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Aviation History
1999
1999 - 1423.PDF
NEWS ANALYSIS Partnership imperative Latin American carriers are searching for international partners and injections of capital to survive into the 21st century PAUL LEWIS/MIAMI FINANCIAL REFORM, reg ulatory liberalisation and growing competition are transforming the face of air transportation in Central and South America. As political barriers are lowered progressively, airlines from Mexico to Chile are searching for international partners and urgently needed infusions of capital to survive in die 21 st century. The need for far-reaching change was acknowledged at a re cent gathering of Latin American airline senior management in Miami. "Probably in 10 years, tfiere will be only a handful of air lines grouped in South America. It is going to be die only way to sur vive," predicts Frederico Bloch, chief executive of Grupo TACA. While there is clear consensus on the need for continent-wide con solidation, the pace and direction mat this takes is still debated. The issues centre on whether this will take the form of mergers or non equity alliances at a regional level, modelled on TACA in Central America, or globally. Colombian ACES chief execu tive Juan Emilio Posada says: "This is going to take place in a shape and form gready influenced by north bound equity alliances". Recent examples include Continental Airlines' purchase of a 49 % stake in COPA of Panama and American Airlines' acquisition of a 10% hold ing in Aerolineas Argentinas. Consolidation is driven by a growing need for additional capital from outside economically de pressed South American. "Airlines in Latin America run a very low cash balance as they count on banks for lines of credit, which I think is a dangerous way to run a business. We're all drawing from the same pool of capital " says David Cush, chief operating officer of Aerolineas. The Argentine carrier plans a $200 million recapitalisation and merger with Austral. Less fortu nate is AeroPeru, which is ground ed, and without aircraft, after a $62 million loss in the last year. The carrier claims to have halved its $174 million debt, but owners Delta Air Lines and Cintra of Mexico have decided to cut their losses and sell their 35% stakes for a "nominal value." Peru, in many regards, has been the model of reform since 1991. "In 10 years from now there will be only a handful of airlines grouped in South America''1 Lima has raised the ceiling on for eign ownership of local carriers from 49% to 70%. It was the first South American nation to sign an open-skies agree ment with die USA and was suc cessful in securing a Category 1 rat ing from the US Federal Aviation Administration's International Air line Safety Asses sment. All this begs the question of why AeroPeru failed to make the business fly. Recently appointed chief execu tive Jaan Albrecht pins the blame on a combination of chronic undercapitalisation, failure to reach a codeshare agreement with Delta, and "negative relations" with the Peruvian Government. The latter was soured by Lima's decision to grant cabotage rights to foreign carriers. "This is the first country to my knowledge in the world to do thus," notes Albrecht. Other Latin American countries have taken a more cautious ap proach to liberalising air services with the USA. A pending open- skies deal with Chile depends on US approval and anti-trust immu- \» _r*~'—=.. FZ£3 -t ass ... • ..-. R S 8 W K7S8HT -^ m .,.,.;..,,.„..,.:.,.. .,.;;,.. 1 ilifiiiiri1 ^^^^^^^0?S9^^^0^^ i^fcjiii P 'H1:EJ • - ^^^ peru & O - U(I-L «.I_J-I-. •• Bplft r jjh, ., Q |gH«M ' :••::.. : r MMtfs3S& • - :::.••:: :•.'.;;:•'; HHPP AeroPeru is grounded after a $62 million loss last year, although Peru in may respects has been a model of reform nity for LanChile's alliance with American. At the same time, Argentina is seeking a graduated implementation of open skies by 2003, fearing being swamped by competing US carriers. The US airline industry, in the wake of Asia's economic implosion, has been turning its attention increasingly to the Latin American air-transport market, which is fore cast to grow from 126 million pas sengers last year to 230 million by 2010. There has been a 21% ex pansion in overall US carrier cap acity to the region, led by Continental and Delta as diey chal lenge American's dominance. Larger Latin American carriers with dominant market share are quickly finding global-alliance homes, with Varig joining Star, VASP partnering Continental, and LanChile and Aerolineas courting oneworld. Attention is turning to finding a solution to die continent's smaller carriers' problem of estab lishing critical mass. Prerequisite ingredients for consolidation are in place, with the gradual lifting of ownership restrictions and the emergence of regional open-skies agreements within the Andean and Mercosur groups. "The more open countries are in terms of cabotage, the easier it will be for governments to approve such levels of consolida tion," says Posada. The stumbling block to a full merger in the short term are labour restrictions, suggests Bloch, who masterminded the equity integra tion of Aviateca of Guatemala, LACSA of Costa Rica, NICA of Nicaragua and TACA de Honduras into Grupo TACA. "We're probably going to see more structures along holding- company lines, because you can align economic interests perfectly and, at the same time, bvpass labour constraints. I think we're going to see it happen quicker than we think." • FLIGHT INTERNATIONAL 19 - 25 May 1999 35
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