In a bizarre and controversial move, criminal authorities in Santiago have grounded AeroContinente Chile and accused it of laundering drug-trafficking money.

For years similar accusations have haunted AeroContinente Peru, which holds 49% of the Chilean airline, but earlier investigations cleared it. In this latest action, a Santiago court ordered the arrest of three senior airline executives and the seizure of AeroContinente's bank accounts, six Boeing 737s and one 767.ÊIt appointed a receiver to take control of all assets, forcing the airline to cancel flights within Chile and between Chile and Peru.

When Carlos Morales, executive director of AeroContinente Peru, flew to Santiago to confer with lawyers, he was forced to take refuge in the Peruvian embassy to avoid detention and questioning.

So far, AeroContinente has been convicted of nothing. It challenges the legality of the moves and has asked for a $1 billion indemnity from Chile's Government if it prevails. It has asked an appeals court in Chile for permission to keep flying pending its trial. In Peru, it wants officials to suspend LanChile's Santiago-Lima flights until those of AeroContinente are restored. Some high-ranking lawmakers in Chile have also questioned proceedings and called for an investigation, but the presidents of Chile and Peru have said they will not interfere with the judicial process.

Opinions are divided on the competitive effect of AeroContinente's grounding. It blames LanChile for inspiring the actions, but LanChile strongly denies this. LanChile had planned to complete its domestic restructuring over the next two months, but now that it has no rivals, Chile's anti-monopoly commission has told it to wait until it can study the competitive effects.

AeroContinente's low fares discouraged others from entering the market after Avant Airlines withdrew in March, some observers claim. Two potential start-ups have now applied for operating licences. Santiago has taken other steps to restore domestic competition. Civil aviation authorities have granted Bolivia's Lloyd Aereo Boliviano (LAB) six-month authority to carry domestic passengers on its flights between northern Chile and Santiago. Whatever the outcome of AeroContinente's case, Chile's action seems to have tainted the bid by AeroContinente Peru to buy Aerolineas Argentinas.

Source: Airline Business