Juan Emilio Posada is overseeing the integration of three airlines that may become a Latin American model

Midway through its integration, the Summa alliance represents the biggest voluntary consolidation of Latin American airlines in modern history. And if recent events are any sign, it may become the model for several more.

Juan Emilio Posada never dreamed he would pilot such a pioneering project, but the forces driving consolidation in Latin American aviation are like the tide no one can stop. And, with his characteristic attention and precision, Posada is converting Colombia's crippled carriers - Avianca, Aces and SAM - into Latin America's sixth largest airline, and even more notably, into one that looks likely to make a profit. And just as he conferred with Robert Milton about Air Canada's takeover of Canadian Airlines, Posada expects management teams from Varig and TAM to beat a path to his door.

Airline mergers are never routine. Each must confront its own demons. In Summa's case, it took two tries to gain government approval and Colombia's AeroCivil still has not approved a full merger. Despite a nearly complete operational integration, Summa remains only an alliance. As Posada told the Airline Business Network 2003 conference at Fort Lauderdale last month: "We are still three airlines."

Summa formally started up on 20 May 2002, but four years of talks and work preceded it. The biggest step was the realisation that things could not go on as they were. Avianca, the world's second oldest airline, and its subsidiary, SAM, were losing money. Age brings distinction, but as Posada recalls: "Years and years of [labour] negotiations can pile up benefits that become aberrations in the modern world."

Mounting losses

Schedule reliability and reputations were slipping. Beer maker Valores Bavaria, Avianca's major shareholder, kept pumping money into the airline as losses mounted. American Airlines backed away from a proposed alliance. After Continental Airlines reviewed the books and also backed away, the brewers began serious talks with the coffee growers who owned rival Aces.

Aces, Colombia's number two airline, was a third of Avianca's size but better off. According to Posada, who was then Aces president, its problem was not debt but "the challenge of expanding into international markets". Aces also was having trouble coaxing a US carrier into an alliance. Continental had already stepped back.

Delta Air Lines agreed to talk, but also lacked enthusiasm. Posada saw nothing on the horizon but black clouds, in the form of more devalued pesos needed to buy increasingly expensive fuel and aircraft priced in US dollars, and more US airlines with stronger balance sheets, networks, and loyalty plans, carrying more of the Colombia-USA traffic essential to the success of Aces. Without an offshore partner or a way to close the gap between peso revenue and dollar costs, he joined the talks with Avianca about finding some way to join forces. This was a year before the terrorist attacks of 11 September 2001.

Avianca and Aces announced early in 2001 their plan to form a third company to own and oversee them both. But it would take another year before Bogota approved it and the parties had completed the steps needed for it to take effect. By then, Avianca had lost another $150 million. Bogota's officials and Avianca's creditors were the two biggest obstacles to the Summa plan. Colombia's national competition watchdog, the Superintendency of Industry and Commerce, reviewed the plan and rejected it. The agency acknowledged the need of Colombia's airlines to confront big foreign carriers, but found the likely loss of domestic competition too high. Merger denied.

Lawyers then argued that mergers by airlines or banks in Colombia were not the Superintendency's responsibility. Other laws, they claimed, left those decisions to the regulators of airlines and banks. The USA takes a middle position on the same question, giving the Departments of Transportation and Justice concurrent authority over most airline competition issues. Summa's lawyers won the argument, and its case moved from the Superintendency to AeroCivil, Colombia's airline regulator. After a new review, AeroCivil approved the integration of the three airlines. The fact that two sets of regulators could reach the opposite result brought some grumbling about foul play, but it is not a result that surprises many lawyers.

The other big obstacle to integration was Avianca's creditors. Avianca had to clean up its balance sheet before integration could start. The coffee growers were not prepared to take on Avianca's debt. It was indeed a dark day on 11 September 2001, but it may have made Avianca's debt settlement process easier because the global aviation crisis sparked by the terrorist attacks forced creditors and lessors to be more flexible. Avianca's $46 million recapitalisation certainly did not hurt. When that was completed last April, Summa was formally launched on 20 May.

Operational integration, once started, moved quickly. McKinsey & Co, integration advisors to Air New Zealand-Ansett and Air Canada-Canadian, had been working with Summa for a year before its launch. When the light turned green, everything was already in place to co-ordinate schedules, reallocate routes, start joint purchasing, and merge frequent flyer plans. Tri-coloured butterflies, Summa's soft-sell logo, started to appear on joint marketing, ticket jackets, and jet tails - along with individual airline logos.


"Planning, marketing, scheduling, network, and finance have now been integrated," says Posada. The main areas that have not are those where AeroCivil requires continued separateness. Summa's three airlines no longer have their own chief executive officers, but a corporate representative. All executive authority rests with Summa. "We still have to meet all the ICAO requirements for three airlines," Posada explains. "That includes having enough management capacity to run certain technical operations in each." He chaffs under some of these requirements. Even though flight procedures have been integrated, for example, "we have three directors of pilot training. We could have one."

Labour relations are the only area of operations still segregated. Avianca and SAM retain separate labour contracts with the unions that represent their pilots, cabin crew, and engineers. Aces was non-union. Avianca and SAM's two-year contracts expire at different times. For now, Posada has no plan to change that pattern. "We will continue to negotiate different agreements with the different unions at different times. We will not try to synchronise them," he says.

As a practical matter, he expects labour terms to move toward uniformity. The only place Posada is pushing for change is on work rules. He does not blame Avianca for these rules; they are simply "the extra baggage that comes with years". But he adds: "Some of these rules are so rigid that they do substantially affect our competitiveness," he adds.

Labour suicide

In typical style, Posada hopes to reason with the unions about these rules. "We are going to try to sit down and convince those unions that it does not give them any true benefits because they are hampering the opportunity to grow. It is labour suicide to continue holding on to benefits that are squeezing your level of success." Would he transfer routes to non-union Aces if Avianca unions refuse to budge? That would certainly not be his style. Yet, Posada continues: "If it comes to a crisis, you would have to use whatever solution you can find, and that would be one of them."

By maintaining separate labour contracts for each airline, Posada is delaying but probably not avoiding completely the headaches faced by Air Canada, for one, over merging seniority lists and contract terms for staff coming from separate airline cultures. Posada concedes that this cultural, as distinct from operational integration, could be harder. "I have been told that it will take about three years," he says. Summa has hired Amauta, a cultural integration consultancy, to help with what Posada calls this campaign for "hearts and minds".

He says Summa has made great strides towards financial soundness. In the year before Summa's launch, the three airlines had a combined loss of $156 million. After seven months of operational merger, they expect to show a combined operating loss for 2002 of something under $44 million. That estimate may end up "somewhat lower", Posada admits, because fuel costs have continued to rise while the peso falls.

By Summa's second anniversary Posada aims to reach "the point of equilibrium", meaning break-even. After that, he foresees positive results. With 2002 sales of $700 million, Posada does not expect to revisit the bad old days of repeated capital calls. "Our five-year plan does not consider any further capitalisations."

The last big issue in Summa's integration is the question of whether to stop at an alliance and retain the identity and legal structure of three airlines, or to merge them formally into one. Posada seems in no hurry to confront this issue, and he offers many reasons for deferring it: the original shareholder agreement between the three carriers did not address this issue; their separate brands are well known, they entered the alliance with different backgrounds; and AeroCivil is worried about oversight. The question of merger, Posada insists, is somewhere "down the road".

In the meantime, he has more pressing concerns. One is the issue of domestic competition. Before it approved Summa's integration plan, AeroCivil required it to propose a code of competitive conduct. Without knowing what minimum standards AeroCivil would accept, Summa was forced to set them at what it guessed would be a high enough level. In that way, it was an exercise in self-regulation. "That was a very clever move by the government," Posada acknowledges. "Once you propose your own code of conduct you might as well meet it." AeroCivil accepted Summa's code, which addresses such questions as making surplus resources available for lease to competitors at market prices, returning unused airport facilities such as ticket counters or gates, and so on.

AeroRepublica, now Colombia's second largest carrier and openly critical of the alliance, demanded last October that AeroCivil rescind approval of the Summa alliance on the grounds that Summa had violated its code of conduct. From the outset, Colombian law does not make size alone illegal, but it forbids abuse of a dominant position. AeroRepublica said Summa was dumping capacity on some domestic routes to ward off rivals, while ignoring the needs of other routes.

So far, AeroCivil has taken no action, but the complaint demonstrates Summa's vulnerability. Despite AeroRepublica's growth in the past year, Summa still controls 62% of the domestic and 50% of its international markets. Like Air Canada, LanChile, or Qantas Airways, with similar market dominance in their own countries, constant scrutiny by rivals and competition watchdogs comes with the territory. "We have a team of people making sure that we comply with our code of conduct," says Posada.

Cash crunch

But Posada's biggest concern is cash. Colombian domestic traffic grew 2% last year, but the Colombia-USA market shrank 9%. This is partly an 11 September aftershock, but Colombia's economy also has close links to that of Venezuela, which has imploded over the past year. The bigger cash problem is not revenue or the 40% hike in fuel prices, but the gap that remains in Summa's foreign exchange ratio. Around 65% of its costs are in dollars, but only 45% of its revenue are dollars. Summa pays dearly for that gap. The 30% drop in Colombia's peso during the past 12 months has cost it $30 million.

Posada is seeking ways to cut costs and raise efficiency, but he can only do so much. Boosting hard currency revenue is easier said than done. Entering an extensive codeshare alliance with Delta signals a good start, but Posada holds little hope that Summa alliances with Delta and Air France will bring it membership in the SkyTeam global group anytime soon.

"Global alliances are very expensive because of the IT commonality requirement," he warned conference delegates at Network 2003. Until they develop some middle ground, "we don't see enough benefit to justify that investment", he says. The benefit would be some incremental increase in hard currency revenue, but how much more would it bring over that which Summa can generate with the bilateral pacts it now has with Delta and Air France, and others it hopes to nurture? Posada reveals that Summa has also started talks with Continental. Carriers are showing more interest in Summa than they did in its individual airlines.

Horizontal alliances

The foreign exchange imbalance that plagues Summa, repeated in varying degrees throughout Latin America, is the stone around the neck of every Spanish- or Portuguese- speaking airline executive in the Americas. Imagine the challenge facing an airline in Argentina, to take a worst example, when the local currency in the past year fell 200%? The only answer, says Bobby Booth, chairman of the Latin-focused consultancy AvGroup, is for more Latin American airlines to enter more horizontal alliances. Booth has been beating the drum for "the holding company solution".

"Colombia's Allianza Summa," adds Mike Miller, president of Miller Air Group consultancy, "is a good bellwether for the region - consolidation based on national and international interests of the country." These mergers are about survival, Miller observes, "as the market is as weak as it's ever been."

Each gives his own reasons, but Posada and Booth both see horizontal alliances - equity alliances between Latin airlines - as preferable to so-called vertical alliances between Latin and US carriers. "Vertical mergers with large foreign airlines are more likely to relegate the Latin American partner to a secondary role," Booth warns. He concedes that the Copa-Continental equity alliance is an exception to this rule, but only "because Continental doesn't interfere in Panama".

Posada cites Aeromexico-Delta and Mexicana-United as an illustration of what can go wrong with vertical deals. "Those alliances are mainly commercial," he notes. "There is no cross-ownership. There are few operational or fleet synergies. So economies of scale are not realised." That, says Booth, is what Latin mergers are all about; "economies of scale, cost reductions, and revenue enhancement".

Consolidation has become a way of life - and death - for Latin airlines. The ghosts of Transbrasil, AeroPeru and Viasa serve as reminders of what happens to those who fail to adapt. Grupo TACA and LanChile have shown the way in forming cross-border partnerships. Aerolineas Argentinas plans to copy that model. Argentina's Lapa and Bolivia's AeroSur have launched their own cross-border group - Alliance of the South.

The Summa model is being closely watched by TAM and Varig, Venezuela's Aeropostal, Avensa and Santa Barbara, and perhaps even Aerolineas and its domestic rivals. The price is a trade-off between domestic and international competition, as demonstrated by the initial denial of Summa's request and in Mexico's decision - still unenforced - to split Cintra. But odds are high that Summa's model is one that others in Latin America will still chose to follow.

Top man

Juan Emilio Posada is always near the top of any list when anyone mentions the "new breed" of Latin American airline leaders.

He earned his MBA at New York's Pace University and then studied international financial law at the UK's London's School of Economics.

He entered banking and became international vice-president for Banco Cafetero in New York, Miami and Bogota. Posada was working for the Royal Dutch-Shell group in the Netherlands when Aces, the coffee growers' airline of Colombia, invited him to lead the carrier's modernisation in 1993. Posada raised capital, upgraded its fleet, grew the airline domestically and pushed for international expansion.

When the Summa alliance between Avianca, Aces, and Sam, was set up Avianca was bigger, but the shareholders picked Posada to pilot the new alliance. He is now president of the management services company called Allianza Summa.

For the past two years Posada has also presided over Latin America's association of international airlines AITAL. Since 1999 he has been a member of the board of governors of the International Air Transport Association.

Source: Airline Business