New life for Aerolineas Argentinas?

Washington DC
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Aerolineas Argentinas quietly began a new chapter in its long and troubled history on 14 March. Overnight the carrier shifted its regional international operation from Ezeiza, which has been Buenos Aires' main international airport since opening in the 1940s, to Aeroparque Jorge Newberry in the city centre. Moving 160 weekly flights may seem rather minor, but for Aerolineas they represent the most important component of a new strategy designed to transform the flag carrier.

The new strategy, based on recommendations from international management consulting firm Oliver Wyman, focuses on building a stronger and larger regional operation. As part of the first phase, Aerolineas plans to grow domestic capacity in 2010 by 40% and regional international capacity by 90%. This will primarily be achieved through additional frequencies to key business destinations such as Asuncion, Santiago and Montevideo.

The carrier's new executive team and Oliver Wyman consultants are confident this additional capacity can be absorbed, given how underserved the Buenos Aires market is compared with other large Latin American cities. "The main recommendation was to grow as much and as fast as possible," says Aerolineas chief commercial officer Juan Pablo Lafosse. "There's a huge opportunity here and we should take it." Oliver Wyman partner Scot Hornick says expansion in faraway continents would be more "glamorous", but the most attractive opportunities for Aerolineas are within Latin America.

 aerolineas baires aviaton photography
©Baires Aviation Photography 
This is not necessarily a new strategy given the focus Copa and LAN have placed on intra-Latin American traffic in pursuing their rapid and highly profitable expansions. But Aerolineas, which has seen its traffic shrink for five consecutive years, has clearly missed out in exploiting the region's rapid economic growth. "There is some aspect of playing catch up," says Vikram Krishnan, Oliver Wyman associate partner and Aerolineas project manager.

Lafosse says Aerolineas decided to build on Oliver Wyman's recommendation of focusing on high-yield regional opportunities by pursuing an expansion at Aeroparque. He explains that focusing on Aeroparque "gives us quite a competitive advantage in terms of the connections with the domestic destinations and the regional routes". Aerolineas now has 626 weekly departures at Aeroparque compared with 52 at Ezeiza.

The move instantly improved the airline's competitive position in the fast-growing market connecting Argentina's secondary cities with South America's main business centres. For city pairs such as Sao Paulo-Cordoba, Aerolineas previously only offered connections that required switching airports in Buenos Aires. Rival carriers from neighbouring countries have been able to exploit this inconvenience by opening routes to secondary Argentinean cities in recent years. In fact, further expansion of Pluna's Argentinean network was blocked last year by the country's government, which viewed the Uruguayan carrier as stealing Aerolineas' traffic between regional cities in Argentina and Brazil.

But more crucially, Aeroparque is the preferred airport for business travellers heading to and from Buenos Aires. Krishnan calls the Aeroparque expansion "a yield play", pointing out that "it's an immensely convenient airport". Previously the airport was only open to domestic and Uruguayan services.

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Lafosse says there were more than enough unused slots at Aeroparque to accommodate the Aerolineas expansion at the airport, as well as new services by foreign carriers. In January, Aerolineas secured permission from the government to launch services from Aeroparque to Brazil, Chile and Paraguay. Foreign carriers have since lodged similar applications. "The only thing we did was request slots and request permission to fly the regional flights. Other carriers made their requests after we had been given our slots and after we had been given the permission. The government is analysing the other requests, but it has nothing to do with Aerolineas," Lafosse says.

The government has indicated it will decide on applications from LAN, TAM and Gol in April or May. All three carriers are expected to be authorised to operate international flights to Aeroparque.

Aeroparque-ing

Lafosse adds the only limitation at Aeroparque is parking spots, which has forced Aerolineas to station several aircraft elsewhere overnight and fly them into Buenos Aires in the early morning. However, there is enough space at Aeroparque for Aerolineas to expand its maintenance facility. Lafosse says Aerolineas has a "strong investment plan" to upgrade its maintenance capabilities at both Aeroparque and Ezeiza, as it looks to bring more maintenance checks in-house.

Maintenance was one of several areas for potential cost and efficiency improvement identified by Oliver Wyman, which had a team of six to eight consultants on the ground in Buenos Aires for a 10-week period in the fourth quarter of last year. The firm delivered its final report to Aerolineas in January. Hornick says, given the staffing levels at the maintenance operation, "there should be more accomplished in-house". He adds changes in exchange rates have also made in-sourcing a more attractive option, compared with outsourcing some heavy checks to Brazil.

Oliver Wyman also identified potential cost savings from fleet rationalisation, aircraft scheduling, catering, ground handling and IT. On IT, Lafosse says Aerolineas is planning "a whole revolution" of its technology, but he acknowledges this will take "at least two to two and a half years" to complete. Aerolineas has begun by seeking bids for new inventory and passenger service systems. Lafosse says the carrier has not yet decided if it will switch reservation platforms and for now is trying to re-negotiate its contract with Sabre. The firm also made suggestions on how Aerolineas can improve its relationship with Aeropuertos Argentina 2000, a private company which operates most of the country's airports.

"They did an analysis of most Aerolineas departments. They have given us recommendations in most areas, focusing on the biggest opportunities in terms of revenue and cost," Lafosse says. "It's quite complex."

Job Cut Caution

Hornick says the government asked Oliver Wyman to identify opportunities for improving cost effectiveness without reducing head count. The government, which has been keen to improve the airline's labour relations after years of strife and frequent strikes, was not interested in adopting a pure low-cost carrier model. While low-cost carriers have changed the competitive landscape in Brazil, Mexico and more recently Colombia, Aerolineas, at least for now, does not have to worry about the prospect of low-cost competition in its home market due to the regulatory environment. "It seems like a less likely place for spawning low-cost carriers," Hornick says.

Oliver Wyman also identified potential operational improvements. Aerolineas had already improved its on-time performance from 50% to 80% before the firm arrived last October, possibly thanks to the improved management-employee relationship after Mariano Recalde took over as chief executive in July. Krishnan says while "overall the on-time performance was already trending north" the team was able to identify areas where operations could be further improved, in particular on long-haul operations.

Lafosse is confident improved reliability will help Aerolineas win back the passengers lost while it was in private hands. The government and management team believe Spanish tour company Marsans, which owned Aerolineas from 2001 until it was renationalised in late 2008, allowed the airline to languish and the operation to degrade.

During the second half of Marsans' tenure, Aerolineas steadily lost market share on international routes as it dropped routes and struggled operationally. Domestically Aerolineas lost market share to LAN Argentina, which since launching in 2005 has been able to quickly expand and win over passengers by offering a more reliable service.

Broken Model

"Oliver Wyman's recommendation was to grow and improve service and operational reliability," Lafosse says. "That's mainly where we are focusing now. The problem was for many years the Aerolineas operation was awful and that had allowed mainly other means of transport to grow a lot but not the airline business. There was not really any reliability on the flights in the past years. We have now gone back to a reliable operation and our customer numbers are growing a lot."

Aerolineas has already recorded a 30% increase in passenger traffic for the first two months of 2010, including a 51% increase on international routes within South America. January revenues were also up 28% year-on-year, from $85 million to $109 million.

On the revenue side, the new strategy focuses on both winning back passengers and forging new alliances. Aerolineas, in recent years, has not had any codeshares. Even interlines have been limited to a few direct spot agreements with other carriers because Aerolineas has been excluded from the IATA clearing house since 2001 over unpaid debts.

Hornick says Aerolineas is now on track to re-enter the clearing system. "We think that's quite a significant enabler to its international strategy," he says, adding it makes sense to not rely entirely on the carrier's own metal to expand its network. Lafosse says: "We are now in the process of negotiating with 10 international carriers" towards new codeshare and interline agreements. Domestic partnerships are also being analysed.

Aerolineas has also scaled back its plans to launch several new long-haul destinations including Havana, Puerto Plata and Orlando. These leisure destinations were part of an ambitious short- to medium-term expansion which was laid down in a pre-Oliver Wyman business plan prepared after Lafosse and chief financial officer Axcel Kicillof joined Aerolineas in September. Oliver Wyman advised the carrier to focus more on higher-yield business destinations within narrowbody range. Launching long-haul leisure routes is simply too risky and did not make sense given the opportunities that existed closer to home.

Long-haul routes also have become harder to support as they now have to rely almost entirely on origin and destination traffic. Aerolineas ceased operating domestic connecting services at Ezeiza in March and there are no longer connections to neighbouring countries. Lafosse explains there was more value in cleaning up the "mess" on domestic to regional international connections. "We had to choose and now we have almost all our operation at Aeroparque," he says.

While Ezeiza now only accounts for 8% of the airline's Buenos Aires departures, Aerolineas points out 47% of its ASKs are still generated by its Ezeiza operation. As a result Aerolineas "is still heavily invested in Ezeiza as a revenue generator". Lafosse says Aerolineas remains committed to retaining all six of its current long-haul destinations - Miami, Madrid, Barcelona, Rome, Auckland and Sydney. Only Miami and Madrid are served daily, but he says: "In 2011 and 2012 we'll increase our operation in Rome and Barcelona."

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Lafosse says the resumption of services to three important business destinations - Mexico City, London and New York - still stand in the revised business plan. Aerolineas now aims to launch service to Mexico City, with the flight potentially continuing to Cancun, in the second half of this year. London and New York are to be launched in 2011. The expansion of the long-haul network will be made possible by growing the carrier's widebody fleet from seven to 15 aircraft. Growth in the narrowbody fleet is even more spectacular as it is roughly doubled to 60 aircraft.

Aerolineas expects the network and fleet expansion will drive a more than two-fold increase in revenues over the next five years, reaching over $2 billion by 2015. Lafosse says the new business plan envisions the carrier generating $1.1 billion in revenues in 2010, a figure it last reached in 2007. Aerolineas' revenues shrunk to only $820 million last year as capacity was 8% down system-wide.

Lafosse says the carrier's new business plan also paves the way for a return to profitability in 2011. Aerolineas, which early in 2009 was bleeding about $1.5 million per day, has already succeeded in moderating losses.

The new management is not shy to admit there is still a lot to be done before the transformation is deemed complete. Aerolineas, over the years, has had many unsuccessful restructurings, led by several different executive teams with input from a wide variety of consults. But the carrier is confident this time will be different. Lafosse emphasises that "all the know-how and best practices of the consultancy has become part of the company".

Aerolineas is now analysing how to follow-up on several Oliver Wyman recommendations. Lafosse says Aerolineas is "not sure yet" if the firm will be hired to help implement further improvements, as it is analysing a mix of in-house and external options. But Hornick adds: "We're certainly hoping to work with them again. We're optimistic."