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Allied survival

Success in Latin America means finding a way around the region's obstacles to growth by reaching out across borders

The facts speak for themselves. Half of Latin America's airlines are technically bankrupt, around 70% are losing money and attrition is slowly consolidating the region's industry into a handful of airlines. Nearly all of these survive because of cross-border equity alliances.

Equity alliances are not unique to Latin America. More famous are those of SAS or indeed the KLM merger with Air France. But the Latin model has evolved a character all its own.

The typical Latin alliance starts with a dominant airline in one country taking a stake in carriers elsewhere in Latin America - either existing airlines or those created for that specific purpose. These are then gradually integrated through codeshares, wet leases, branding and centralised management, until the emerging group eventually assumes the character of a single, cross-border airline. It is a uniquely Latin American process.

The evolution of this model started when Federico Bloch took the controls at TACA International, flag carrier of Central America's tiniest nation - El Salvador. In 1992, TACA competed with five other small airlines in the seven countries that comprise Central America.

Bloch, who was killed in April this year, had a clear vision for what he and chairman Roberto Kriete hoped to achieve when they first embarked on the strategy of buying equity in its neighbours. "Our aim was to form a consortium of airlines. It was basically a decision that Roberto Kriete and I made that, in order for us to grow, we needed to expand beyond our borders," as Bloch explained four years ago. "We needed a critical mass in order to be competitive. We knew no small airline was going to survive in the end in Latin America."

Through the mid-1990s, TACA International accumulated stakes, ranging from 10% to 49%, in Guatemala's Aviataca, Costa Rica's Lacsa, Nicaragua's NICA and Sahsa in Honduras. Panama's COPA also joined the group but then left. Once the integration of these carriers started, they called themselves "the American Central Corporation". It was not a true corporation but they were searching for a common brand. That came about in 1997 when they agreed to what Bloch called the "Grupo TACA commercial umbrella".

Bloch was one of the so-called "new breed" of Latin American airline executives. His contemporaries - Rolim Amaro at Brazil's TAM and Enrique Cueto at LanChile - shared his views on the need for cross-border alliances.

At the same time that Grupo TACA was choosing a name, Amaro changed TAM's structure, creating a holding company called TAM and splitting operations between subsidiaries TAM Regionais (domestic) and TAM Meridionais (international). Then it bought management control of Paraguay's LAPSA and changed its name to TAM Mercosur. The renaming of LAPSA towards the end of 1997 was widely seen as a signal of TAM's desire to create a multinational flag carrier.

LanChile's opening move

LanChile's Cueto waited until AeroPeru collapsed before his first venture into cross-border alliances. Exploiting the vacuum left by AeroPeru, LanChile found a Peruvian partner, retained 49% and launched LanPeru in 1999. Within months it gained international routes, thanks to jets wet-leased from LanChile. The success of LanPeru encouraged Cueto to seek similar opportunities elsewhere.

TAM did not pursue further cross-border ties, largely because of Brazil's economic nosedive. Whatever further expansion Amaro may have planned was cut short by the helicopter accident that killed him in 2001.

TACA's only addition after its initial formation was the successful debut of TACA Peru the same year as LanPeru's launch. Unlike other Grupo TACA members, TACA Peru was formed as a start-up. TACA has also discussed an Ecuadorian member. but it remains at the talking stage. A proposed member in Venezuela is in the rumour stage. It is not clear where TACA's new codeshare alliance with Avianca will lead. Meanwhile, LanChile has repeated its Peruvian success with new affiliates launched the same way as LanPeru - from scratch - in Ecuador and the Dominican Republic. It is determined to keep growing. Jorge Awad, LAN's chairman, recently declared that an affiliate in Argentina is a priority for this year, and Brazil a possibility.

This year the LAN group also took the bold step of adopting the name "LAN" - Latin American Networks - as a common brand for its entire group. Using this single name with a common livery for all carriers effectively integrates them into the first pan-Latin American airline. Earlier this year LAN's marketing strategy was recognised in the Airline Strategy Awards, run by this magazine.  The significance of LAN's renaming was not lost on Grupo TACA which has followed suit, with all its airlines switching to the TACA name.

TACA thus pioneered the successful Latin model of cross-border equity alliances, TAM followed with its smaller version and LanChile lifted the idea to new heights by creating affiliates and then adopting a common brand for the entire group.

Others have taken the alliance route with less success. Brazil's VASP once owned Ecuatoriana and Lloyd Aéreo Boliviano. But it never overcame nationalistic concerns, especially in Bolivia, about outside control of the flag carrier. Varig has a stake in Uruguay's Pluna but took no steps to integrate it.

Peru's AeroContinente made a foray into Chile with its own start-up and tried to convince officials in Ecuador to let it buy Ecuatoriana. But AeroContinente could not shake the bad reputation, deserved or not, which followed claims that its founder was involved in drug trafficking and money laundering and somehow the airline was connected.

Santiago grounded AeroContinente Chile, for reasons that remain disputed, and the Ecuadorian government ignored the Ecuatoriana offer. AeroContinente's only affiliate is now in the Dominican Republic and its future is clouded by the parent airline's turmoil. Finally, Bolivia's AeroSur formed an equity alliance with Argentina's LAPA in 2002, but it lasted only months before LAPA collapsed.

Undaunted, others still try. Venezuela's Aeropostal has linked AeroHonduras (formerly SolAir), AeroRepublica (Colombia), and a Costa Rican start-up that awaits approval. It is eyeing Ecuador's Aerogal as a possible addition to this new alliance.

Argentinian plans

Aerolineas Argentinas has touted plans for a similar group in South America's Southern Cone. Its new Chilean affiliate, Aerolineas del Sur, plans its take-off in September. Aerolineas has scrapped plans to buy control of Uruguay's Pluna after Montevideo objected strongly. The proposed Aerolineas model differs from others in that Aerolineas, majority owned by Spain's Marsans group, will not own affiliates itself, whereas the Marsans group would. Its Chilean rivals claim this is simply a ruse so that Argentina is not pressured to reciprocate by opening its skies to Chilean carriers in the same way that Chile is allowing Aerolineas del Sur.

The most recent cross-border equity deal involves Brazil's OceanAir, whose parent Sinergy is buying 75% of a reorganised Avianca. It is too soon to know what will develop from this or from Avianca's new codeshare with TACA.

Why has the cross-border equity alliance become so popular in Latin America? The consistent answer is that it is the only obvious way for airlines in small countries to grow. Growth via domestic consolidation generally has not worked.

The proposed Varig-TAM marriage in Brazil or the Summa alliance of Colombia's Avianca, ACESand SAM,are just the latest examples of the many things that can go wrong in domestic mergers. They stumble for many reasons but competition rules are a major one. An example is Avianca and ACES, which made two attempts to integrate before gaining approval. Another is the current opposition of CADE, Brazil's antitrust agency, to the Varig-TAM codeshare. A third is Cintra, which remains under orders from Mexico's competition commission to split its subsidiaries Aeromexico and Mexicana.

With domestic mergers a poor option, Latin carriers must look beyond their borders for growth. Yet, when they do, they face what Patricio Sepulveda, IATA's Latin American regional director, calls "a very restrictive and protectionist regulatory framework that is basically unchanged since the 1940s".

"Cross-border equity alliances have been popular in Latin America," Sepulveda says, "because of what I call using the window because the door is shut. The only way for an airline to grow and create a network once its market is saturated is to create these alliances."

Of course, Latin America is hardly alone in facing limits on foreign ownership or fifth-freedom. The difference, says Alex de Gunten, director of AITAL, the International Association of Latin American Airlines, is that "the markets are so small that airlines can't get economies of scale" without crossing borders.

Weak markets

"In Latin America per capita income is low. We have 400 million people but only about 3% of those can afford to fly," Sepulveda explains. Thus, cross-border alliances seem to be the only way around small domestic markets, domestic merger obstacles and restrictive aviation regimes.

In Category 2 countries barred from the USA under its safety assessment programme - and too many Latin American nations are - cross-border alliances also offer wet-leased aircraft from a Category 1 partner that can give credibility to air service.

No one claims these alliances are perfect. As Enrique Cueto complains: "Why should we need to look for a partner and create a company in each country? You don't get the best synergies this way."

An alliance may look like one airline but, so long as each member must remain a legal entity within its own country, that appearance brings with it a mountain of back-office headaches - separate operating certificates, separate reporting to each aviation authority, separate accounting, labour negotiations, traffic rights and so on.

As Cueto knows too well, alliances also require some tightrope walking between management control and foreign ownership caps. LanPeru has faced one drama after another - first with a local partner that turned against the alliance, then with challenges by Peruvian rivals about the legality of its ownership. With a committee of Peru's congress conducting its own inquiry, LanPeru's ownership could turn into a political football.

Whenever an airline in one country appears to control an airline in another, the political and legal waters grow treacherous. LanEcuador was forced to change its ownership before Washington would issue a foreign operator's licence. Chile and AeroContinente have been at war in courts and diplomatic halls for years. Bolivia is still trying to extradite LAB's former owner from Brazil. Such are the hazards of cross-border alliances.

Inevitably, the question arises of why some do better than others. Many will claim, for instance, that LAN's alliance success is helped by Chile's geography - at the southern end of the continent - so that LAN is already flying over countries that offer partnership opportunities en route to North America. Peru, Ecuador and the Dominican Republic were natural alliance venues. But more is involved than stopovers and luck. Both de Gunten and Sepulveda stress the quality of management in all successful alliances. "They are highly disciplined," says de Gunten. "The grade of professionalism can make or break one of these alliances," adds Sepulveda.

Capital need

Sepulveda also stresses the need for capital, a concern he often voices about Latin aviation. It is obvious to any observer that Varig, for instance, is too saddled with debt to turn its stake in Pluna into much more. "The strength of the parent company," de Gunten adds, is key to any alliance's success. They rarely succeed, he adds, when parent airlines "are having their own problems".

Latin America has seen one final type of cross-border link - where an airline foreign to the region owns and exercises control over one or more Latin airlines. Iberia once played such a role at Aerolineas, Viasa and others. It has long since withdrawn. So has SAS, which once held LanChile shares. American Airlines and Delta Air Lines also owned stakes in Aerolineas and AeroPeru respectively.

Only two such alliances remain. One is the Marsans group's control of Interinvest, the holding company that owns 98% of Aerolineas Argentinas. This aligns Aerolineas with Spain's leisure carrier Air Plus Comet (owned by Marsans) and Spanair (of which Marsans holds 5%). The other is the Continental Airlines 49% stake in COPA.

The growth of overseas links with Latin carriers remains uncertain but the trend for cross-border equity alliances within the region is clear. As their rivals continue to shrink and disappear, these groupings look set to grow to dominate Latin American aviation.

The two biggest nations untouched so far by alliances are Brazil and Mexico but, even there, the first inroads are starting. LAN now calls Brazil a "possibility", while Mexico's Cintra and LAN have unveiled plans to link networks by sharing codes and honouring loyalty programmes.

No part of Latin America can escape the forces that drive these alliances. As Bloch predicted all those years ago: "We are going to see a consolidation. This is the future in Latin America." n

REPORT BY DAVID KNIBB in seattle

Allied

survival

Success in Latin America means finding a way around the region's obstacles to growth by reaching out across borders

The facts speak for themselves. Half of Latin America's airlines are technically bankrupt, around 70% are losing money and attrition is slowly consolidating the region's industry into a handful of airlines. Nearly all of these survive because of cross-border equity alliances.

Equity alliances are not unique to Latin America. More famous are those of SASor indeed the KLM merger with Air France. But the Latin model has evolved a character all its own.

The typical Latin alliance starts with a dominant airline in one country taking a stake in carriers elsewhere in Latin America - either existing airlines or those created for that specific purpose. These are then gradually integrated through codeshares, wet leases, branding and centralised management, until the emerging group eventually assumes the character of a single, cross-border airline. It is a uniquely Latin American process.

The evolution of this model started when Federico Bloch took the controls at TACA International, flag carrier of Central America's tiniest nation - El Salvador. In 1992, TACA competed with five other small airlines in the seven countries that comprise Central America.

Bloch, who was killed in April this year, had a clear vision for what he and chairman Roberto Kriete hoped to achieve when they first embarked on the strategy of buying equity in its neighbours. "Our aim was to form a consortium of airlines. It was basically a decision that Roberto Kriete and I made that, in order for us to grow, we needed to expand beyond our borders,"as Bloch explained four years ago (see February 2001). "We needed a critical mass in order to be competitive. We knew no small airline was going to survive in the end in Latin America."

Through the mid-1990s, TACA International accumulated stakes, ranging from 10% to 49%, in Guatemala's Aviataca, Costa Rica's Lacsa, Nicaragua's NICA and Sahsa in Honduras. Panama's COPA also joined the group but then left. Once the integration of these carriers started, they called themselves "the American Central Corporation". It was not a true corporation but they were searching for a common brand. That came about in 1997 when they agreed to what Bloch called the "Grupo TACA commercial umbrella".

Bloch was one of the so-called "new breed" of Latin American airline executives. His contemporaries - Rolim Amaro at Brazil's TAM and Enrique Cueto at LanChile - shared his views on the need for cross-border alliances.

At the same time that Grupo TACA was choosing a name, Amaro changed TAM's structure, creating a holding company called TAM and splitting operations between subsidiaries TAM Regionais (domestic) and TAM Meridionais (international). Then it bought management control of Paraguay's LAPSA and changed its name to TAM Mercosur. The renaming of LAPSA towards the end of 1997 was widely seen as a signal of TAM's desire to create a multinational flag carrier.

LanChile's opening move

LanChile's Cueto waited until AeroPeru collapsed before his first venture into cross-border alliances. Exploiting the vacuum left by AeroPeru, LanChile found a Peruvian partner, retained 49% and launched LanPeru in 1999. Within months it gained international routes, thanks to jets wet-leased from LanChile. The success of LanPeru encouraged Cueto to seek similar opportunities elsewhere.

TAM did not pursue further cross-border ties, largely because of Brazil's economic nosedive. Whatever further expansion Amaro may have planned was cut short by the helicopter accident that killed him in 2001.

TACA's only addition after its initial formation was the successful debut of TACA Peru the same year as LanPeru's launch. Unlike other Grupo TACA members, TACA Peru was formed as a start-up. TACA has also discussed an Ecuadorian member. but it remains at the talking stage. A proposed member in Venezuela is in the rumour stage. It is not clear where TACA's new codeshare alliance with Avianca will lead. Meanwhile, LanChile has repeated its Peruvian success with new affiliates launched the same way as LanPeru - from scratch - in Ecuador and the Dominican Republic. It is determined to keep growing. Jorge Awad, LAN's chairman, recently declared that an affiliate in Argentina is a priority for this year, and Brazil a possibility.

This year the LAN group also took the bold step of adopting the name "LAN" - Latin American Networks - as a common brand for its entire group. Using this single name with a common livery for all carriers effectively integrates them into the first pan-Latin American airline. Earlier this year LAN's marketing strategy was recognised in the Airline Strategy Awards, run by this magazine (see August page 43) The significance of LAN's renaming was not lost on Grupo TACA which has followed suit, with all its airlines switching to the TACA name.

TACA thus pioneered the successful Latin model of cross-border equity alliances, TAM followed with its smaller version and LanChile lifted the idea to new heights by creating affiliates and then adopting a common brand for the entire group.

Others have taken the alliance route with less success. Brazil's VASP once owned Ecuatoriana and Lloyd A‚reo Boliviano. But it never overcame nationalistic concerns, especially in Bolivia, about outside control of the flag carrier. Varig has a stake in Uruguay's Pluna but took no steps to integrate it.

Peru's AeroContinente made a foray into Chile with its own start-up and tried to convince officials in Ecuador to let it buy Ecuatoriana. But AeroContinente could not shake the bad reputation, deserved or not, which followed claims that its founder was involved in drug trafficking and money laundering and somehow the airline was connected.

Santiago grounded AeroContinente Chile, for reasons that remain disputed, and the Ecuadorian government ignored the Ecuatoriana offer. AeroContinente's only affiliate is now in the Dominican Republic and its future is clouded by the parent airline's turmoil. Finally, Bolivia's AeroSur formed an equity alliance with Argentina's LAPA in 2002, but it lasted only months before LAPA collapsed.

Undaunted, others still try. Venezuela's Aeropostal has linked AeroHonduras (formerly SolAir), AeroRepublica (Colombia), and a Costa Rican start-up that awaits approval. It is eyeing Ecuador's Aerogal as a possible addition to this new alliance.

Argentinian plans

Aerolineas Argentinas has touted plans for a similar group in South America's Southern Cone. Its new Chilean affiliate, Aerolineas del Sur, plans its take-off in September. Aerolineas has scrapped plans to buy control of Uruguay's Pluna after Montevideo objected strongly. The proposed Aerolineas model differs from others in that Aerolineas, majority owned by Spain's Marsans group, will not own affiliates itself, whereas the Marsans group would. Its Chilean rivals claim this is simply a ruse so that Argentina is not pressured to reciprocate by opening its skies to Chilean carriers in the same way that Chile is allowing Aerolineas del Sur.

The most recent cross-border equity deal involves Brazil's OceanAir, whose parent Sinergy is buying 75% of a reorganised Avianca. It is too soon to know what will develop from this or from Avianca's new codeshare with TACA.

Why has the cross-border equity alliance become so popular in Latin America? The consistent answer is that it is the only obvious way for airlines in small countries to grow. Growth via domestic consolidation generally has not worked.

The proposed Varig-TAM marriage in Brazil or the Summa alliance of Colombia's Avianca, ACESand SAM,are just the latest examples of the many things that can go wrong in domestic mergers. They stumble for many reasons but competition rules are a major one. An example is Avianca and ACES, which made two attempts to integrate before gaining approval. Another is the current opposition of CADE, Brazil's antitrust agency, to the Varig-TAM codeshare. A third is Cintra, which remains under orders from Mexico's competition commission to split its subsidiaries Aeromexico and Mexicana.

With domestic mergers a poor option, Latin carriers must look beyond their borders for growth. Yet, when they do, they face what Patricio Sepulveda, IATA's Latin American regional director, calls "a very restrictive and protectionist regulatory framework that is basically unchanged since the 1940s".

"Cross-border equity alliances have been popular in Latin America," Sepulveda says, "because of what I call using the window because the door is shut. The only way for an airline to grow and create a network once its market is saturated is to create these alliances."

Of course, Latin America is hardly alone in facing limits on foreign ownership or fifth-freedom. The difference, says Alex de Gunten, director of AITAL, the International Association of Latin American Airlines, is that "the markets are so small that airlines can't get economies of scale" without crossing borders.

Weak markets

"In Latin America per capita income is low. We have 400 million people but only about 3% of those can afford to fly," Sepulveda explains. Thus, cross-border alliances seem to be the only way around small domestic markets, domestic merger obstacles and restrictive aviation regimes.

In Category 2 countries barred from the USA under its safety assessment programme - and too many Latin American nations are - cross-border alliances also offer wet-leased aircraft from a Category 1 partner that can give credibility to air service.

No one claims these alliances are perfect. As Enrique Cueto complains: "Why should we need to look for a partner and create a company in each country? You don't get the best synergies this way."

An alliance may look like one airline but, so long as each member must remain a legal entity within its own country, that appearance brings with it a mountain of back-office headaches - separate operating certificates, separate reporting to each aviation authority, separate accounting, labour negotiations, traffic rights and so on.

As Cueto knows too well, alliances also require some tightrope walking between management control and foreign ownership caps. LanPeru has faced one drama after another - first with a local partner that turned against the alliance, then with challenges by Peruvian rivals about the legality of its ownership. With a committee of Peru's congress conducting its own inquiry, LanPeru's ownership could turn into a political football.

Whenever an airline in one country appears to control an airline in another, the political and legal waters grow treacherous. LanEcuador was forced to change its ownership before Washington would issue a foreign operator's licence. Chile and AeroContinente have been at war in courts and diplomatic halls for years. Bolivia is still trying to extradite LAB's former owner from Brazil. Such are the hazards of cross-border alliances.

Inevitably, the question arises of why some do better than others. Many will claim, for instance, that LAN's alliance success is helped by Chile's geography - at the southern end of the continent - so that LAN is already flying over countries that offer partnership opportunities en route to North America. Peru, Ecuador and the Dominican Republic were natural alliance venues. But more is involved than stopovers and luck. Both de Gunten and Sepulveda stress the quality of management in all successful alliances. "They are highly disciplined," says de Gunten. "The grade of professionalism can make or break one of these alliances," adds Sepulveda.

Capital need

Sepulveda also stresses the need for capital, a concern he often voices about Latin aviation. It is obvious to any observer that Varig, for instance, is too saddled with debt to turn its stake in Pluna into much more. "The strength of the parent company," de Gunten adds, is key to any alliance's success. They rarely succeed, he adds, when parent airlines "are having their own problems".

Latin America has seen one final type of cross-border link - where an airline foreign to the region owns and exercises control over one or more Latin airlines. Iberia once played such a role at Aerolineas, Viasa and others. It has long since withdrawn. So has SAS, which once held LanChile shares. American Airlines and Delta Air Lines also owned stakes in Aerolineas and AeroPeru respectively.

Only two such alliances remain. One is the Marsans group's control of Interinvest, the holding company that owns 98% of Aerolineas Argentinas. This aligns Aerolineas with Spain's leisure carrier Air Plus Comet (owned by Marsans) and Spanair (of which Marsans holds 5%). The other is the Continental Airlines 49% stake in COPA.

The growth of overseas links with Latin carriers remains uncertain but the trend for cross-border equity alliances within the region is clear. As their rivals continue to shrink and disappear, these groupings look set to grow to dominate Latin American aviation.

The two biggest nations untouched so far by alliances are Brazil and Mexico but, even there, the first inroads are starting. LAN now calls Brazil a "possibility", while Mexico's Cintra and LAN have unveiled plans to link networks by sharing codes and honouring loyalty programmes.

No part of Latin America can escape the forces that drive these alliances. As Bloch predicted all those years ago: "We are going to see a consolidation. This is the future in Latin America." n

 

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