Vasp's ambitions spread far and wide, but are its financial resources equally expandable? Lois Jones reports. Vasp chairman and president Wagner Canhedo Azevado is a man who likes to think big and be in control.

The chairman likes to consider South America, and not just Brazil, as a single primary market. Canhedo wants to cast a network of air services over the region, piggybacking on the growing integration and power of the Mercosur bloc, comprising Brazil, Argentina, Chile, Uruguay and Paraguay.

He says that Vasp 'would like to occupy all the blank spaces in South America and create an integrated network across the area'. In his opinion, 'Mercosur is the great market of the next decade'.

Vasp is well on the way to achieving its ambition of creating a 'powerful air network in South America' by acquiring stock and administrative control of other airlines in the region. The carrier has already brought three airlines into its fold, Lloyd Aéreo Boliviano, Ecuatoriana de Aviacion and Transportes Aéreos Neuquen, naming the group Vasp Air System.

Canhedo's aim is for the subsidiaries initially to operate on national routes, before introducing them to regional services within South America and ultimately to international destinations in Europe and the US.

Vasp's 'national, regional, international' plan may be well defined. But according to one industry source, the airline has devised a strategy that 'doesn't pay off'. It says Vasp should concentrate on trapping the far higher passenger numbers out of Brazil, rather than the much less significant traffic from smaller Latin American countries. While Canhedo's plan may pay off politically and allow the carrier to acquire additional route rights, it may not pay financially. The source predicts that the carrier will 'be stretched financially' and 'Canhedo is bluffing somewhat if he says he isn't'.

However, Canhedo sees money as no object. Vasp is just one of 21 companies which make up the Canhedo group, whose annual revenue amounts to US$3 billion.

The group holds 60 per cent of Vasp, with the remainder in the hands of the Sïo Paulo state government, after Canhedo won an open public bidding for control of the formerly wholly state-owned airline in 1990. Canhedo says he plans to increase his ownership participation in the airline.

At first sight, the airline's financial situation seems in good shape. Vasp's net result fell slightly from US$155.4 million to US$151.5 million last year. In 1997, Canhedo predicts revenue growth of some 12 per cent on 1996 turnover of US$1.2 billion.

The airline is, however, tremendously undercapitalised. Total long term liabilities amount to US$1.2 billion on total stockholders' equity of US$50.5 million. Vasp may well receive a huge helping hand via government compensation. Vasp has sued the government for US$1.8 billion to compensate for freezes on air fares between 1986 and 1990, but the government is unlikely to pay out the whole amount.

Canhedo concedes that Vasp has given up higher profits by investing in foreign airlines in South America - a strategy which he views as 'indispensable to accomplishing Vasp's goals'.

Vasp holds a 50.1 per cent stake in the Quito-based carrier, Ecuatoriana de Aviacion. It acquired a 51 per cent stake in the Bolivian carrier, Lloyd Aéreo Boliviano, in 1994 and has increased its stake in Transportes Aéreos Neuquen from 80 to 87 per cent, since it bought control of the Argentinian carrier in 1994.

Canhedo has ensured that his investments have brought management control, but he intends that his new subsidiaries will keep their own identities and names. 'These countries are very proud of these carriers,' he says. Canhedo has installed only one Brazilian executive, the president and chief executive of LAB, and 'that's because he's my son!'

Canhedo is proud of the fact that while Ecuatoriana only existed on paper when he bought it, the airline now 'flies all over Latin America'. The Quito-based carrier operates 10 routes to New York, Miami, Caracas, Bogota, Lima, Santiago, Buenos Aires, Sïo Paulo, Rio de Janeiro and Manaus. It has three Airbus A310s and three Boeing 727-200s, and its single DC-10 is being converted for cargo use.

Although Canhedo refuses to detail the amount invested in the Ecuadorian subsidiary, he confirms that it falls within the US$47.8 million limit outlined for investment up to June 1998. After that date, Vasp intends to 'increase the equity deal to expand the company'. The Ecuadorian carrier lost US$6.7 million last year.

In contrast, LAB recorded a profit of US$938,000 in 1996. The Bolivian carrier has a fleet of 15 aircraft, including B727s, B737-300s and Airbus A310s, and operates to 23 destinations in South America, as well as 13 weekly flights to Miami. Operations to New York are due to start later this year, and LAB intends to launch services to Madrid, Paris and Lisbon in 1997, pending approval of bilaterals.

Vasp's Argentinian subsidiary, Transportes Aéreos Neuquen or Tansa, flies to 12 points in Argentina and four in Chile. Vasp intends to add four B737-200/300s to Tansa's current fleet of Saab 340s, Fairchild Metros and Turbo Commanders.

To a large extent, however, the direction of Tansa's future growth depends on market demand, says Canhedo. Additionally, Vasp has been stalling future expansion plans while waiting to see whether its bid for fellow Argentinian carrier Aerolineas Argentinas was to be accepted.

Canhedo had made an offer of US$300 million in cash to take control of Aerolineas Argentinas, based on the Argentinian carrier's assets on 31 December 1995, but this offer was spurned in favour of the one made by American Airlines.

Vasp's plans for expansion do not stop with the three Latin American subsidiaries. According to air transport consultant José Martinelli, Vasp has already converted its air taxi company Brata into a regional company on paper and means to launch regional operations in Brazil within the next 12 months.

While Vasp decides on how to establish an intra-regional network across Latin America, elsewhere it means to extend its presence via codesharing. 'We are interested in codesharing with all US and European carriers - we are open to all possibilities,' declares Canhedo.

Air transport consultant Mario Sampaio urges Vasp to act sharply. 'Vasp will need to form an alliance in the near future', particularly now that its main domestic competitor, Varig, is part of the Star Alliance. Vasp's existing alliances are limited to a block space agreement with Olympic Airways on Vasp's Athens-Rio de Janeiro-Sïo Paulo service.

While Vasp's alliance strategy may be lacking, the carrier has plans for the development of its cargo business and has set up a cargo franchising network called Vaspex. Vasp has already placed 203 franchisees out of a total of 376 potential candidates who will collect and distribute parcels across Brazil. Although Vaspex will mainly be tied to Brazil, Vasp plans to extend the service internationally in May 1998.

Vasp is undeterred by the US$120 million cost of the project, pointing out that the Brazilian cargo market generates an annual revenue of US$6.5 billion. Part of the investment will be used to update airport terminals and acquire eight B737-200s to add to its six cargo aircraft.

Vaspex will increase cargo's contribution to the company's revenue from 11 per cent to 25 per cent by 1998.

Vasp also plans to expand its passenger operations and aims to increase fleet numbers from 41 to 48 aircraft by next year. It is currently negotiating for B737-700s and is also deciding between Boeing 767s or Airbuses for medium-haul routes.

Vasp plans to keep its nine McDonnell Douglas MD-11s. In addition to the MD-11's role as a long-haul aircraft, Vasp introduced it on domestic services last year. It flies from Rio to Brasilia and from Sïo Paulo to Brasilia and Salvador, bringing three-class service to the domestic market for the first time.

Vasp serves 50 domestic points and 13 global destinations from its main hub at Sïo Paulo. Last year, the airline introduced international services to Athens, Osaka and Frankfurt. This year, Canhedo expects load factors to reach 60 per cent on domestic routes and 67-70 per cent internationally.

Vasp dismisses the damaging effects of growing competition on international services, posed by Brazilian counterparts Varig, TAM and Transbrasil, as well as the US and European majors. Canhedo claims that out of all the Brazilian carriers, Vasp is the best prepared to face competition as 'its operating costs are under control and it has a very good breakeven point of 52 per cent'.

Indeed, Canhedo says he is in favour of competition. 'The more competition the better. We were born and grew up under competition - that's what makes Vasp work'. Canhedo turns the competitive threat posed by the USmajors, American, United, Delta and Continental, into a positive. In his opinion, the US carriers will bring more passengers into the country and these passengers 'will eventually fly Vasp'.

However ambitious, competitive and confident Vasp may be, it needs to establish clear limits to its expansion and beware of stretching itself too far. The carrier has to balance the potentially heavy cost of creating a South American network against the pressure which its Brazilian network will be under without alliances for it to fall back on.

However ambitious, competitive and confident Vasp may be, it needs to establish clear limits to its expansion and beware of stretching itself too far. The carrier has to balance the potentially heavy cost of creating a South American network against the pressure which its Brazilian network will be under without alliances for it to fall back on.

Source: Airline Business