With a burgeoning economy, and a new USpartner, Aerolineas Argentinas is riding high as it reaps the benefits of its restructuring plan. Karen Walker reports. Business is back to normal at Aerolineas Argentinas following a frenetic few months during which Buenos Aires became a popular destination for management at both American Airlines and Continental Airlines. Each US airline was of course seeking a slice of Aerolineas and a strategically valuable foothold in the Latin American market. American won that stake and Aerolineas' president, Manuel Moran, must now ensure his US partner has no cause to doubt the soundness of the investment.

Moran himself has no qualms. He sees the very fact that two US airlines ended up competing over Aerolineas as proof that his company is finally heading in the right direction after many years of a meandering uncertainty that has seen Aerolineas lose some US$325 million since 1993. This year, however, Moran is confident of reporting a 'humble' profit of around $4 million. More important than the actual sums will be the psychological breakthrough they represent. 'It will not be a large profit, but it will at least be positive,' remarks Moran.

Aerolineas has been dogged by setbacks since 1990 when it became the first major company in Argentina to be privatised. By its own account the company was 'plagued' with labour, financial and political difficulties that delayed the startup of any strategic plan. A key problem, and one that permeated most large companies in Argentina pre-privatisation, was overstaffing. This led not only to high operating costs but also to layers of bureaucracy that threatened to grind the company to a standstill. Insiders say it was almost impossible to get anyone to return a telephone call - if the telephone system was working at all - let alone make a decision.

High unemployment

Much of that has changed. Argentinians have become comfortable with capitalism even though the rash of privatisations has left the country with high unemployment. But political and economic stability have been the upside, and they in turn have also helped a slimmed-down Aerolineas get back on its feet. In 1990 Aerolineas employed more than 9,500 people; today it has just 4,700 on the payroll and productivity has increased by 52 per cent over the past three years. Substantial cash injections from the Spanish airline Iberia, which until the American deal is complete still owns a 20 per cent stake in Aerolineas, have also helped keep the airline solvent. And an across-the-board cost reduction programme is expected to see annual savings of around $30 million from this year.

So American is investing in a company that is still far from a model operation, but is financially fitter than it has ever been since privatisation.When the deal is finalised - something that Moran does not see taking more than a few weeks - Iberia will exchange its 20 per cent for a 10 per cent stake in Interinvest, the majority shareholder of Aerolineas, and American will enter into Interinvest with a 10 per cent share. The remaining 80 per cent of Interinvest will go to private investors. In turn, Interinvest's share in Aerolineas will go up by 20 per cent to 83.35 per cent; 10 per cent will remain with company employees; 5 per cent with the Argentine Government and 1.65 per cent with Argentine private investors.

Moran is not concerned about the American agreement stumbling at the legal hurdles, despite threats of protest from other US airlines, most notably Continental. Since the two airlines plan to forge a codeshare agreement but are not seeking antitrust immunity, he believes there is little basis for preventing the agreement. 'I don't see any problems. In principle, this should be no different to other agreements we have with other airlines, such as Iberia. I certainly hope that will be the case.'

Although Moran was denying rumours that Iberia might sell part of its stake to American as recently as 1995, he now portrays the new deal as part of a long-planned strategy. 'As far back as 1993, when the current management team arrived here from Iberia, and after reviewing the company situation, we decided that for the long-term survival of the company it was necessary to have an alliance with a US company in the same way as with Europe. Why? To stay competitive. The traffic densities we have here in Argentina are not enough, but there is enough traffic going beyond Miami, Los Angeles and New York that we were losing. The hub in Madrid for beyond destinations such as Paris, Rome and London was proving to be a good experience and that's what we needed to create in the US as well.'

Beyond traffic

Last year US traffic generated revenues of $238 million for Aerolineas versus total revenues of $925.5 million. Moran says that one third of the US business is beyond traffic, especially to destinations in Canada and the Caribbean. Moran also anticipates that Aerolineas will transport 25 per cent more traffic to the US this year than it will to Europe. 'So it is very important to have a good partner in the US and we saw that quite clearly. But the problem was that we didn't just have that problem,' says Moran.

Back in 1993, when Aerolineas made a net loss of $151 million, Moran says the company was not a sufficiently attractive proposition for the right sort of partner. A restructuring plan was implemented and was starting to show signs of success - traffic rose by 18 per cent in 1994 and load factors were also rising, giving credence to predictions of break even results for 1994 and a profit in 1995. But the so-called 'tequila crisis', when the Mexican stock market crashed, had a ripple effect throughout South America, setting back plans to seek an alliance partner by two more years.

'Finally, in 1996, the company was in a good enough situation to rethink the issue. Then we were nicely surprised to find there were two candidates,' says Moran. 'And they were so interested that they were ready to invest in the company, which was of great interest to Iberia and a very satisfactory situation for us. It seemed that we were doing things right.'

Latin American prize

Iberia, which by now had pumped almost $1 billion into Aerolineas, finally had in its hands a Latin American prize that others were willing to buy into. Moran insists that from his standpoint the offers from both American and Continental seemed even. 'We were working with both the American and the Continental teams in the first stage of this business and the approach from each was more or less the same.

'What we were looking to do was increase our traffic and the appeal to our customers by offering a larger network - both airlines could do that. Obviously, the frequent flyer programmes were very important, but again we could sign with either Continental or American. We were also thinking of connectivities in the US - either Miami or Newark would work - and for possible cost reductions through, say, the shared use of terminals. From our point of view, these things were more or less the same in each case and I cannot say I saw very different approaches from either team.'

Genuine partnership

Publicly, however, American and Continental did take different stances. American acknowledged only that it was interested in acquiring a share in Aerolineas and said nothing more. Continental adopted a much higher profile, insisting that its offer would be a more genuine partnership whereas American was seeking only to control Aerolineas as it pursued its own interests in Latin America.

Moran says he has no fears on this score. 'We expect to do many and great things with American. We now have to get down to the nitty gritty of where we go from here. We need to have detailed talks with the managers at American, finalise what we have started, analyse our markets and develop the commercial possibilities. We will do all that over the next few weeks. But dominance by American is not a concern, to tell the truth. That would be a mistake, anyway, because they would be penalised too. In this business you can lose a tremendous lot of money unless you do it right. If you try to milk an airline, you find out very quickly that it is the small company that ends up milking the larger.'

Moran is eager to start work with his new partner. Top priorities are the codeshare arrangements, combining frequent flyer programmes and potential cost synergies.

The codeshare focus, says Moran, will not be on Buenos Aires to Miami, Los Angeles or New York. Load factors on those routes are healthy - 77 per cent for Miami, 72 per cent for LA and 68 per cent for New York - and Aerolineas operates daily services to each city. On average, those load factors are up by 6 per cent over 1995. If those trends continue into next year, Aerolineas might put Boeing 747-200s on the New York route to replace the Airbus A310s it currently uses, he adds. While Aerolineas takes just under a third of the available markets between Buenos Aires, Miami and New York, it has almost 95 per cent of the available Buenos Aires to LA market, states Moran.

What interests Moran is the possibility, through codeshare, of being able to reach new destinations, such as Washington D.C. Even though Aerolineas has developed a mini-hub in New York, Moran's attention already seems to be turning to Miami - a major hub for American and the acknowledged gateway between the US and Latin America. 'I expect Miami will be the most convenient seat for us; most traffic is there right now,' says Moran. 'For going on to the Caribbean, it is better and for most passengers it is as good as New York, including those going on to Canada. In the end, it will all depend on capacity and schedule.'

Moran hopes that ultimately the agreement with American will increase Aerolineas' traffic to the US 'quite dramatically'. He is seeking a 30-40 per cent increase and sees much of that extra business coming from the US. 'Our main target will be to get US traffic that is not just coming to Buenos Aires, but going to other countries in the region,' he says.

Moran is also hopeful that the alliance, through American's connection with Qantas, will help improve traffic to the Australian and Asian markets that Aerolineas has been unable to tap into successfully.

International traffic outside South America still accounts for only around a quarter of the 4 million passengers the airline carried in 1996 and Moran says Aerolineas' seven 747-200s are unsuited for reaching far-flung destinations.'We need to make some decisions about our long-range fleet, not just for Australia and Asia, but for our European routes as well. We need something that can fly longer, but is smaller than the 747. We have to work that decision through with the shareholders.'

Complicated maintenance

The Aerolineas fleet, although better streamlined than when Moran arrived in 1993, needs further attention all round. The airline has just dispensed with the last of its Boeing 727s, but still has eight aircraft types in a fleet of just 48 aircraft. As well as the 747s, there are 17 B737s, seven McDonnell Douglas MD-88s and three Airbus A310s. At Austral Lineas Aereas, the domestic carrier that is part of the same group, there are two MD-81s, three MD-83s, seven DC-9s and two Casa CN-235s. 'Austral has traditionally been in the McDonnell Douglas camp, while Aerolineas has been in the Boeing camp,' says Moran. 'It makes maintenance much more complicated than it need be.'

Moran is non-commital over whether American, now firmly in the Boeing camp since signing its long-term, exclusive deal last year, might sway any new aircraft decisions. Whether Aerolineas purchases or leases its next aircraft will depend on the shareholders and the opportunities on offer, says Moran. However, tackling the fleet issue is now back on the priority list. 'We had reached something of an impasse because of the continuing negotations between the partnership candidates and Iberia,' says Moran. 'A number of things had to be delayed, including the fleet plan. But I hope that we can now start to make some of those decisions.'

A critical part of the new deal is its potential to put Aerolineas on the global alliance map - assuming American is able to consummate its partnership with British Airways and that BA finalises an agreement with Iberia. 'We are the number two airline in South America, but we are still a small to medium size company in global terms,' says Moran.

'But we are not a niche company. Our only chance of survival is through something bigger. I don't know how many alliance groups you will have in the end. The Star alliance is obviously one of the big ones and clearly another is American with British Airways and Iberia. It is very important for us to be part of that group.'

Moran expects, by being part of that group, to foster a much more aggressive marketing stance in the US as well as gain a stronger position in the overall international market. Some of that strategy is already in place, he says, such as a new cabin class - a combined first and business cabin called Club Gold - for international services outside South America. Aerolineas claims this new service caused global flight sales to double last year over 1995. An additional 20 per cent increase in international sales is forecast for this year.

Moran is blunt: without the substantial support of Iberia, Aerolineas Argentinas would not exist today. 'This was a very inefficient company with no cost control and no knowledge of how to compete in the marketplace,' he says. But with those issues mostly being addressed, a positive national economy, and an US alliance partner, the Aerolineas president remains confident that the carrier can finally unhook itself from its Spanish life support machine.

Source: Airline Business