Aerolineas Argentinas is hoping to break even this year, a sign that it could soon cease to be a financial drain on its ailing majority owner Iberia. Sara Guild reports.South America has been the bane of Iberia's expansionist existence since 1990. So it is perhaps a bit of a blow to find that at least one of its charges would prefer not to have a state-owned national carrier as a majority shareholder. But then Aerolineas Argentinas may also have preferred to do without over $900 million in capital injected by Iberia since November 1990.

To an outsider this may smack of anti-colonialism or arrogance, but perhaps the Argentineans do have a point: the carrier is in the difficult situation of having to think and act as a private company while the Spanish flag seeks to raid its own country's coffers of $1.07 billion in state aid.

Officially of course, Aerolineas' president Manuel Moran gives the impression of a good working relationship between Iberia, Aerolineas and the Argentinean government. But, despite his Argentine origins, you would expect this of a president sent over from Iberia's parent company, Ini, to turn around the carrier's dire financial position. The early animosity between the Argentineans - both in the company and the government - and the Spanish from Iberia, which holds 83 per cent of the carrier, has already been well documented.

Now, however, Moran says that is all over and there are 'very good relations' between all concerned. 'Iberia is satisfied and happy with its strategy in Latin America,' he says. 'Since 1993 we have started working on what we should do with the company. This has been carried out professionally without political interference and external forces jeopardising the company,' says Moran.

However not all agree. 'Moran will never be seen as Argentinean,' says one source at Aerolineas. Furthermore Aerolineas insiders claim much of the restructuring work was done before Iberia took a more hands-on approach in 1994 along with its third recapitalisation of $140 million.

Iberia's own financial difficulties explain why many Argentineans feel they would be better off with an owner that is free to focus on Aerolineas' difficulties instead of its own. And now that the company has adopted the privatised airline mentality there is a tendency for its executives to look down their noses at state-owned companies. It is worth pointing out, however, that Iberia's own troubles can be blamed in part on the Argentinean carrier, which reported net losses of $293 million in 1993/94 and $223 million in 1992/93.

Rumours surface with regularity that Iberia is looking to sell off part or all of its stake and American Airlines has often been mentioned as a potential buyer. Moran denies the claim as well as speculation that a sell-off has been discussed in Brussels as a possible condition to be attached to any approval of Iberia's proposed state capital injection.

Iberia can perhaps begin to breathe more easily as the numbers show restructuring and cost cutting at Aerolineas could be taking hold. Despite a $293.3 million loss last year, Aerolineas is heading for a predicted operating profit of US$40 million and expects to break even in the latest financial year ending 30 June, 1995. The carrier reported a net loss of only $7 million in its first quarter, compared with a loss of $42 million in the previous year. Traffic rose by more than 18 per cent from January to November 1994 and by 19 per cent in the first quarter 1994/95. And the carrier's load factor rose from an average of 61 per cent between January and April 1993 to 69 per cent in the same period of 1995.

Employees have been reduced from 9,585 in November 1990 to 5,963 in March of this year, a cut of 38 per cent. Employee productivity has also increased: there was an improvement of 63 per cent in RPKs per employee in the first four calendar months of 1995 compared to the same period in 1993.

Senior management has also taken the plunge to help reduce costs, with the highest paid having taken a 15 per cent salary reduction and promised increased productivity in return for shares in two years' time. The company's employees currently hold 10 per cent of the stock, with the government holding 5 per cent and private investors the remaining 2 per cent.

But all is not rosy. Argentina is currently in the throes of recession and this year the rate of domestic market growth, an enviable 15 to 20 per cent over the past few years, has slowed to 6 to 8 per cent. International growth is marginally higher at some 9 to 10 per cent. Moran concedes this level of domestic growth may be normal in European or North American markets but emphasises that in Argentina it is not. In May Aerolineas actually had a reduction in domestic traffic over the previous year, a serious trend given that domestic business accounts for 47 per cent of the carrier's overall traffic. Moran says the drop can be accounted for in part by the presidential elections and the introduction of the new winter timetable, but stresses that it will not help the carrier's efforts to climb out of the red. International traffic outside South America accounts for just 28 per cent of the carrier's business with another 25 per cent on regional routes.

Coupled with the regular seasonal fluctuations in traffic, the recession caused liquidity problems at the carrier in June, with pilots protesting over the late payment of their May salaries. Moran says this was solved by Aerolineas going to the international markets for dollar denominated loans and adds that it is a great benefit to be allied with Iberia. 'It helps being owned by a foreign shareholder because the financial people look at you [as carrying] an international level of risk rather than the local one,' he says.

Aerolineas is halfway through its restructuring programme and there is still work to be done, says Moran. The list includes a review of long-haul fleet development, currently underway, and a close examination of existing routes, with the future strategic goal of expanding on the benefits of Iberia's Madrid hub and looking for opportunities to create other minihubs. Aerolineas has already cancelled its routes to Panama and Mexico due to their lack of profitability, but Moran says the situation will be reviewed in December and that Mexico could then be reinstated.

Aerolineas currently has a fleet of seven Boeing 747-200s, 11 737s, eight 727s and six McDonnell Douglas MD-88s. Last July it leased four Airbus A310s, which are now operated on its US routes. An MD-83 was leased out last year while three Fokker 28s have been grounded. Details of the carrier's long-haul fleet development strategy should be decided by the end of 1995. Moran says he sees three possibilities: first, using A340s only and disposing of the B747s and A310s; second, combining the B747 and A340 fleets and third, using A340s and A310s.

The decision depends on whether the carrier wants to fly nonstop or with one stop, in either Madrid, Rio de Janeiro or Sao Paulo. While desirable, the nonstop strategy is not necessarily practical given the low density destinations served by Aerolineas, especially in the southern tip of South America, says Moran. 'I think mixing the two strategies [one stop and nonstop] and aircraft types makes the most sense,' he adds.

Aerolineas is not targeting growth through new international destinations, but is instead seeking the rights through normal bilateral negotiations to increase frequencies on existing routes, says Moran. In the recent renegotiation with Germany, Aerolineas added one frequency to Frankfurt via Madrid and the agreement allows Aerolineas the choice of codesharing on the onward flight with Iberia, downsizing to a smaller aircraft or adding a stop in Brazil. The smaller aircraft would most probably be an A310 leased from Airbus with Aerolineas crew supplied from its Madrid base, says Moran. A foreign airline crew will be considered if it is cheaper. 'We are always looking for the most profitable way of doing things,' says Moran.

A more efficient use of the A310 fleet on US routes will leave the B747 fleet free to increase European frequencies to London, Rome, Paris, Frankfurt and Zurich. These are all served from eight to 11 times a week through the Madrid hub. Aerolineas also plans to add a frequency on the Sydney route from the start of the summer schedule in January/February.

In the US Aerolineas already operates daily frequencies to Miami and plans to be serving its New York and Los Angeles destinations daily by the end of 1995. Under the 1994 bilateral with the US, frequencies are limited to 22 per week in 1995, rising to 26 in 1996 and 28 in 1998. Also negotiated in that bilateral was the possibility of a fourth destination, which Moran says will be either Washington or Orlando depending on traffic growth from next June.

Competition on the New York route will intensify from October when American Airlines will offer nonstop, daily flights from Buenos Aires. However as 75 to 80 per cent of the traffic between Argentina and the US orginates in Argentina, Moran feels he 'has a competitive advantage in being an Argentinean company.'

New York may become even more important for Aerolineas as it studies the possibility of using it as a minihub for its Canadian destinations. The carrier currently serves Montreal and Toronto via New York two or three times a week. Moran is looking at a possible codeshare with a US or Canadian carrier that would permit more frequent flights through New York. Alternatively, Moran says Aerolineas may wet lease a smaller aircraft for the Canadian services.

In the Caribbean Aerolineas makes use of Iberia Group connections in the form of Viasa. Aerolineas flies via Caracas to the tourist ports and other destinations such as Havannah, Cancun and Santa Domingo. The two carriers also codeshare on Buenos Aires-Caracas using Viasa resources.

Elsewhere the synergies of the Iberia Group are evident. Most computer software packages in areas such as finance and planning are the same, while sales teams are combined wherever possible. In European countries where Aerolineas has only a small presence, such as Switzerland and Germany, Iberia sells on behalf of Aerolineas. And Aerolineas and Viasa have joined forces in some South American countries, such as Colombia and Uruguay. In the maintenance field, there are deals with Iberia to overhaul Aerolineas' B747s and 727s. 'Wherever we see potential for synergy, we try to make use of it,' says Moran.

But the relationship with Ladeco in Chile has never evolved into a partnership, says Moran, partly because Iberia's stake was not a majority one. Now that LanChile has bought the controlling interest in Ladeco, Iberia's presence in Chile is in question. And the new Chilean carrier will almost certainly be a tough competitor for Aerolineas. Moran directs questions on the subject to Madrid but believes Iberia will entertain all possibilities, including the sale of its 35 per cent stake in Ladeco, as it considers the future in Chile.

Other alliances remain a distant prospect. With 20 per cent of the market originating in the US, a US partner would bring some welcome feeder traffic, though Moran does not believe Aerolineas needs a US partner to survive. So far the carrier only has a couple of frequent flyer agreements with Continental and TWA.

What the Argentine carrier needs most is a turnaround in the Argentinean economy, continued growth internationally and further efficiencies to put it firmly back on the road to profits. For all its efforts and financing Iberia may well see the benefits from one of its South American investments yet. n

In 1994 domestic deregulation allowed Lapa explosive growth from four routes in 1993 to 20 routes by mid 1995. Seven more are due to come on line in mid-September and a tie up with United Airline's Mileage Plus frequent flyer programme is expected to boost the carrier's average load factor to 80 per cent. The South American regional market will be accessible from November, and Deutsch says Santiago, Chile; Asuncion, Paraguay; Sao Paula, Rio de Janeiro, Florianopolis and Porto Alegre, Brazil; Montevideo and Punta del Este, Uruguay, are currently under consideration.

Domestic growth has been serviced by Lapa's four Boeing 737s and two Saab 340s. In August the carrier received two more B737s and delivery of a B757 was expected by the end of September. Traffic has increased from 2,000 passengers in 1993 to an expected 80,000 in 1996.

Part of the ethos of keeping costs low has been to buy engine maintenance from Israel Aircraft Industries at hourly rates.

Argentina's long thin geography and scattered population make it impossible for Lapa to fly only shorthaul à la Southwest. And while Trelew, Bariloche, Como de Rivadavia and Rio Gallegos are sufficiently long distance to warrant a heated meal on board, others have a drinks-only service. The B757 will allow Lapa to fly the longer routes nonstop and will also be used for charter operations in the South American summer. The carrier has wet-leased 757s for the past three years.

With the growth have come profits. In 1994 Lapa's net profit was $1.5 million on revenues of $35 million. Deutsch predicts a similar profit in 1995 on estimated revenues of around $60 million. The new aircraft and a forced move, due to runway repairs, to a military airport for 45 days during October will take their toll on the bottom line, he adds.

Currently Lapa has about 20 per cent of the domestic market, which grows by about 500,000 passengers a year. Deutsch hopes the tie-up with United will bring Lapa up to 30 per cent. He says there are 120,000 United frequent flyers travelling through Argentina with 40,000 active members. 'We are a little airline so any alliance with a big guy is good for us,' Deutsch adds.

Source: Airline Business