The surge in new entrants to the Colombian market is over but major challenges remain. David Knibb reviews the progress of the five main players.

Nowadays Colombians seem naturally optimistic. The heady days of growth are still a fresh enough memory for few to be willing to predict their airlines are on the verge of shrinking. But the combined effect of less traffic and more regulation points in that direction.

In the first four years of this decade, Colombia's aviation sector grew quickly. President Cesar Gaviria was a champion of free markets. Under his influence AeroCivil approved new airlines, awarded new routes, and stopped policing fares. 'If you had ten pesos and I had a driver's license, we could start an airline,' quipped one aviation lawyer.

Alfonso Avila left the helm at SAM, Avianca's local subsidiary, scratched out an agreement on a hotel napkin with the head of a New York-based aircraft lessor, and formed AeroRepublica. Aces, traditionally a turboprop operator serving coffee plantations, leased jets and launched a Colombian route network with more destinations than any other airline. Little Aero Pesca became Intercontinental Colombia with a fleet of leased DC-9s. Avianca and SAM watched with dismay as their domestic semi-monopoly turned into a free-for-all.

Gustavo Lenis, who was then president of SAM and now heads Avianca, recalls, 'It was a dumb move. Competition is good, but new airlines need rules, capital, and infrastructure. Allowing new entrants without that was irresponsible.'

The proliferation ended when Ernesto Samper became Colombia's president in 1994. He was more cautious about liberalisation; his administration has approved no new airlines. But that change in government did not reverse the competitive forces already unleashed. New entrants kept adding capacity and cutting fares, creating fare wars. In 1995, there was the first cutback in local service when Aces dropped two unprofitable routes. Since then, the five domestic jet operators have been locked in a marketshare struggle.

Avianca now carries 42 per cent of all domestic passengers, more than twice its nearest rival, but down from 59 per cent in 1991. Lenis admits Avianca's share has been sliding ever since competition came to Colombia, but believes he has finally stopped the decline.

Aces has grabbed 18 per cent of all traffic with 180 daily flights - more than any other Colombian carrier. It flies Boeing 727s on trunk routes and Twin Otters on thin traditional routes. Aces will start replacing B727s with A320s on both domestic and overseas routes when the first of eight new aircraft arrive later this year. Aces may also shift more frequencies to trunk routes to attract business travellers. Peak hour slot limits at Bogotá's airport are its biggest constraint. They should ease when a second runway is completed next August, although AeroCivil has yet to start the necessary air navigation changes.

Aces president and CEO, Juan Emilio Posada, concedes that he is shifting the emphasis offshore, but says the change is not at the expense of domestic operations. 'We are simply growing faster internationally.'

AeroRepublica is hot on Aces' heels with 17 per cent of domestic traffic. During the first quarter of 1997 when traffic fell, AeroRepublica was the only Colombian airline to carry more passengers.

Alfonso Avila, Aero-Republica's president and CEO, credits two factors for this growth -- a focus on trunk routes and service innovations. 'We are Colombia's first new airline in a quarter of a century,' Avila says, 'and we wanted to offer a different approach.' That includes hot meals and tourist promotions. Avila says his initial strategy targeted the tourist market 'because it is more price sensitive.' AeroRepublica now hopes to change that by offering more frequencies and write-in-your-destination coupon tickets for business travellers.

While rivals have copied some of these innovations, AeroRepublica enjoys the cost advantage of operating without trade unions. It matches the fares of larger rivals, except on popular routes like Bogotá-Medellin, where it may discount a few dollars on a capacity-controlled basis.



Avianca's subsidiary, SAM, is Colombia's fourth carrier with 13 per cent of the traffic. Camilo Villegas, executive vice president and effectively SAM's general manager, claims its share would be higher but for a crisis last year with its RJ100 fleet when engine problems caused a plunge in dispatch reliability. Since then Allied Signal and AI(R) have come to the rescue with engine improvements and closer support. Reliability has climbed back to about 97 per cent though the goal is higher. Market share is recovering more slowly.

With only half the daily flights of Aces, Villegas wants to enlarge SAM's fleet, both at the top and bottom. He has bought four delivery positions -- one step short and many dollars less than firm orders or options -- for Boeing's 737-500. The first two could come next year, although Villegas continues to assess the A319. SAM is also talking with Dornier and Bombardier about replacing its Twin Otters. Villegas thinks turboprop routes have great potential and could be producing a fifth of SAM's revenue within six or seven years.

The final domestic jet operator is Intercontinental, which maintains 7 per cent of the market with fares about 10 per cent below its rivals. Several turboprop airlines carry the 3 per cent balance of passengers. The largest of these is militaryowned and operated Satena, which relieves commercial operators from the burden of missionary routes.

Each jet airline has some international routes. Avianca operates throughout the Americas and to Europe. Aces aspires to a similar but smaller role. The rest confine themselves to the regions.

The only international route AeroRepublica wants is Orlando. It plans to start lobbying later this year before US-Colombia talks open again next year. Otherwise AeroRepublica serves Aruba only in the high season and suspended flights to Cuba a year ago. It was too hard to compete against Cubana, complains Avila, because 'they don't know how much it costs.' Intercontinental flies to Cuba and Panama while SAM has turned its Cuba and Jamaica routes over to Avianca.

Colombia shares open skies with other members of the Andean Pact - Venezuela, Ecuador, Peru, and Bolivia - but none of the Colombian carriers see much growth opportunity there. Caracas traffic fell after Venezuela's economic crisis last year and the carriers are also deferring any other moves on Andean Pact routes. Complains AeroRepublica's Avila, 'there is too much supply now.'


Austerity measures

The same is now true in Colombia. Economic growth has nearly halved to a projected 3.5 per cent for this year. 'According to street jargon, if you're not growing fast you're in a recession,' says Aces' Posada, a former international banker. 'But Colombia is not in recession, its economy is simply decelerating.' That is partly due to austerity measures designed to cool 19 per cent annual inflation, but the immediate effect was a 12.5 per cent drop in first quarter air traffic. The result: another fare war.

Two other challenges face Colombian airlines. To comply with Icao standards and regain a Category I rating from the US Federal Aviation Administration, AeroCivil has required recertification of every Colombian airline. Predictably, those with the least capital and fastest growth have had the most problems. At least one has required extensions and is still not recertified.

This process has reversed parts of the integration of the operations of SAM/Avianca. SAM still outsources maintenance to Avianca and shares reservations, ground handling, and labour relations with its parent. But AeroCivil has required SAM to rehire its own safety, flight training, and flight operations directors.

'It is now almost impossible to start a new airline,' says an aviation lawyer, referring to the tighter standards now applied to all carriers. Everyone has their prediction about when the FAA might upgrade Colombia to the Category I status it heldbefore 1995. Reassessment could come as early as June; others say later this year. AeroCivil officials are optimistic about the outcome, but others grumble that a pure air safety issue has been linked by Washington to its broader political differences with Bogotá.


Stage 2 ban

Added to the safety requirements, Colombia has banned the import of more Stage 2 aircraft since January, cutting off what was the cheapest supply of equipment for several carriers. Airlines may continue flying Stage 2 fleets for now, but all aircraft must satisfy Stage 3 requirements by January 1, 2002. This poses a major challenge for some carriers.

Intercontinental and AeroRepublica are the only two not to have yet revealed how they will meet the new noise standards. 'We have not decided whether to refleet, hushkit, or reengine,' says AeroRepublica's Avila. 'We will operate all our DC-9s until 2002.'

If they can weather the current fall in traffic and satisfy AeroCivil's recertification rules, Colombia's airlines effectively have five years to figure out where they fit into what is now a 1.5 million annual passenger market.

'By June we will have all our aircraft operating again,' predicts SAM's Villegas. 'We will build up the regional routes with turboprops. We expect to finish the year with 17 per cent of the market. I'm optimistic.'

'I'm not scared,' echoes Aces' Posada. 'We have learned to do business in an underdeveloped country. Lack of stability is part of what we learned. By no means is Colombia a mature market. It could generate 10 million passengers a year.' Finally, Alfonso Avila adds: 'In the last four years we have passed two airlines and are now close to Aces. Five years from now AeroRepublica will be Colombia's second carrier.'

No one could ever accuse the Colombians of being pessimistic.

Source: Airline Business