LAN to acquire Colombia's Aires

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LAN has unveiled plans to acquire Colombian carrier Aires, only hours after it informed analysts of its plans to exercise its option to buy Colombian start-up AerOasis.

The Chile-based airline group in a statement issued late on 27 October says it has forged an agreement to acquire 99% of Aires for about $32.5 million. It says the deal is subject to regulatory approvals and due diligence, which it estimates will take 30 to 60 days.

Aires is currently the second largest carrier after Avianca in Colombia's fast-growing domestic market, operating to 27 Colombian cities with a fleet of nine Boeing 737-700s, 11 Bombardier Dash 8 Q200s and four Q400s. Aires also has a fledgling international network consisting of three destinations which it has been intending to grow dramatically.

LAN says Aires will become a new LAN affiliate carrier, joining the passenger carrier affiliates it already has in Argentina, Ecuador and Peru. LAN says if its pending merger with TAM is completed, Aires will also become part of the proposed LATAM Airlines Group.

LAN has been looking at entering the Colombian market for some time and in May unveiled plans to tie up with AerOasis, a proposed start-up which has been planning to launch services in Colombia since 2006. The two companies initially said the partnership only included LAN providing consulting services and helping AerOasis with the certification process.

But in late July LAN CFO Alejandro de la Fuente told analysts LAN was aiming to bring AerOasis into its airline group once the carrier launched operations. De la Fuente, during an analysts call earlier on 27 October to discuss third quarter earnings, said LAN was still intending to have AerOasis become part of LAN and explained this would be achieved by exercising an option it has to acquire AerOasis.

Given LAN is now planning to acquire an established carrier in Aires it would seems unlikely it will go forward and exercise its option to acquire AerOasis. In its statement announcing the Aires acquisition, LAN does not mention its option to buy AerOasis but says its agreement to buy Aires "has no impact on the technical support and service consultancy provided by LAN to Colombian airline AerOasis in the process of obtaining its operating permit issued by the Colombian Civil Aviation Authority".

During the 27 October analyst call, de la Fuente said AerOasis was expected to secure all the required regulatory approvals early next year and launch services in February with three Airbus A320s subleased from LAN. He said LAN's planned acquisition of AerOasis would occur just before its planned February launch and just after it is authorised to begin operations.

"We have an option to purchase the company. Once the regulatory approvals are received the idea is to acquire AerOasis." de la Fuente explained.

He added that once it purchased AerOasis, the company would become a LAN affiliate and it would later become part of the LatAm Airlines Group once the merger with TAM is completed.

De la Fuente said while AerOasis was planning to launch operations with three of LAN's A320s the plan was to increase its fleet to five aircraft "fast". He added that "we have plans to increase the operation to 10 aircraft in a short period".

LAN executives said AerOasis would initially operate only domestically following "more or less" a low-cost model but international flights would be added later. Aires currently operates its 737s under a low-cost model while its Q200s are operated under a more traditional regional model.

AerOasis is currently owned by Colombian investment firm Corso. Aires is privately owned by a group of Colombian families although it previously said it would look at some point for a public offering to help fund its ambitious expansion. LAN says it is acquiring 99% of Aires "through the purchase of its parent entities".

As there are not any foreign airline ownership restrictions in Colombia, LAN should not have any problems securing approval to acquire Aires or AerOasis.

LAN's foray into Colombia will increase competition between LAN and the recently established Avianca-TACA group. The two groups already compete head to head in Peru, where they both have affiliates.

Competition will also increase between LAN and Panama's Copa, which has a subsidiary in Colombia that was recently rebranded from Aero Republica to Copa Airlines Colombia. Aero Republica is the third largest carrier in Colombia, having recently been overtaken by fast-growing Aires.

Former Avianca president Juan Emilio Posada also is preparing to launch a new low-cost airline in Colombia in the third quarter of next year with backing from a major South American investment bank. EasyFly, a Colombian regional carrier which was launched in 2007 by former Aero Republica owner Alfonso Avila, also has been looking at entering domestic trunk routes following low-cost model.

In speaking to analysts earlier on 27 October, LAN executives acknowledged Colombia is a highly competitive market but pointed out it is also "very attractive" because it is growing so fast. In the first half of this year Colombia's domestic market grew 38% to 7.4 million passengers and its carriers expect growth to continue as low fares and fast economic growth generate new demand.

De la Fuente told analysts that while LAN has "very strong competitors" in Colombia its operation there will be very cost efficient. "The idea is to grow very fast in that market," he said.