Judging by the casualties, one might conclude that the real financial crisis two years ago occurred not in Asia, but in Latin America. Asia's woes grabbed headlines around the world, but it only lost two airlines. The quieter crisis in Latin America, meanwhile, has claimed three and left three more airlines so badly crippled they could collapse. In the past 12 months, three Latin American airlines have failed: AeroPeru, Mexico's TAESA and Ecuador's SAETA. The three on the brink are Aerolineas Argentinas, Avensa and VASP (see box over page). If VASP goes, it could pull three more partly owned airlines down with it - Lloyd Aereo Boliviano, Ecuatoriana and Argentina's TAN. The final list could be longer - Colombia's airlines are struggling against the worst conditions in their history.
Comparisons between Asia and Latin America are risky because both are internally diverse, but Latin nations seem to give their airlines more freedom to fail. Governments in Venezuela and Argentina have stepped in to help carriers, but with limited relief. Caracas appointed a new chief executive for Avensa and Buenos Aires shelved its open skies bilateral to protect Aerolineas from US competitors. But even that was far less aggressive than, for example, Manila's suspension of sixth freedom rights held by Philippine Airlines' rivals. Asian nations helped their airlines in many ways and the only two carriers to collapse - Indonesia's Sempati and Malaysia's Saega - were relatively small and non-strategic. That is not to say Asia was better able to look after its own - it simply chose to.
Asia's crisis is over; Latin America expects improvement this year. But the dangers have not passed and the biggest mistake would be not to understand the reasons behind what happened - in other words - those who don't learn from history are destined to repeat it. But learning is complicated because airlines fail for multiple reasons. "There's never one thing that kills an airline," says Bob Booth, Miami-based chairman of the AvGroup consultancy. "Bad decisions, the market, competition - events have a cumulative impact."
Latin American failures have some things in common. Obviously, the economy has much to do with airline health. Financial institutions say last year was Latin America's worst economic slump in over a decade. A precipitating cause maybe, but it does not affect all airlines equally. Why, for instance, did TAESA fail as Mexico's economy strengthened? Or why is VASP's long-term debt more than twice that of any other Brazilian airline? There are other causes.
Key themes
Airline management during economic turmoil demands fastidious care. As Federico Bloch, Grupo TACA's chief executive, warned at AVGroup's Latin America and Caribbean chief executive conference in Orlando, Florida: "This industry doesn't allow for many mistakes." Yet, those familiar with the region focus on several key themes. One is markets. "The airlines with the bigger problems seem to lack a strong domestic base," notes Patricio Sepulveda, Latin American director for the International Air Transport Association (IATA). "LanChile is probably the most successful airline in the region. Chile's government allowed LanChile investors to purchase Ladeco. That gave the combined company about 80% of the market." Compare that to Aerolineas Argentinas. As one authority points out, it once had 80% of the domestic market, but after having to compete with LAPA, Southern Winds and AeroVip, that share has fallen to around 40%.
Aside from wondering how to divide the domestic pie, Sepulveda worries that air travel remains beyond the means of most. "We have very fast growth, but per capita income is low. Latin America has 400 million people, but only about 3% of those can afford to fly." This wealth gap lies behind other problems. Airline privatisation ended a decade ago in Latin America, but many wonder how well it worked. Julius Maldutis, a CIBC aviation analyst who rarely minces words, told the Orlando conference: "Privatisation is not a success unless an airline is sold to global capital markets - not to six friends of the transport minister."
This lack of broad public ownership causes problems. Airlines end up in what AvGroup's Booth calls "family fiefdoms". The result is "management that is accountable to the whims and fancies of the owners, but not to the bottom line," says Booth. As Juan Emilio Posada, chief executive of Aces, says: "In countries without liquid capital markets, airlines are often run by people with big egos."
Another problem, Sepulveda says, is that privatisation has not helped the airlines. He implies no corruption, but believes the opportunity was squandered. "The government required investment in the airline as part of privatisation, but it was a formality. The government was paid, but no money went into the airline."
Undercapitalisation is the most common problem. It goes back to economics. Most airlines are privately held because of scarce, but concentrated, wealth. When political winds change, capital can fly away. Even the richest families lack the millions needed for new fleets, technology and talent. Without strong equity markets, carriers have traditionally relied on bank debt. LanChile tapped Wall Street capital several years ago and TACA may be working on a public offering, but these examples are rare. As Sepulveda notes: "Latin American economies don't attract investors. Nobody wants to invest in a risky sector like aviation in a risky region."
This is starting to change for infrastructure projects. Firms such as the Inter-American Development Bank, World Bank and US Export-Import Bank seem more willing to fund airports in the region. But there is a big difference between an airport and an airline. Ownership limits are part of the problem. When local capital is scarce, they limits retard airline growth. As a result, some countries have all but abandoned them. AeroPeru, for instance, had only 30% local ownership; Aerolineas Argentinas has only 15%.
Booth sees one other potential for local capital. "Lack of private capital is changing," he says. "Pension funds in Chile, Peru and some other countries are a growing source of public money." Public ownership may be "the wave of the future," as Booth sees it, but Latin airlines cannot afford to wait for it before improving their management.
Management stars
Brian Evison, who spends much of his time in Latin America for operating lessor Boullioun, singles out some management stars which set an example for others. "There are some very successful managers in Latin America," Evison notes. "Look at Federico Bloch at TACA, Enrique Cueto at LanChile, Rolim Amaro at TAM. These guys really know how to monitor issues as they occur. They even plan for them. I lift my hat off to them." Evison lists management and communication as two keys to success. One follows from the other. Conversely, Evison cites examples where Latin managers do not encourage good communication between mid- and upper-levels or between management and owners. Although this is not uniquely Latin American, Evison says, it is all too common there.
IATA's Sepulveda is more blunt. He blames the process that substituted private owners for governments. "Few of the airlines have been effective at incorporating new technologies or training their people," he says. And Latin airlines did not fully grasp the impact that liberalisation and the rash of open skies agreements would have on the industry. "Local owners were not prepared for this fierce competition," he says.
For Juan Emilio Posada, Aces chief executive, this explains many of the current problems. "These are difficult times in Latin America," he says, referring to the economic turmoil. "And deregulation coincided with difficult times."
The pilots of Aerolineas Argentinas partly blame Peru's open skies accord with the USA for AeroPeru's demise. No doubt, such pacts gave US carriers the flexibility to shift capacity from Asia into Latin America. But, as Posada observes, "deregulation is irreversible". Rather than complain, the key is to adapt. Many managers have failed to do this. As a result, the old, beleaguered owners of Latin airlines are bailing out. Sepulveda observes: "Ten years ago everything was on sale, but the seller was a government. Today, everything is on sale, but the sellers are private."
Ownership change is inevitable. However, it will solve nothing alone. Strategies must also change if Latin America is to avoid another bloodbath in the next downturn.
Networks and feeder traffic are the key, says Evison. But a bigger part of networking may be the trend toward regional consolidation. Grupo TACA started it in Central America. TAM has bought and added several airlines to its family. Insiders think TAM and Transbrasil are heading for a merger. If Avensa's plan works, Venezuela will have two main carriers instead of three.
Consolidation may be harder domestically than across borders due to antitrust concerns. Witness Mexico's impasse over Cintra. Even if consolidation does not build domestic traffic, it can still help with the chronic shortage of capital. But the biggest advantage may come in giving consolidated carriers more leverage within liberalised markets. It is no coincidence that nearly all the failures and near-failures have been loners. As Gustavo Lenis, Avianca's chief executive, once remarked: "To survive, we have to be part of something."
Latin America's casualties
AeroPeru suffered from absentee ownership. Cintra, holding company for Aeromexico and Mexicana, held 70% of AeroPeru before selling half its shares to Delta Air Lines. Staff in Lima complained that the Mexicans ran AeroPeru for their own profit rather than Peru's. Jaan Albrecht, seconded from Mexicana to run AeroPeru, blamed other causes - chronic undercapitalisation, failure to codeshare with Delta, and poor government relations. He was especially distressed by Lima's decision to grant cabotage to foreign carriers. He could have added that home-grown AeroContinente had run most domestic rivals out of business with its low fares.
Taesa of Mexico was slowly paying off its debts until a fatal crash caused the government to ground and scrutinise it. Before Taesa could fly again, authorities ordered it to make a long list of corrections, including an injection of $130 million in new capital within 90 days. Desperately seeking investors but unable to fly, it ran out of money.
Saeta of Ecuador was always short of capital. Its problems peaked last October when it tried to switch to cheaper aircraft on its Miami route. Because Ecuador is rated Category II for safety oversight by the US Federal Aviation Administration, that required a US waiver. The FAA refused, grounding Saeta's key route. Its domestic mainstay was the Quito-Guayaquil air shuttle pool. In February its partner stopped accepting Saeta tickets for lack of payment, grounding Saeta's best domestic route. With Ecuador in its worst economic crisis in decades, and inbound traffic scared off by unrest and volcanic eruptions, Saeta stopped flying.
On the critical list
Aerolineas Argentinas is effectively bankrupt, propped up as long as its Spanish shareholders continue to underwrite losses. By year's end the airline's debts could reach $1 billion. Yet, Argentinians seem united in their criticism of a Spanish restructuring plan. Theories are abound as to why Aerolineas has lost money since its 1990 privatisation. Absentee owners, foreign managers, domestic rivals, and a shaky economy are all nominees.
Avensa has been Venezuela's odd-man-out for years. The former Caldera government almost bankrupted it by freezing foreign exchange during the bolivar's tailspin. Avensa had to sue a hostile transport minister to regain its European routes. When Hugo Chavez swept into power, Avensa thought its fortunes might turn. But Aeropostal and Aserca signed alliances with US carriers, Avensa did not. In December, Venezuela was hit by floods and mudslides. Thousands died. Caracas airport closed for weeks and airlines lost millions. Lacking reserves, Avensa was forced to seek government help. Caracas replaced Henry Lord Boulton, long-time chief executive, and pushed Avensa toward a merger with Aserca. But first Avensa must reorganise and pay off $53 million in debts, and no-one has offered to help.
Vasp is another victim of currency devaluation. When the Brazilian real plunged 50% last year all of Brazil's airlines reeled from the impact, but Vasp reeled the most. Privately held, it does not report results, but estimates place its debts at $1.9 billion. Brazil's three other large carriers show halting signs of recovery, but Vasp is still trying to find the bottom, shedding routes and aircraft, and offering to sell subsidiaries in a frantic effort to stop the bleeding.
Source: Airline Business
