Continental Airlines' decision not to invest in AeroPeru is being viewed as the death knell for the Peruvian flag carrier. The likely winners will be two start-ups - each with foreign ties - together with AeroContinente, Peru's other international carrier.

AeroPeru has been grounded since March and its outlook is bleak. All aircraft have been returned to lessors and the airline owes $85 million. The door is wide open to new competition, which is moving fast to make make the most of the opportunity.

LanPeru, in which LanChile has a 49% stake, launched domestic services in July from Lima to Cuzco and Arequipa, using two Boeing 737-200s. The flights are designed to connect with LanChile's Los Angeles, New York and Santiago operations.

Another start-up, TransAm, was planning its own mid-July launch, with 737-200s leased from its strategic partner, Grupo TACA. International rival AeroContinente has received authority to fly a number of Central and South American routes.

This was the second time in two years that Continental had tried to construct an equity alliance with AeroPeru. Last year it was outbid by Delta Air Lines, which then withdrew its interest. This time, Continental was considering a $30 million cash injection in exchange for a 49% stake and effective control. As part of the deal, the Peruvian Government and other creditors would have capitalised debts.

But last-minute meetings between Peru's President, Alberto Fujimori, and Continental executives Greg Benneman and David Grizzle failed to find accord on two conditions that Continental considered deal-breakers - a four-month freeze on operating certificates for any more airlines in Peru and protection against predatory fares.

Fujimori balked on the first point. When talks broke off, he issued a statement saying: "I have no power to limit the entry of airlines under the law." The request for protection from predatory pricing was clearly directed at AeroContinente, which has driven most rivals out of business with its low domestic fares, although the airline insists the fares are legal.

Source: Airline Business