Latin liberator

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DAVID KNIBB IN SANTIAGO

LanChile's Enrique Cueto has faced an uphill struggle in his mission to reform aviation in Latin America. But his zeal for finishing the job in a reluctant region remains undiminshed

Geography and politics have conspired to make a crusader out of Enrique Cueto. It is not a role he has sought; indeed, it is the part of being LanChile's chief executive he likes the least. But somebody has to do it, and he has taken to the task with typical gusto. He has certainly become Latin America's most vigorous advocate for liberalised aviation. For seven years he has been a voice in the wilderness - pounding away at sceptical neighbours on the need for closer co-operation, standardised regulation and regional open skies. Cueto has warned again and again that if the region's carriers fail to work together, they will be overwhelmed by mega-carriers from the north. Only now, as Latin aviation reels in the wake of 11 September, are others starting to join the refrain.

Cueto has led by example. He convinced Chile to become the first country in the region to sign an open skies bilateral with the USA, and LanChile was one of the first Latin airlines to align itself with a US carrier and to join a global alliance. Chile also set a precedent others continue to emulate by insisting on US antitrust immunity for the LanChile-American Airlines alliance before allowing open skies to take effect. LanChile is one of the few publicly traded Latin American carriers in the region, and is still the only one listed on the New York Stock Exchange. It has consistently won international service awards and has long been its region's most profitable airline.

Cueto can take much of the credit, but this success partly stems from LanChile's inherent advantages, as the company enjoys one of the most favorable environments of any Latin airline - notably because Chile has been South America's showcase for economic and political stability, despite occasional disruptions.

Chile's is a market-orientated economy, and the country has the region's largest middle class. Squeezed between the Andes and the Pacific Ocean, its long, pencil-thin shape has hampered the creation of ground-transport infrastructure, making the country a perfect candidate for aviation. Before the advent of domestic flights, many Chilean towns could only be reached by boat.

What is more, since the government allowed LanChile to take over rival carrier Ladeco in 1996, the carrier has faced only token competition on local routes. Aerocontinente Chile - its only domestic rival - claims less than 10% of the traffic and is currently under court supervision.

Despite these advantages, LanChile still needs regional liberalisation if it is to continue to thrive. Its domestic base is small - Chile's population is only 15.3 million. Therefore, in order to grow, the airline needs to combine traffic from some of the many countries it overflies between Santiago and North America. It is little wonder, then, that LanChile wants its Latin neighbours to grant it more traffic rights.

New markets

Cueto admits his lobbying for liberalisation is born of self-interest. "This market is so small, it is impossible to compete with the world if we don't increase the size of our airline. The only way to grow is with new markets," he says. "We don't want protection; we want market."

The view from Chile is much the same as from far-flung New Zealand or South Africa - the rest of the world is far away and the distant competitors are much bigger. To face them as equals requires building one's strength locally. Cueto feels compelled to construct a route network across Latin America so that he can gain and keep the respect of carriers - such as American Airlines, British Airways and Iberia - that fly in from overseas.

He puts the situation in this perspective: "Latin America has 5% of the world's traffic. Traffic within the region is about 2%. Of this, 1% is Brazil. So we seem willing to divide the other 1% between 12 countries, each with it's own airline? That's crazy."

Cueto may have selfish reasons for preaching liberalisation, but he does see it as a regional need. Every year, there are fewer Latin American aircraft flying within Latin America, he says. Too many airlines are too small to survive. They lack capital or access to capital. The list of casualties grows every year. Governments ask their air forces to operate civilian flights, a solution he sees as only short term. And the result, according to Cueto, is that Latin aviation grows weaker and foreign carriers extend control over the region.

He lays much of the blame on local air forces. Many Latin airlines, including LanChile, owe their origins to the military. When well-connected officers retire, Cueto says, they become civil aviation officials. Their policies reflect their nationalism.

"In Ecuador they say that they can't have Peruvian pilots because they fought a war with Peru. And in Peru they say that they don't want Ecuadorian pilots,'" Cueto says. "They are more concerned with who owns the airline than the issue of better air service for the country. We don't know Sony's owner, or the energy company, or the bank. But in the airline sector, the question is always who the owner is?" he complains.

Local resistance

According to Cueto, Argentina, Brazil and Venezuela are the worst offenders. Brazil is inward-looking and Venezuela has small, struggling airlines.

But Cueto reserves his strongest criticism for Argentina. At one time, any Argentinian airline could have foreign owners as long as the ownership was directed through a local company. But the government changed the law, limiting foreign ownership to Aerolineas Argentinas. LAPA, Argentina's second largest airline, went broke trying to compete with Aerolineas, mainly because the Spanish government, through SEPI, poured almost $2 billion into Aerolineas. "How could you compete against a small company that spends $2 billion? It's impossible," says Cueto. At a recent conference, Cueto said: "Argentina could be the home of a great international airline, but we are not going to move into the country unless the situation gets back to normality and predictability."

His message for the rest of Latin America has been to form reciprocal open skies agreements between all nations in the region. "We are small airlines operating in a highly fragmented environment in economic crisis. No Latin American carrier has the size or network to optimise equipment use," he warns.

"Fifteen Latin and Caribbean nations have open skies agreements with the USA, so why should they not have open skies with each other? We have asked our government to work for a common Latin American arena," Cueto adds.

But the Chilean government, LanChile and Cueto all face resistance here. Others see trading the right to carry third-country traffic with Chile as entirely one-sided, since Chile is at the tip of South America. New Zealand has often heard the same refrain: "Where can you fly beyond there except Antarctica?"

Doubtful neighbours also fear that LanChile's efficiency and strength would give it more scope to exploit open skies than their own weak carriers. Hence, to protect their own, they resist.

The biggest hurdle, however, may be less rational. Many South Americans resent Chile's relative success. As weary Argentinians enter their fourth year of recession, they have lost interest in Chilean advice. As for Peru, Chile's money may drive much of its economy, but that does not mean Peruvians will necessary listen to their southern neighbours.

Protection policy

For these reasons, Chile's transport minister Carlos Cruz told Cueto and a delegation of LanChile officials in October that he saw little hope for regional open skies. Naming Bolivia, Brazil and Venezuela specifically, Cruz said that other Latin nations were unwilling to adopt such a policy.

"What are they protecting?" Cueto asks. Better air service would help them develop, he says, while protecting local airlines that are failing anyway helps no one. But, as so often happens, this falls on deaf ears. So Cueto has been forced to take matters into his own hands, looking for openings wherever he can find them.

When AeroPeru failed, LanChile launched LanPeru. Last year, a rebellious Peruvian partner had to be replaced, but today LanPeru operates new Airbus A320s, is its country's second largest domestic carrier with 20% of the market, and flies to Miami and New York. LanChile supplies the Boeing 767s, LanPeru the pilots.

Lima has become a major LanChile hub. LanChile operates on its own from Lima to Los Angeles and New York. Under the Peru-Chile bilateral, it enjoys fifth freedoms to these destinations. On the popular Miami route, it flies its own aircraft using LanPeru's pilots and traffic rights. "That's the only way we can work in Latin America," says Cueto, with a hint of irony.

Ecuador has become a variation on this theme. When Ecuatoriana's aircraft were repossessed a year ago, LanChile offered its 767s for flights to the USA. At first LanChile flew charters, then wetleases, and now codeshares. It uses its own fifth freedoms from Guayaquil and Ecuatoriana's rights from Quito to Miami and New York.

"You don't get the best synergies this way. But we have to grow [through local partnerships] until we get the open market," Cueto explains. "We will use subsidiaries, such as LanPeru and now Ecuatoriana. As other airlines become weaker, we have more opportunity to arrange co-operation or integration."

Cueto has named Argentina, Bolivia and Uruguay as other places LanChile may try to enter in this way. But it requires timing and patience.

"Twenty-five years ago it was impossible to create a Chilean company in Peru. Today we have one. Ten years ago, Ecuador would not talk to us. Today weare helping them solve their aviation problem. Now in Colombia we are talking - we have some very good friends in Aces and Avianca. We can work togetherwith them."

Cargo is the other major way that Cueto has circumvented Latin America's blinkered approach. The proportion of its revenue derived from cargo has always marked LanChile out. "Thirty-two percent of our revenue comes from air cargo," Cueto says. "We have the biggest cargo operation in Latin America. The next largest, Varig, has half our volume. We don't have a huge competitor in the region. In 1999, we were 21st among cargo airlines in the world. We could become one of the 10 biggest," he adds.

Part of LanChile's success in cargo is due to Chile's emphasis on exports. But Cueto is quick to stress the difference in Latin attitudes toward passenger airlines, on the one hand, and air freight on the other. Airlines that carry passengers are national sovereignty symbols.

Of cargo carriers, he says: "We can do more because nobody cares if we have traffic rights from Miami. How do we fly from Miami to S‹o Paulo every night with a Boeing 747? We use ASBA [Aerolineas Brasileras] traffic rights, and then we fly to Colombia - and who cares?" he asks. "The passenger business has all the glamour. In cargo, we are growing stronger because nobody cares. That's the good news," he adds.

US success

With the recent opening of a $60 million cargo terminal in Miami, LanChile has become the biggest foreign carrier freight operation in the USA. It has separate coolers for fish, flowers and produce, which represent exports from six Latin countries. Not only does this underscore Cueto's belief in the future of cargo, but the difference in his attitude compared with those of others.

He recounts the visit to Santiago by Brazil's director general of civil aviation. The official wanted to see LanChile's cargo facilities because he could not understand how a small country could have a cargo company double the size of Brazil's biggest airline. "It's not here," Cueto explained. "Our terminal is in Miami."

LanChile is taking other steps to build on its cargo success. Cueto says that the airline has started delivering small products for internet customers. "We offer to deliver to his home in 24 hours - not only in Chile, but all over the region. It is not an important part of our business [yet], but we are mixing old economy with this new economy."

The company has also restructured so that cargo operations are now in a separate LanCargo division. "We did this to facilitate separate partnerships on the passenger and cargo side," Cueto explains. He predicts that within two to five years, one of the biggest air cargo companies in the world is likely to become interested in Latin America.

"They will prefer working with us. A strategic partner could give us important traffic to Latin America. They don't want to worry about passenger issues or oneworld, he says, arguing that they are only interested in who is to be their own Latin American partner.'"

If Cueto needs a separate partner for cargo, he is also pleased with his passenger partners in oneworld. American Airlines and LanChile carry 54% of all Chile-USA traffic. They codeshare between, beyond, and behind gateways. Cueto says membership in American's AAdvantage frequent-flyer programme gives LanChile "a huge advantage".

Oneworld, he adds, "helps us overcome Latin America's reputation for poor safety and bad service. It gives a small company like Lan exposure and credibility in other parts of the world."

Liberalisation

But as much as local partners, air cargo, and alliances help, Cueto inevitably returns to his continuing crusade to liberalise Latin aviation. "If other Latin governments don't open their markets", he warns, "in the end we are going to see more LanPerus and TACA Perus. It is impossible for so many airlines in Latin America to survive." He notes that about "85% of the airlines in this region were in the red even before 11 September, and that its aftermath will only "accelerate integration in Latin America".

Part of Cueto shares the view of Patricio Sepulveda, regional director for Latin America of the International Air Transport Association. Sepulveda says that 60% of the region's traffic is carried by only 10 Latin airlines or airline groups. And in five years, he predicts, that same traffic will be carried by only five.

"The foreign airlines have better traffic rights in the region than we do. Yet, within the region, because we are brothers, we only fight. Latin America has two, three, maybe four airlines that are doing a reasonably good job. But that's not enough. You need more size. We need to work together."

At last, others are starting to say the same thing. At the Ibero-American summit held last November in Lima, the heads of state from all Latin American countries, along with those of Spain and Portugal, decided to consider aviation's plight.

In the wake of 11 September, they have recognised that Latin aviation is in crisis. In a joint statement they acknowledged that air transport is "a strategic sector for the development and the integration of our nations". They directed Latin America's transport ministers to convene and to seek solutions. In December, those ministers are scheduled to meet in Bogotà. Discussion seems likely to centre on a joint proposal from IATA and the Association of Latin America International Airlines.

It suggests a common regulatory framework that would allow better aircraft and crew use; a joint air traffic control authority; relaxed foreign ownership rules, particularly for investors from inside the region; streamlined approval for codeshares, and more flexible traffic rights - as the first steps towards a common Latin American aviation market. How much of this will actually happen remains to be seen. But, finally, Latin America's once lone Liberator is no longer alone.