BRIAN HOMEWOOD RIO DE JANERIO South America's regional scene is shifting rapidly; regional jets, economic upheavals, loosening of government restrictions and the scramble to secure partnerships with major carriers are all having an impact.

The idea of travelling on a regional airline in South America usually evokes thoughts of heart-stopping trips into the depths of Tierra del Fuego, the heart of the Amazon rain forest, or the wilds of the Andes on board an antiquated turboprop.

Those days, however, may be numbered. A good proportion of the continent's regional flights are now operated by forward-thinking companies flying modern jets. New airlines, closely tied to major established groups, have emerged in the past couple of years and more seem set on following suit. Smaller airlines, meanwhile, are trying to find their niche in this new reality.

With its vast distances, difficult terrain and pockets of considerable wealth, South America has always represented interesting hunting for regional airlines. "If I were to start an airline now, this is what I'd be looking at because it has the most incredible potential for growth," says Bob Booth, analyst for Miami-based Aviation Management Services. "The smaller jet is going to change the face of South America."

TAM and Rio-Sul in Brazil and Southern Winds in Argentina have provided examples of what Booth believes other airlines could achieve. Tam and Rio-Sul share 95% of the Brazilian regional market, by far Latin America's largest. Both grew spectacularly in the 1990s, when the government lifted restrictions which allowed them only to operate in a designated region of the country. TAM remains faithful to its regional flights, but has added long distance services within Brazil and international routes to Paris and Miami.

TAM's main rival, Rio-Sul, has continued to expand despite the currency devaluation and recession which hit Brazil at the start of the year. It is expected to be the only one of the country's major airlines to announce a profit for trouble-hit 1999, with predicted revenues of Real 660 million ($324 million). The airline received three more Embraer RJ-145s in October and was due to add another Boeing 737-500 in January.

In neighbouring Argentina, Southern Winds has seen stunning growth since it was launched in 1996. The company set up a hub in the provincial city of Cordoba and found a niche in the market by offering non-stop flights to other parts of Argentina. This was a huge boost for passengers, who previously had to travel via Buenos Aires on their way to other provincial cities.

SW, as Southern Winds is popularly known, expects to carry 600,000 passengers and has extended its operations to Rosario. Its next aim is to set up a shuttle between Rosario and Buenos Aires and it is looking into the possibility of buying 70-seat jets. "This is the model," says Booth, referring to the way SW has carved a new niche by serving previously unconnected cities. "What you have got to do is look at the city pairs that don't have any service."

Last year also saw the inauguration of Argentina's Aero Vip, an airline which is owned by a group of businessmen led by Sebastian Casado, but which effectively operates as a feeder airline for Aerolineas Argentinas. Aero Vip first studied the market for four years and at one point contemplated an alliance with SW before opting for the American Airlines corner. Analysts say that other South American regionals must look at forging similar alliances if they are to thrive.

Brazil's struggle

Despite the generally promising outlook, however, there have so far been only a handful of success stories. Many airlines are struggling to survive and the continent's regional market is in a state of upheaval. The situation is most dramatic in Brazil, where the smaller airlines face an uphill battle. The economic recession, combined with the removal of a crucial government subsidy, has led a number of companies to slash routes, return aircraft and consider pulling out of the market. Only four or five of the dozen regionals operating are expected to survive in their present form. "They are in a very difficult situation and without the fares subsidy many of them do not have any chance of survival," says Jose Carlos Felicio, president of Passaredo, one of the affected airlines. "It's a question of time. At the moment, I would say that many have no chance of survival." Mario Sampaio, an aviation consultant with Multiplan Consultaria, agrees: "These airlines operate small networks with a low density of traffic and are in a lot of difficulties. In addition, some ran into a lot of problems after the Real was devalued."

The Brazilian Government has abolished the subsidy previously given to help regional airlines maintain services on unprofitable routes. The subsidy was collected via a 3% tax on all tickets sold on major domestic routes. According to Felicio, who represents regional airlines on the board of Brazil's Airlines Association (SNEA), this subsidy often represents 50% or 60% of the airlines' revenue from fares. "The rules of the game have changed and companies have been forced to return aircraft and cancel contracts," he says.

Felicio also points out that competition from national carriers has further damaged the regionals. "In a lot of cases, the large companies have been competing with us on our routes. We simply do not have a chance against them. We need to work with them, bringing passengers from smaller centres to their hubs," he says.

In some cases, partnerships with major carriers have helped regionals to flourish. Two years ago, Varig pulled out of the three-company pool (VASP and Tranbrasil were the other members) which operated most of the flights on the Rio-Sïo Paulo shuttle and set up its own shuttle with Rio-Sul. The Rio-Sul aircraft were painted in an almost identical livery and passengers were awarded points on Varig's mileage programme.

Meanwhile, a host of new independent airlines have sprouted and it is these which have been worst affected by the combined effects of economic recession and a currency valuation. Estimates are that if the Brazilian economy begins to grow again, only four of five of these will survive, while others will return to their original roles as air taxis. "If we have some expansion in the economy, which as an optimist I think will happen, I believe that Penta, Rico, Tavaj and Pantanal will survive," says Ramiro Tojal, vice-president of Pantanal.

Three of the newcomers - Penta, Rico and Tavaj - operate in the Amazon region, filling in the vacuum left by the exit of TABA, which switched its focus to crowded south-east market and is now in serious financial difficulties. Although both Tavaj and Penta have returned de Havilland Dash 8s and cut routes, analysts believe both can keep going in a region which depends more heavily than most on air transport. Rico is said to be in a healthier state, with lower costs and a streamlined staff. "If they can continue developing the market in the Amazon, then they have chances of progress," says Sampaio.

The future is less optimistic in Brazil's north-east where both TAF and Abaeté are struggling. "The problem is that the per capita income is so low that it is difficult to make routes viable," says Sampaio. "They don't understand this. In the state of Sïo Paulo, airlines become viable when the distance between two cities is 250km (155 miles). In the north east this rises to 450km."

Further south, the regionals have struggled to compete with TAM and Rio-Sul. Felicio says that Passaredo has reduced it fleet, which operates principally out of Ribeirao Preto in the state of Sïo Paulo, and will concentrate on a few lines and on setting up a partnership with a major carrier. Pantanal, which became a regional in 1993 and has signed an agreement to take over TAM's routes from Sïo Paulo to smaller cities in the state, is making similar moves.


Abaeté Linhas Aéreas Interbrasil Star Rio-Sul Penta (Pena Transportes Aéreos) Passaredo Transportes Aéreos Pantanal Linhas Aéreas Rico Linhas Aéroeas TABA (Transporters Aéreos da Bacia Amazonica) TAF Linhas Aéreas TAM (Transportes Aéreos Mercosur Regionais) Tavaj - Transportes Aéreos Regulares Total Linhas Aéreas

Promise in Argentina

Argentina has already seen failures. Sources say Kaiken Líneas Aéreas, which has been operating from Rio Grande and serving the south of the country since 1993, stopped flying due to mounting financial difficulties. Strangely, the Argentina Civil Aviation Authority granted it new routes just days before.

Other Argentinian regionals include Laer and Cata, which principally serve the province of Buenos Aires. Laer is still owned by the government of Entre Ríos province. Analysts say it is hard to know where the airline is heading. "They rely on improvisation rather than planning," says one.

Like Brazil, Argentina is still seen as having a promising regional market, although analysts point out that teaming up with a major partner is crucial. "The potential is quite large, especially in cross-border operations between Argentina and Chile," says Javier Lifa, a Buenos Aires-based consultant. The two countries share the longest border in the world - around 5,000km - and there are also opportunities for flights between Argentina and Brazil, probably as fifth freedom rights.

United Airlines is believed to have shown interest in entering the Argentinian regional market, either via an agreement with SW or by setting up its own partner with local investors.


Aero Vip CATA Laer (Lineas Aéreas Entre Rios) Southern Winds TAN (Transportes Aéreos Neuquen)

Peruvian changes

Changes are also in sight in Peru, where both the TACA Group and AeroContinente are rumoured to be planning new regional services. Such a move may prompt AeroCondor to return to its former role as a purely air taxi company, in which it has been successful, and would force the carriers such as Star Up and Transporte Aéreo Andahuaylas to either modernise or get out.

AeroCondor general manager Luis Eduardo Palacin says the airline has survived all the turbulence in the market because it has always been run "as a family company". But he may have to re-examine the airline's role, if Taca Peru or LanPeru expand their services. "We fly to Cajamarca and Huanuco where the runways don't take jets. People prefer to fly jets and the government plans to improve the runways in the next two or three years, so we may just go back to the tourist services," Palacin says.

Palacin points out that Peru's regional airlines have a tendency to "pop up and disappear three or four months later". But he adds that Star Up and Transporte Aéreo Andahuaylas are doing well with Soviet-built aircraft. "They are working hard, trying to build up their routes," he says. "I think they will survive."

Elsewhere in Latin America, Colombia has had its success stories. AIRES carried over 500,000 passengers last year and is looking to increase its 6% market share. Other Colombian regionals include Aerotaca, based in Villavicencio, and the government-owned airline Satena, which is administered by the air force. Satena has upgraded its fleet with six Fairchild Dornier 328s.


AeroCondor Star Up Transporte Aero Andahuaylas

Chilean environment

Chile is an unusual case, as at no point in its 4,000km length is it more than 150km wide. Consequently, it does not provide a favourable environment for regional airlines. Aerovias DAP is the only small Chilean airline to have managed to succeed and even so, its market share is less than 1%. It is based in Punta Arenas, at the southern tip of the country, and flies to around 10 destinations. Bus company Varmontt is understood to be preparing to start an airline by the same name to serve the southern tourist-orientated lake district.

Meanwhile, Ecuador's tiny regional market has been squashed by a serious economic recession. Similarly, Uruguay and Paraguay, both sparsely inhabited, offer limited opportunities for regional airlines. Paraguay's only domestic airline is ARPA, which is owned by Rolim Amaro, the president of Brazil's TAM.


Aerovias DAP

Venezuelan promise

In contrast, Venezuela, like Brazil, has seen a plethora of small start-ups venture into the market. "Venezuela is a country with a good potential for regional companies; the distances are large and it has difficult terrain," says Multiplan Consultaria's Sampaio. Air Venezuela, based in the Andean University town of Merida, is planning to grow and is negotiating the purchase of seven IPTN N-250s from Indonesia. Some of its routes are operated in an agreement with Aserca, one of the three Venezuelan international carriers that has sprung up in place of defunct Viasa.

Also expanding is Avior Express, formed in 1994, with the merging of Aviones del Oriente and Helicópteros del Oriente. It serves 17 destinations from its base in Barcelona. LAI has become a regional airline after changes in legislation allowed it to fly large aircraft. Since then it has acquired three ATR 42s and two ATR 72s for its routes, which serve the western part of the country, with plans also for Caribbean destinations such as Aruba and Curaçïo.

Laser, launched in 1994, has found a niche in the market by concentrating on quality service on its flights from Caracas to Porlamar and Maracaibo. Venezuela's oil capital, Maracaibo, also has an airline, Santa Barbara Airlines, serving a number of destinations. TAAN is the most recent start-up, prompting some observers to believe that there are now too many airlines operating domestically and that some consolidation is inevitable.


Air Venezuela Avior Express LAI (Linea Aérea Iaaca) LASER (Lineas Aéreas de Servicio Ejecutivo Regional) Santa Barbara Airlines TAAN (Transporte Aéreo Andino)


Arpa Colombia

Aires (Aerovias de Integracion Regional) Aerotaca Satena (Servicio Aereonavigacion a Territorios Nacionales)

Source: Airline Business