Ecuador's President Rafael ­Correa is showing his economics background with a series of measures that are forcing local airlines to modernise and seek cross-border alliances.

November brought the first big policy changes when his government announced it would end a jet fuel subsidy that is costing $130 million a year, and replace it with a credit line to help local carriers upgrade their ageing fleets. Of Ecuador's three main airlines, only military-operated TAME has a relatively young fleet of Airbus and Embraer jets.

Both Aerogal and Icaro fly older Fokker F-28s, Boeing 737-200s and 727s. Unless they upgrade by March 2010, they will lose their fuel subsidies.

The National Finance Corporation is offering an initial credit line to airlines of $100 million for newer aircraft, backed by the Inter-American Development Bank and the Andean Development Corporation. So far Icaro is the only carrier to show any interest in this credit.

The next big change will come late in March when LAN Ecuador launches domestic flights. The government okayed these flights despite vigorous warnings from local carriers that LAN Ecuador could drive them out of business. The national aviation council has given LAN Ecuador the green light to operate 56 of the 77 domestic flights it sought.

Ecuador's local carriers are trying to adjust to these changes. After initially voicing its opposition, Icaro decided to support LAN's request, hoping for some alliance with LAN on those routes it will not operate.

TAME is also building cross-border ties. It joined TACA's ­loyalty programme last year and inked a codeshare pact with TACA in December.

Aerogal is more coy about its links to the Synergy Group. German Efromovich, owner and president of Synergy, claims his group has secured an option to buy up to 80% of Aerogal. The latter denies such a contract, but the two sides are talking and closer ties are being struck between Aerogal and Synergy's Colombian carrier Avianca.

Synergy has turned over management of Vipsa, its small Ecuador airline, to Aerogal Avianca and Aerogal have integrated ground handling and Avianca is transferring a leased Boeing 757 to Aerogal. Efromovich says this will allow Avianca and Aerogal to compete more effectively against LAN.

Source: Airline Business