After steering dramatic expansion and consolidation at TACA, Roberto Kriete kicked up a gear in 2009 when he engineered a merger with Avianca - linking with another of Latin America's well-known aviation families, the Efromovichs
The sound of a helicopter powering up blares from the mobile phone of Roberto Kriete. The long-time executive and owner of Central American airline grouping Grupo TACA politely excuses himself and, when he is ready to resume the interview, explains his unusual choice of ring tone. Kriete says aviation is in his blood, having dedicated 30 years to transforming TACA from a tiny flag carrier with three aircraft and an annual revenue stream of $35 million into an airline group that was generating $1 billion in revenues before its merger one year ago with Colombia's Avianca.
Kriete is also a private pilot. He spends his weekends flying a two-seat aerobatic aircraft and twice-weekly takes the controls of his helicopter, which is parked on the roof of TACA's headquarters in San Salvador.
When Avianca chief executive Fabio Vallegas is in town, Kriete sometimes takes Villegas out for lunch in the chopper. Having the two top executives of the new Avianca-TACA parent company flying together in a helicopter may seem risky, but for Kriete it is pure fun. As for work, Kriete cannot think of a better job than running an airline. "This is what I enjoy doing," he says. "The airline industry has been good to me."
Kriete recalls that when he first became involved in TACA in 1980, his family owned only a 20% stake, which was originally acquired by his grandfather Ricardo Kriete. Over the next three decades, the Krietes slowly grew their stake in TACA to 100% and established a consortium consisting eventually of eight carriers in seven countries. Kriete says he "has always been a supporter of consolidation" and knew that at some point it would make sense to pursue a tie-up with another Latin American airline group. In October 2009, Kiete chose German Efromovich as his partner. Efromovich owns Avianca, Avianca Brazil - formerly Ocean Air - and Ecuador's AeroGal.
The merger was completed at the end of January 2010, creating Latin America's fourth largest airline group after TAM, LAN and Gol. The new group says it generated more than $3 billion in revenues in 2010 and carried 17 million passengers across its network of 128 cities with a fleet of 116 aircraft. These figures exclude AeroGal and Avianca Brazil. For now, these fall under Efromovich's Synergy Aerospace, but they will eventually transfer to Avianca-TACA. "We've already had a year of integration. We are moving forward and we just joined the Star Alliance. It's going really, really well," says Kriete, who now serves as chairman of Avianca-TACA and is overseeing integration efforts with Villegas, who serves as chief executive of the new parent company.
Avianca and TACA have already identified $200 million in synergies, although Kriete expects even more once the integration process is completed in 2012. He says the merger is already generating "tons of synergies", but most of the $200 million will not be realised until the carriers merge their systems and processes.
Kriete says that bringing together reservations, passenger, accounting and revenue management systems are the tough parts of the integration. "We spent months and months just negotiating with the providers. We're pretty much at the end of the road, but implementing those systems will take 12 months at least, if not 18. You're going to get about half of the synergies in 2011 and about half of the synergies in 2012."
This year will see major milestones, including the merging of the Avianca and TACA frequent flier programmes, which combined have almost four million members. Avianca-TACA is also expected to select a single brand this year, although multiple operator certificates will be retained to meet regulatory requirements and it will be some time before the Avianca or TACA name disappears.
Kriete says that adopting a single brand is not worthwhile "unless all your passenger touch points and all your passenger perceptions are identical and you are really acting as a single carrier". He continues: "All your processes need to be merged - that's where the real detail of the integration is - and that probably won't be completed until 2012. It's really complicated, merging two entities like this. You need to dig deep; harmonise the entire company into a single entity and have one, well-designed and efficient process for everything. It's a good time to look at all the processes and really streamline."
Kriete's decision to pursue a merger with Avianca was validated last August, when rival LAN unveiled plans to merge with TAM. LAN and TAM, Latin America's two largest airline groups, expect to complete their merger in the second quarter of this year, creating a new parent company that will be more than triple the size of Avianca-TACA. But Kriete is not concerned about being outmuscled: he expects the LAN-TAM deal to be more challenging to complete.
Kriete points out that Avianca and TACA were able to complete their merger in only four months because "we had no overlap and zero ownership restrictions". He claims that LAN and TAM do not have this. "Look at the market shares between Brazil and Chile and Brazil and Argentina. Plus, you have ownership restrictions in Brazil that you didn't have in Colombia or Central America. The LAN-TAM deal depends very much on the government having the flexibility in accepting the [proposed ownership] structure." Kriete also warns that the deal still has to be approved.
Kriete and Villegas stress that Avianca-TACA is not looking to respond to the LAN-TAM merger through further acquisitions. Instead, Avianca-TACA is focused on its integration and preparing for the Star Alliance membership in early 2012.
Avianca-TACA believes Star will give it the virtual network to succeed on a global scale without a large, long-haul operation. "Of course, LAN and TAM is a huge company, but this isn't only about size," Villegas says. "Size is important, but it doesn't make you successful. I think we can be successful with our size and with our strategy." Villegas warns against growing for the sake of it: "You can destroy a lot of value with that objective. If there are opportunities that will reinforce what we are doing and add value to our company and our customers, we'd be open to discuss that. But we don't have an objective to be the largest. That is not our main purpose. We want to be a very good airline, a very efficient airline, a very competitive airline in terms of service and with very competitive financial results."
In recent years, Avianca has been consistently profitable, while TACA has been profitable or at worst broken even. They are confident of even higher profit margins once their integration is complete and could eventually pursue an initial public offering, an ambition Avianca has had since Synergy acquired the Colombian carrier in 2004.
The Efromovichs now own two-thirds of Avianca-TACA, while the Krietes own one-third, although the families have equal voting rights in the new parent company. German Efromovich and his brother Jose both sit on the Avianca-TACA board and are active in helping Kriete and Villegas map out a strategy for the new company. But while Kriete has more than 30 years of airline experience and a deep passion for aviation in general, the Efromovichs are relative newcomers. "They are not airline people, so they are very happy to have me here," Kriete says. "They are entrepreneurs; they are not airline managers."
In one of its first joint tasks, Avianca-TACA completed last year a new network plan that focuses future growth on three main hubs. San Salvador is being positioned as the group's main hub for connecting Latin America with North America, while Lima will cater more towards intra-Latin America traffic. Growth in Bogotá, the only hub in the group that now has widebodies, will be driven mainly by increased local demand, although some intra-Latin America connections will also be pursued.
Some have questioned this multi-hub strategy and Avianca-TACA's ability to compete against Panama's Copa, which has become the leader in intra-Latin America traffic by focusing growth on a single hub. Copa executives have repeatedly claimed that all three of Avianca-TACA's hubs are expected to remain constrained, while there will be plenty of room for further growth at Panama City following the completion of a major airport expansion project there later this year. Kriete is highly complimentary of Copa, saying its hub "is tremendous and has done wonders for Panama". But he sees an increasing role for El Salvador and is confident it will ultimately pursue long overdue expansion of its only international airport.
"I think the Copa organisation has done a wonderful job in persuading the [Panamanian] government that what is good for Copa is good for Panama and what is good for Panama is good for Copa. So they allow Copa to not only participate in the process of decision-making but in the decision making itself," Kriete says. He adds that in El Salvador "we haven't had that. We're trying to get the government of El Salvador to expand the airport. We're at a limit right now. They already have a master plan and I think they will go forward with it. It's a wholly owned subsidiary of the government, so they have the wherewithal and the cashflow to do it."
Kriete says now is the time to pursue expansion in San Salvador because traffic has just recovered to 2008 levels after dropping in 2009. In Bogota, airport expansion is already under way, but Kriete acknowledges that not enough is being done to resolve the bottleneck. "The problem we're seeing in Bogota is that the growth has been so fast that the minute they finish the terminal, it will be not enough already. It will be too little too late," Kriete says. "Right now, we're suffering the consequences. We've got a lot of delays, we've got a lot of waiting times for take-offs and gates. It's a typical congested airport."
As the president of Latin American airline association ALTA, Kriete is now leading a push to persuade the region's governments to increase their investment in aviation and tackle the growing infrastructure challenges. "They still feel aviation is something for the wealthy when it has really become a tremendous driver of progress," he explains.
"Aviation generates a tremendous amount of employment and commerce. The cost of aviation [flying in Latin America] has dropped over 40% in the last 30 years, so it's become much more affordable and we get treated almost as if we are tobacco and firearms with the level of taxation." He urges governments to re-invest their aviation income into the sector. "The infrastructure problem in Latin America is probably the biggest bottleneck for growth in the industry," he observes.
Kriete adds that most Latin American governments do not understand aviation and what a hub can do for a country. "Our challenge is to make sure they are aware what repercussions it has. It's about explaining to them how they shouldn't be killing the chicken for the golden egg."
While promoting airport expansion, ALTA and Kriete are also campaigning against unreasonably high airport charges. ALTA has long complained that airports in Latin America are abusing their monopoly powers and overcharging airlines. "What is the best business you can get into? It's a well-run airport. What is the second best business you can get into? It's a poorly run airport," Kriete jokes. So why, then, did he decide to get into the airline business rather than airports? Kriete responds: "I would be really, really bored running an airport. It's like running a shopping centre. It's nothing. It's just a piece of real estate. It's less complicated than running a hotel."
Kriete is very happy working long hours, putting together the new Avianca-TACA, while also finding the time to lead ALTA, his family's investment firm and a non-profit foundation. But he expects to eventually give in to his wife's request to slow down. "We're working really hard to integrate it into a single entity. That requires a lot of support from myself as ex-chief executive of TACA, a lot of support from Fabio and a lot of support from German. Once that phase is completed, I'll be 60 and I will look forward to doing other things," Kriete says. "I expect to still be very involved but just not as involved and not as active as I am right now."