The drive for growth and some underlying political tensions within Central America could test Federico Bloch as he continues Grupo TACA's unique approach to integration.

When Federico Bloch first went to work for TACA International Airlines in 1979, times were very different. El Salvador's flag-carrier had only three aircraft and was just part of a Central American aviation industry which had long since fragmented. Although they had at one time been consolidated, the region's six flag-carriers were as divided as the civil wars that split its nations. Today, with Bloch at the helm, Grupo TACA is one of the three most important airline groupings in Latin America. The group's six airlines have a common brand, an integrated fleet of 36 mostly new jets, six regionals providing feeder traffic, 2.5 million passengers annually, and revenues last year of some $700 million.

It has achieved this status through a two-step process of integration and growth. The integration, while a rare success in the airline community, also carries risks. It relies on the voluntary ongoing consent and goodwill of each group member. That may be its strength, but it also poses a danger, since the growth now under way does not benefit all members alike. As that benefit gap grows, so does the risk that a member may opt out if it feels that it is not gaining a fair share.

The integration process began when Bloch, early in his career, saw that a three-aircraft airline would not last long. As he moved up in TACA International from the finance department to executive vice-president and then to chief executive, he convinced the airline's mostly Salvadoran owners that equity stakes in the region's other airlines might help forge alliances. They agreed and TACA International became a stakeholder in all of Central America's flag carriers.

That stake varied from 10% to 49%, but it gave TACA, with Bloch as chief missionary, a platform from which to persuade the other airlines why they needed to co-operate. "We knew that no small airline was going to survive in the end in Latin America," Bloch recalls. "We needed a critical mass in order to be competitive." Grupo TACA was the result. Not a corporation, not even an entity, in late 1997 Grupo TACA became a name - "a commercial umbrella", as Bloch calls it - for Central America's airlines.

Integration began. The group progressed from a common name and logo to a common frequent flyer plan, maintenance, accounting systems and, ultimately, a common operating management. "Everyone understood that the only way to have an efficient network was to treat it as a single one," says Bloch. Grupo TACA also became a joint purchasing agent, and extended the logic of that in late 1997 to a joint order with LanChile and Brazil's TAM for 110 Airbus A320-family jets.

"Networks, schedules and costs are all integrated," says Bloch. "Standards are the same: service, safety, everything. We are 95% integrated." This did not happen by chance. Bloch explains: "The phases we took the group through were planned. It would have been difficult to do it any quicker. We were breaking ground in a lot of areas, and are quite satisfied with the way the group developed."

Growth and integration were almost simultaneous. The first expansion was into North America. Ironically, traffic grew during the region's civil wars, as Central Americans fled the fighting. When peace returned in the mid-1990s, tourism took off, with Costa Rica becoming an eco-tourism hot spot. Now its neighbours hope to mimic its success. Today, traffic between North and Central America is evenly split between business, tourism, and visiting friends and relatives.

While Grupo TACA serves Mexico and Canada, the linchpin of its North American strategy is its alliance with American Airlines. Without it, Grupo TACA probably would be just another obscure Latin American airline. Its two-year struggle for approval of that alliance, and the carve-outs required as part of that approval, left Bloch sceptical about US aviation policy. He saw hypocrisy in Washington's zeal for open skies when it also seemed reluctant to level the playing field for small Latin carriers trying to compete with large US rivals. His suspicions grew when Continental Airlines entered El Salvador with what he saw as excess capacity and below-cost fares, coupled with Washington's unwillingness to do anything about it.

Anti-trust woes

In their initial alliance request, Grupo TACA and American did not seek anti-trust immunity. Sensibly, they suspected it would be denied. But along with their current request to renew the two-year-old alliance, Grupo TACA and American will now seek this vital status. Bloch thinks it has a chance this time, mostly because he sees a change in the view at the US Department of Transportation (DoT). "On our initial application, there was a perception that American had a very tight grip on the market, which was not true then and is not true now. I think the DoT now understands that we have an open and very competitive market," he says. The application for anti-trust immunity has been pending for nearly a year, opposed by Continental and Delta, which has convinced the DoT to require American and Grupo TACA to produce additional data. Washington has sent no signals about when it might decide. For now, Grupo TACA's North American strategy is on hold until the outcome is clear.

Accordingly, Bloch is convinced that the governments of Central America made "a big mistake" by accepting US open skies without making it conditional on a series of US approvals. "I am sorry that we didn't insist on conditions on anti-trust immunity and predatory pricing. We suffered tremendously from that. I would urge anyone signing an open skies bilateral now to get some pretty tight language on predatory pricing."

Now that all the major US carriers have entered the Central American market, Bloch thinks they are less aggressive. The entry of Continental and Delta Air Lines made a dent in its market share, but Grupo TACA still carries more than half of all US-Central American passengers. While the outspoken TACA chief still worries there is nothing to prevent a new outbreak of predatory pricing, for the moment things have stabilised.

Focusing on the core market

In Central America the group's strategy focuses on keeping what it now has. With local rivals starting up from time to time, none poses a serious threat. Within the region, Grupo TACA still stresses the frequencies and service standards that keep local customers happy. Its biggest threat stems from Panamanian carrier COPA's decision to split off and form a separate alliance with Continental. The Houston-based carrier now owns 49% of COPA's parent company, and the two airlines are building a Panama hub with one-stop connections between most of North and South America.

Aeroperlas, a Panamanian regional, joined Grupo TACA in March, and could offer some competition to the COPA-Continental combination. Aeroperlas plans to serve some regional destinations from Panama, but Bloch sees it only as a "niche player" that will not divert traffic away from Grupo TACA's own north-south hub in Costa Rica.

The big news at Grupo TACA today concerns neither North nor Central America, but the group's expansion into South America - perhaps a natural if belated move for the airlines of a region that comprises the land bridge between North and South America. Historically, half the group's traffic was intra-Central America, and the other half between there and North America. Now that mix is 40% for both North and Central, with South America on 20%. Bloch predicts the mix will be one third each within a year or two.

"Presently, our growth is all south," Bloch declares. "That's our goal for the foreseeable future. We want a network that is geographically diversified and well balanced between the regions. Basically, we don't want all our eggs in one basket." This South American strategy centres on two hubs. One is San José, Costa Rica, which acts as a conduit between North and South America. Half of San José's traffic is in transit between the two continents.

Lima is the other hub. TACA International joined forces last July with Daniel Ratti, a veteran of Peruvian aviation, to launch TACA Peru. Since then, after fending off a lawsuit by ex-employees of bankrupt AeroPeru, TACA Peru has revived many of AeroPeru's dormant South American routes. Although it launched its first flights to Miami in December, Bloch says that "Lima is fundamentally an intra-South American hub. South America tends to be a continent that generates its own traffic. In South America, we have a growth strategy focusing primarily on increased frequencies, and also on the strengthening of our Lima hub," he explains.

"Maybe we will add one or two more routes, but when you look at a map of our network, we already cover all of the large cities in Latin America." Ecuador is the only place where Grupo TACA aims to expand. The group plans to launch a new airline from scratch in the first quarter of this year with daily flights from Quito to Caracas, Bogota, San José and the USA.







Costa Rica



TACA Ecuador (2001)


TACA Honduras


TACA International

El Salvador











Inter of Cuba




La Costena



Costa Rica

Regional expansion

Grupo TACA relies mostly on its own members for this South American expansion. It codeshares with Avianca to and from Bogota, and TACA Peru started a codeshare with Aeromexico in December. "We don't have many routes that have codeshares," admits Bloch, "but where we do, that extra revenue is important."

The benefits of Grupo TACA's South American strategy are uneven, unlike its growth within Central and North America. TACA Peru, the cornerstone of this strategy, is 49% owned by a Peruvian company, which itself belongs to El Salvador's TACA International. The investors that form what eventually may become TACA Ecuador are from Ecuador and Costa Rica. Thus, in terms of Central American interests, shareholders from El Salvador and Costa Rica control both South American ventures of Grupo TACA. The group's members in Guatemala, Honduras, Nicaragua and Panama have no stake in this expansion.

The significance of this is underscored by the nature of Grupo TACA itself. Consider the symbolism of its aircraft: each one has the group's logo on its tail, but carries its own airline's name on the fuselage. The group does not apply for government approvals in its own name or on behalf of each member: members may apply for these approvals jointly, but must do so in their individual names. Each airline is designated by its own country. The US Federal Aviation Administration assesses each TACA country separately under its international safety programme. More importantly, members of Grupo TACA are not financially integrated. On codeshared flights they must account to each other. Revenue is not pooled. Each airline makes its own financial reports to its own shareholders. On the key issue of money, Grupo TACA is not a group.

Bloch, Enrique Cueto at LanChile and Rolim Amaro at TAM all see the future of Latin American aviation in a similar light. Each has expanded beyond its borders by taking equity stakes in new or existing airlines, providing substantial guidance, standardising operations and integrating them into a shared network. Brazil's TAM has done this successfully in Paraguay. LanChile is trying, with mixed results, to do it in Peru and Ecuador. "This is the future of Latin America," predicts Bloch. "We are going to see a consolidation of Latin America into fewer carriers with broader coverage."

But, as LanChile's venture with LanPeru shows, partnerships can fail. The equity designed to cement relations within Grupo TACA also runs only one way. TACA International holds stakes in the other Central American airlines; none holds a stake in it. Moreover, TACA does not hold enough to call the shots anywhere. Bloch, however, dismisses any danger of division within his group, saying: "We are 100% harmonious."

He sees the integration of airlines as part of a broader movement within Central America. The region now has a single air traffic control entity - COCESNA - and a single agency - ACSA - providing air safety expertise to each country's civil aviation authority. Grupo TACA was a pioneer in integrating private Central American companies, but banks and others are following. SICA or Central American Integration System, brings officials together on a regular basis to discuss integration. Bloch stresses, "We have a political mandate from the region to work as a region."

What then are the risks that a Grupo TACA member might bolt because of nationalistic pressures? "We are way past that," Bloch insists. "The governments and constituents understand that in a globalised world, the airlines must co-operate in order to be efficient."

But problems do occasionally arise between Central American nations. Last year saw a new spate of border disputes, such as one which led Nicaragua to slap a 35% tariff on goods from Honduras. That action provoked Honduras to increase vehicle checks and charges at its border, creating traffic backups and hot tempers in El Salvador. Then, when El Salvador, Guatemala and Nicaragua agreed to draft their own free trade agreement, Honduras was upset at its exclusion. These may be normal squabbles between neighbours, but they reveal the underlying tension between the richer and poorer nations of the region. Perhaps the fact that Grupo TACA's airlines are all privately held may insulate it from some of the region's volatility.

In the end, while the rationale for co-operation is strong - especially among airlines of small countries - the group's growth into South America could aggravate disparities and pose a growing test for the vision and diplomacy of its leaders.

Latin leader

Federico Bloch is the president and chief executive of both TACA International Airlines, El Salvador's flag carrier, and Grupo TACA, the key group of Central American airlines, which he has been instrumental in helping to assemble. Although born in El Salvador, Bloch was educated in the USA. He holds a masters in industrial engineering from Stanford University, and an MBA from the Harvard Business School. After university he returned to El Salvador in 1979 and assumed the role of chief financial officer at TACA International. Two years later he became executive vice-president. He went on to become TACA's president and chief executive in 1992. In 1997 Grupo TACA was launched as an airline grouping. Bloch chairs LatinPass and the Latin American Air Transport Association. He is also a member of the International Air Transport Association board of governors. Bloch, who turns 47 this month, lives in San Salvador with his wife and two sons.

Source: Airline Business