier this year, LAN Argentina was faced with the threat of eviction from a hangar it leases at the downtown Buenos Aires Aeroparque airport. Argentinian airport regulator ORSNA had told LAN to vacate the hangar within 10 days, despite an existing lease agreement which allows the carrier to remain until July 2023.
LAN Argentina has a 27% share of the country’s market and employs 2,780 staff in the country. Observers linked the eviction threat to individuals loyal to loss-making state-owned carrier Aerolineas Argentinas. The dispute prompted LATAM to issue a public statement vowing legal action, a move that departed from the usually diplomatic remarks the airline has made in past skirmishes with the Argentinian authorities.
Rationality on the part of the Argentinians looks to have prevailed, and LATAM says it is staying on in the hangar. Cueto points out that LAN Argentina received strong support in Buenos Aires, including from key politicians, the media and other opinion leaders.
He also singles out government regulations in the region that he believes make Latin American airlines less competitive than their counterparts in other parts of the world. For example, he says pilots in Brazil are required by law to fly fewer hours a year compared to pilots in other countries. "We think Brazil must have open skies with the world," says Cueto. "But when you say you are going to be open to the world, you have to be competitive at the same time. The competitiveness has not been moving."
What is perhaps most frustrating to Cueto, though, is Latin American governments’ wariness of joint ventures and codeshare agreements between airlines, which are common among airlines in other parts of the world. "For them [the governments], any consolidation in the region, any codesharing is in some way considered anti-competitive," Cueto laments.
"So this type of JV that you see between the Europeans, if you try to do that here, if you say, ‘We are going to do a JV,’ they will say, ‘No, no, you are crazy.’"
The world’s airlines are moving towards such joint ventures and partnerships to increase revenue, but Latin America has not caught up, he states. "We are behind the US and Europe when it comes to these antitrust issues. Their operating system is version 3.0, Chile is perhaps version 1.5, and in some places, it’s version 0," Cueto quips.
After 30 years in the industry, one would think that Cueto would have plenty of tips for an aspiring chief executive. Asked what he would say to someone who wants to lead an airline, Cueto pauses. His answer, like his office space, is surprisingly modest.
"The core of your success is the team that you build, and how you build a team with different skills, ways of thinking. Even with very different people, you can still have a clear objective and mission.
“That’s important. Latin America is Latin America. You have problems in Argentina, Colombia, Brazil. But at the same time you have a lot of opportunities, a lot of potential. And you need to be aware things could change very quickly in this part of the world. You need to be flexible."
The 54-year-old Cueto is not giving up the fight any time soon. He smiles wistfully when asked if he has thought about retirement plans. "I have a lot of work in the next two to three years," he says. "I would like to continue after that, but perhaps not in this current position."
Cueto’s family, who own a stake in LATAM, has interests in other industries. But he says he and his brother Ignacio (chief executive of LAN) cannot imagine leaving the airline business. "We dedicate most of our time to this, and we are happy to do only this. No other industry can compare, there are so many issues to challenge us, especially in this part of the world. But we are happy."