An unprecedented restructuring plan has put Avensa back in the black amid economic chaos, but has also attracted fierce criticism. Flag carrier Viasa has lost out to its rival in both the domestic and US markets and as it struggles to fight back, new entrants are appearing on the scene. Barry Lynn reports.

Recently, Henry Lord Boulton was talking with his son, a pilot for the Venezuelan airline company Boulton has presided over for 23 years, Avensa (Aerovias Venezolanas). Dismayed over pilots riding in taxis and eating expensive meals à la carte while laid over in a foreign city, the 66-year-old Boulton asked: 'Son, what do you do when you have to spend the night in Miami?' The answer brought a smile to Henry Boulton's face: 'Dad, I go to McDonalds and eat a Big Mac.'

A perfect response to a man who is as famous in Caracas for practising what has been described as 'savage capitalism' in reducing costs as he is for the tall figure he cuts, the deep pockets he maintains and the flawless English he speaks. Six years ago he decided to turn Avensa's small domestic charter subsidiary Servivensa into an international airline that would displace Venezuelan flag Viasa on routes to the US. Equally important, he launched a union-busting plan that has resulted in an outsourcing programme that must be unprecedented among carriers anywhere in the world.

Boulton, it is fair to say, has not set out to win friends. If you happen to be one of his employees, you might want a president who is less autocratic; in US terms, less Frank Lorenzo and more Herb Kelleher. If you happen to be a Venezuelan consumer who must fly on an airline that controls 80 per cent of the domestic market, you might look with fondness on Aeropostal, the state-owned domestic carrier that went bankrupt in October 1994 after intense competition with Avensa. And if you are an industry official who has watched Boulton keep the airline flying even as Venezuela has drifted through its worst economic crisis in 30 years, you might want someone less 'tyrannical,' as Boulton is described by Luis Igancio Mendoza, president of Viasa in the late 1980s. As impressive as Boulton is in person, equally so is the long list of enemies and critics the former pilot has.

The evolution of Avensa illustrates how greatly Venezuela's airline industry has changed since the late 1980s. Built up in the 1960s and 1970s as Venezuela used oil earnings to develop state-held industries, the country's state airlines became among the best on the continent. State-owned Viasa carried the greatest share of international passengers, many of whom then flew on to destinations in Venezuela's interior on Aeropostal. Domestic fares were low, thanks to large state subsidies.

But as the economy stagnated in the 1980s, the Venezuelan government began to abandon its more intrusive policies while initiating the privatisation of state companies.

At the same time, Pan Am and Eastern were replaced by the more powerful, more aggressive American Airlines and United Airlines. This combination of events had much the same result as it did elsewhere in Latin America: flag carriers either failed or were privatised. Viasa has greatly cut back service in the five years since it was purchased by an Iberia-led consortium and operates more and more as an offshoot of the Spanish state airline. Aeropostal, grounded for two years, is now being marketed for a second attempt at privatisation.

Avensa, however, has been different. Though 20 per cent owned by the Venezuelan state, the airline long ago developed a scrappy character as it fought to survive against heavily subsidised competitors. Boulton, who took control of Avensa in 1973 when the company was in bankruptcy, conformed to strict regulations that favoured unions - at least until 1990, when the Venezuelan government opted to deregulate the domestic market. He seized the opportunity to break the unions' grasp on the company by ceding operations over to a 'new' Servivensa and then using former salaried employees as contract workers. 'We have introduced a thorough programme to outsource everything,' Boulton says. 'Basically, we have taken our people and asked them to set up their own companies.'

The subcontracting campaign has touched almost every part of the company. Reservations are now handled by an independent company (Avensa still has oversight over contracts with other companies). Flight attendants are individual contractors and must pay for their own health and unemployment insurance, not to mention lodging, meals and transportation when they stay abroad while on duty.

But it is with the pilots Boulton has shown the most skill in slowly destroying Avensa's once-strong unions. As Servivensa grew - it is now a much larger operation than its host company - the airline hired cockpit crews on a contract basis. Over time, and over the furious objections of Avensa's pilot union, Boulton began to use Servivensa crews to fly Avensa aircraft. Under the new regulatory regime, however, the state declined to step in to back the workers, and last year Avensa's pilot's union at last surrendered: it reformed as a subcontracting company to Avensa. Frank Lorenzo would be proud.

Boulton says the outsourcing programme has been hugely successful. When Servivensa launched scheduled service in December 1990, Avensa's airline operation had some 4,000 employees. Now, Avensa itself directly employs only 600 people, while Servivensa direct employees total a mere 64. Last year the airline operations reported a profit of US$11 million on almost US$250 million in revenue. Costs have dropped by more than a third, and airlines throughout the region have studied Boulton's reforms. 'Productivity has risen tremendously,' he says, adding that eventually he wants airline workforces to consist of only top management and their personal assistants.

However, outside Boulton's downtown Caracas office, praise for his choice of tactics is scarce. Avensa's service has become 'grotesquely terrible' following the closure of Aeropostal, says Toby Bottome, founder of Venezuela's oldest economic newsletter, Veneconomy, and a widely respected commentator on the country's businesses.

Not that Venezuela has been an easy place in which to operate in recent years, for any company with international ties. After his 1993 election, President Rafael Caldera abandoned many of the free market reforms of his predecessor Carlos Andres Perez, even reinstituting infamous and arcane currency conversion rules. For the Avensa-Servivensa operation, this meant that when it needed to buy a spare part in the US, it often could not obtain the dollars it would need for the transaction. One result is that about one-third of the 37 strong fleet, including B727s, B737s, B757s and DC-9s, is grounded most days. A number have been cannibalised for parts to keep the rest of the fleet in the air.

Despite such problems arising from the vagaries of Venezuela's economy, people throughout the country have been surprised by the severity of Boulton's actions. Unions have been fiercely opposed, and a faction of the Boulton family, led by the airline's now 86-year-old founder Andres Boulton, recently used Salomon Brothers in an unsuccessful attempt to market its 20 per cent stake in Avensa. Even within the usually fraternal world of Venezuelan airline executives, criticism is rife. 'It's really horrible,' says former Viasa chief Mendoza. 'You can't treat [employees] like that. You have to have more human feeling.'

The most damning criticism of Avensa, however, seems to have been made by its customers. Avensa may dominate the Venezuelan market, but it is a market that shrunk by more than half since 1988, to under 3 million passengers last year. Undoubtedly, this is at least partly due to simple supply and demand equations that, when Aeropostal was flying, meant more capacity and lower prices. As a result of monopoly pricing in the air, Caracas' news media is full of reports about the swelling legions of people travelling on the country's battered and already overcrowded buses.

However lacking Boulton is in popularity, his approach to the airline business is almost diametrically opposed to that of erstwhile flag carrier Viasa.

Five years after being sold to Iberia, the company still has almost as many employees as in 1989. Commercial director Juan Pedro Aritio says the company has in fact eliminated 500 positions over the past four years. But with 2,700 employees, the company directly employs nearly as many people as it did when Mendoza stepped down in 1989, despite the fact that it has abandoned many routes.

Many of the cutbacks were due to efficiencies that came from coordinating some of Viasa's services with those of Iberia and Aerolineas Argentinas, which remains the Spanish flag carrier's other primary investment on the continent, albeit indirectly. These three airlines, for instance, now share the same sales force in Europe and in most of South America.

Nonetheless, Viasa, an airline well acquainted with labour strife, also has turned to outside contractors for many services, including Iberia for maintenance. Aritio even admits that he admires some of Boulton's more aggressive tactics to trim the workforce. 'As an executive in charge of keeping costs under control, it doesn't appear to me to be a bad idea,' he says.

But Viasa must function under many more restrictions than does the Avensa-Servivensa operation. Iberia, for instance, owns only a 45 per cent share of Viasa, controlling the airline in conjunction with Venezuela's Banco Provincial, which holds 15 per cent. The other 40 per cent still belongs to the Venezuelan Investment Fund (FIV), which has opposed some efforts to trim the airline's staff.

In fact, relations between the FIV and Iberia have often been strained over the past four years, as have relations between Viasa's Venezuelan staff and foreign managers placed by Iberia. Most observers are quick to say, however, that the situation never deteriorated as badly as the relationship between Iberia and Aerolineas. Moreover, the airline reported a $2 million operating profit last year - the first since 1989.

Still, the airline is far from its glory years, when it served much of North America. Much of the damage to Viasa's route system occurred during a vicious fare war two years ago, precipitated by Avensa's decision to operate six daily shuttles to Miami and to cut fares by nearly half. American and United were able to match the fares, but Viasa opted to cut back on service instead. A South American carrier with limited access to Miami is clearly at a serious competitive disadvantage.

The airline is doing much better flying to Europe, due to its Iberia connections and the less rigorous transatlantic competition. This in turn has helped the airline market itself within Venezuela's Andean Pact neighbours as a way of connecting to Europe. Viasa and Avensa together now dominate Andean Pact traffic into Venezuela, splitting an 80 per cent share of passengers. The main difference is that Viasa takes passengers onward to Europe, whereas most of Avensa's onward passengers connect to Miami and New York flights.

The new Viasa does not lack for critics. The company, which operates a small fleet of five B727s and five DC-10s, has been faulted for not being consistent with domestic service, and for a lack of proper support on some international flights. A flight to Puerto Ordaz in Venezuela's interior, for instance, was introduced and then quickly abandoned earlier this year. In mid-July, one of the company's Miami flights was cancelled for three straight days, due to a problem with an emergency slide. 'You have to be more reliable,' Mendoza says. 'How can you create confidence like that?'

Over the long term, however, Viasa may benefit from some important geographic advantages. For parent company Iberia, which also operates hubs in Miami and Buenos Aires, Caracas may well turn out to offer the perfect combination of low-cost labour and jet fuel, and proximity to cities throughout the Americas. And compared with Avensa, Viasa may well turn out to have a happier workforce. Aritio may admire Boulton's daring in slashing his workforce, but he says Viasa has no intention of following the Avensa example.

Domestically, many people think the market has become much more attractive for a new entrant: 'There is a tremendous opportunity for whoever comes in,' says Veneconomy's Bottome. Still, Avensa's 80 per cent market share looks safe a while longer.

The biggest potential competitor on everyone's minds is Aeropostal, which ceased operations in October 1994 when it declared bankruptcy. Three months earlier, a privatisation attempt failed when the Venezuelan Investment Fund rejected as too low a $35 million offer for the airline. Aeropostal has been dormant since, its nine DC-9s carefully maintained in a Maiquetia hanger. Though the airline still controls prime counterspace, an extensive selection of spare parts and good hangers, it also comes with a price tag that observers say is still too high. In April, FIV set a price of $40 million for the airline, but this represents a de facto price of $30 million, since Venezuela's bankruptcy court can accept any bid within 75 per cent of the asking price. No buyer stepped forward, however, and the government is now said to be considering dropping the asking price to $28-30 million.

Another factor that may deter many potential investors in Aeropostal is uncertainty over whether they will be able to repatriate profits earned in Venezuela. Last February, American Airlines sued the Venezuelan government over losses it says it sustained when the government refused to exchange American's local currency earnings until after a large devaluation. In protest, American later cut back service to Venezuela.

Perhaps the greatest threat to the Aeropostal privatisation comes from the number of small but healthy airlines that have launched operations in Venezuela in recent years. Some have combined high reputations for service and reliability with low overhead. Still, these airlines are not finding it easy to expand service quickly. The two largest, Aserca (often rumoured as a potential joint venture partner with American) and Zuliana de Aviacion, each operate only six jets. Oriental de Aviacion operates two jets and Laser operates one. Aerotuy has three turboprops, while LAI operates two.

Two startups are also close to launch. Santa Barbara Airlines, which is being advised by a former Viasa planning director, plans to start a domestic and regional hub in Maracaibo with turboprops by the end of the year, and Air Venezuela is set to begin service with five Convair 580s.

But until the American case is settled - the suit recently advanced to the country's Supreme Court - these airlines will likely continue to have trouble attracting the new investments they need to grow operations in any significant way.

One final deterrent to anyone interested in competing with Avensa is the US Federal Aviation Administration's Category 2 listing of Venezuela, which bars Venezuelan carriers from introducing new service to the US. An FAA team flew to Caracas in early July, and a report is due out soon. Initial indications are that it is unlikely Venezuela will be downgraded to Category 3, under which Venezuelan carriers would be banned from the US, though there is little hope it will be given the all-clear Category 1 status soon.

So for now, the future of Venezuela's airline industry may well be in Henry Boulton's hands. Which means that observers will get a chance to see if a passenger airline run in what Luis Ignacio Mendoza calls a 'tyrannical' manner, with employees working in a 'climate of fear,' can succeed. In Venezuela, at least in the near term, the answer may well be yes, at least until a large investor arrives willing to take on the risks of operating in the country's environment.

And Boulton's plans? Cut costs further. Then cut them again. Boulton's son, for one, has sparked an idea: 'I think that's great,' Boulton senior says of his pilots eating on the cheap. 'A Big Mac and a glass of milk. What more could you want?'

Source: Airline Business