Aerolineas Argentinas continues to struggle as government protection from competition increases

Aeroparque only handled domestic and Uruguay flights until 2010, when it was opened to regional international flights operated by Aerolineas, LAN, Gol and TAM. Gol and TAM are being allowed to continue to serve Aeroparque (TAM is now the process of merging with LAN but the two groups will retain independent operations) while Aerolineas continues to operate almost all of its short-haul international flights at Aeroparque, including to Santiago and Sao Paulo.

Aerolineas and LAN both currently operate three daily flights on the Aeroparque-Santiago route, according to schedule data from Innovata. LAN also now operates seven daily flights from Santiago to Buenos Aires' main international airport, Ezeiza, as the airline group was initially only able to secure a limited number of international slots at Aeroparque.

Between Aeroparque and Sao Paulo, LAN now operates two daily flights compared to five daily flights for Aerolineas and three daily flights for Gol. TAM currently doesn't serve Aeroparque from Sao Paulo because it uses its three Aeroparque slots to operate one flight each from Asuncion, Porto Alegre and Rio de Janeiro but it places its code on LAN's Aeroparque-Sao Paulo flights.

Buenos Aires to Santiago and Sao Paulo average number of daily flights by carrier: Jan-2012

Airline	Buenos Aires Aeroparque-Santiago	Buenos Aires Ezeiza-Santiago	Buenos Aires Aeroparque-Sao Paulo	Buenos Aires Ezeiza-Sao Paulo
Aerolineas Argentinas	3	1	5	1
GOL	0	1	3	3
LAN	3	7	2	0
TAM	0	0	0	6
Others	0	3	0	1

Source: CAPA - Centre for Aviation & Innovata
Notes: Merger partners LAN and TAM already codeshare on all Buenos Aires-Sao Paulo flights while Aerolineas plans to begin codesharing with Gol on all Buenos Aires-Sao Paulo flights sometime in 2012. TAM flights listed are operated by TAM (Brazil) or TAM Paraguay. LAN flights listed are operated by LAN Argentina or LAN Airlines (Chile).

If LAN does not win its appeal of Argentina's decision to revoke its authorisation to operate international flights at Aeroparque, the airline group will have to move its Aeroparque international flights back to Ezeiza, putting it a competitive disadvantage on the Santiago and Sao Paulo routes. The impact in the corporate market could particularly be significant because business passengers value the convenience of Aeroparque over Ezeiza, which is located far from the city centre.

New policy will not impact LAN's domestic operation

LAN Argentina, however, will continue to be able to compete with Aerolineas on domestic trunk routes from Aeroparque. LAN currently has about a 41% share of the total Argentina domestic market and accounts for 47% of total domestic capacity at Aeroparque (See Background information). Historically nearly all domestic flights at Buenos Aires have been operated at Aeroparque while non-Uruguay international flights have been operated at Ezeiza, where Aerolineas continues to base its long-haul operation.

Aeroparque currently accounts for 83% of all domestic capacity in Argentina while Ezeiza accounts for only 3%, according to Innovata data. Ezeiza still accounts for 66% of all international capacity (seats) in the Argentinean market, compared to 21% for Aeroparque, although Ezeiza now has only a slightly larger number of international flights (weekly frequencies).

The Argentina Government's original decision two years ago to open Aeroparque to international flights to Brazil, Chile and Paraguay was driven by a shift of strategy at Aerolineas to focus more on the regional international market. Aerolineas' current business plan, which was implemented about a year after renationalisation, identified lucrative opportunities in Argentina's regional international market, which at the time was relatively under-served. Aerolineas subsequently asked the Government for a change in policy at Aeroparque to allow regional international flights, believing it could better exploit growing demand for regional international services, particularly from the business sector, by basing its international narrowbody fleet at Aeroparque.

Aerolineas moved in Mar-2010 about 160 weekly international flights to Brazil, Chile and Paraguay from Ezeiza to Aeropoarque. In 2010, the carrier also significantly increased capacity on regional international routes and pursued rapid renewal of its narrowbody fleet, with Boeing 737-700s replacing 737-500s on short- and medium-haul international flights.

Aerolineas' long-haul operation continues to flounder

The new strategy has paid off as profitability on regional international routes has improved. Aerolineas' narrowbody operation (domestic and regional international) is now believed to be close to breakeven while the widebody operation continues to bleed cash at a rate exceeding USD1 million per day and potentially approaching USD2 million per day. As CAPA reported in Jul-2011:

The first phase of the restructuring - which focussed on improving reliability, renewing the narrowbody fleet and expanding the short/medium-haul international operation - has been completed relatively quickly and successfully. But Aerolineas has been slow in implementing the critical second phase, improving profitability of the long-haul operation through fleet renewal and network enhancements. Aerolineas now aims to make progress in the ongoing attempt to improve the performance of the long-haul operation in 2H2011 although it will more likely be 2H2012 or even 2013 before positive results are generated.

See related article: Aerolineas Argentinas focuses on fixing highly unprofitable long-haul operation

Over the last six months Aerolineas has again failed to make any significant progress in improving the profitability of its long-haul operation. While there remains hope for improvement in the medium-term, obstacles continue to significantly limit Aerolineas' ability to implement the second critical phase of its restructuring. The main challenges are staunch union resistance to any adjustments in the carrier's long-haul operation and limited availability of more efficient widebody aircraft.

Aerolineas has been trying since 2009 to acquire A330 aircraft as an interim step to renew its ageing and fuel inefficient widebody fleet, which consists entirely of A340s and Boeing 747s. Aerolineas chief commercial officer Juan Pablo Lafosse told CAPA back in Jun-2011 that the carrier had finally secured three A330s for delivery in late 2011 and early 2012 along with two additional A340-300s.

Aerolineas fails again to secure leases on A330s

But the A330 lease deal ended up falling through and Aerolineas has instead had to settle on leasing four additional A340s, two of which were delivered in Dec-2011. Speaking to CAPA at the ALTA Airline Leaders Forum in November, Aerolineas vice president business development and alliances Guillermo Rudaeff said the four additional A340s are slated to be placed into service in 1Q2012 and will be used to add frequencies on existing routes. The four additional A340s should give the carrier a widebody fleet of 14 A340s along with two 747-400s (the carrier's third 747-400 is already parked).

Mr Lafosse said back in June that Aerolineas was planning to use the planned expansion of its widebody fleet to increase the frequency on five of its existing long-haul routes to daily, resume service to New York and phase out its remaining 747-400s. Only two of Aerolineas' eight long-haul routes are now served daily: Madrid and Miami. Aerolineas is still aiming to upgrade its Barcelona, Bogota, Caracas, Mexico City and Rome services to daily, leaving only its Buenos Aires-Auckland-Sydney route with less than daily service. (Cancun, which is now served twice per week as a tag with Mexico City, will also remain less than daily while Mexico City is upgraded from four weekly flights to seven.)

Aerolineas believes the combination of daily frequencies in most long-haul markets and its upcoming entrance into the SkyTeam alliance will attract more business passengers, leading to improved profitability across its long-haul network. But it remains unclear if Aerolineas will be able to phase out its 747-400s, another critical component in its plan for turning around the highly unprofitable long-haul operation.

Aerolineas now uses its two remaining 747-400s on its daily Buenos Aires-Madrid route. The carrier is keen to place A340s on this key business route because its 747-400s have an extremely outdated product, putting it at a competitive disadvantage compared to Iberia, particularly in the premium cabin.

Moving to an Airbus widebody fleet would also reduce maintenance costs and improve the carrier's overall efficiency. But the plan to phase out the 747-400s in early 2012 has been met with staunch union opposition, leading to a mechanics strike in Nov-2011. Labour issues have plagued Aerolineas for years and continue to threaten the company's ability to make the adjustments needed to restore profitability.

While the carrier would benefit from streamlining its widebody fleet to a single aircraft type, the A340, it will soon also need to find a solution for the medium to long term. Some of Aerolineas' A340s are now over 15 years old and have leases that start expiring in 2013. Two-engine aircraft, initially A330s and eventually A350s or Boeing 787s, would give the carrier the fuel efficiency needed for a sustainable long-haul operation.

Aerolineas is now close to completing a rejuvenation of its entire narrowbody fleet, focussing on Boeing 737NGs at its mainline operation and E190s at its Austral subsidiary. The carrier has taken delivery of 49 aircraft since renationalisation, primarily second-hand 737-700s and E190s. But it has repeatedly failed to come up with medium- and long-term solutions for its widebody requirement.

A more modern widebody fleet and accompanying improvement in its long-haul product will enable Aerolineas to fully reap the potential benefits of its SkyTeam membership. Mr Rudaeff says Aerolineas is now on track to formally join SkyTeam in Jul-2012 or Aug-2012.

Implementation of Aerolineas-Delta codeshare faces delays

Delta Air Lines is sponsoring Aerolineas' membership into SkyTeam and in Aug-2011 the two carriers unveiled plans to begin codesharing from 4Q2011. But the implementation of the codeshare has been delayed as Aerolineas continues to work on upgrading its IT systems to support codesharing and its entrance into SkyTeam.

Mr Rudaeff acknowledges such work is challenging as Aerolineas only returned in Mar-2011 to the IATA clearinghouse following a 10-year hiatus. Aerolineas has since been working on restoring several key IT functions such as through check-in and interline e-ticketing. Mr Rudaeff says Aerolineas is now aiming to start codesharing with Delta in Mar-2011 or Apr-2011 although a slight additional delay is possible.

Aerolineas expects the codeshare with Delta will be implemented from the beginning on both Delta and Aerolineas-operated flights. The codeshare agreement covers Delta's Atlanta-Buenos Aires and Aerolines' Miami-Buenos Aires routes as well as domestic connections in the US and Argentina. Delta-operated international connections to Canada and Aerolineas-operated international connections to Brazil, Bolivia, Chile, Paraguay and Uruguay are also included in the first phase.

Aerolineas to also codeshare with Gol, Alitalia, Air France-KLM and Air Europa

Delta is the first of several codeshares that Aerolineas is banking will generate additional revenues and improve the profitability of its international operation. The second codeshare expected to be implemented is with Brazil's Gol. The two carriers signed a codeshare deal in Sep-2011 and are now working on implementation.

Mr Radaeff says the codeshare with Gol will include flights operated by both carriers, primarily on the Sao Paulo-Buenos Aires route. He says the codeshare will improve Aerolineas' presence in its biggest foreign market, Brazil, resulting in a better product for business travellers shuttling between the two countries.

An implementation date has not been set because Gol first needs to complete an upgrade of its reservation system that will allow the carrier to begin carrying the code of other carriers on its flights. Gol currently is only able to place its code on flights operated with its partners but plans to soon complete an upgrade of its Naviatire reservation system to support two-way codesharing, starting with Aerolineas and Delta. Mr Radaeff says the Aerolineas-Gol codeshare will be a two-way codeshare from the beginning.

Mr Radaeff says Alitalia will likely become the third codeshare partner for Aerolineas, followed by Air France-KLM and Air Europa. Codeshare agreements with all three SkyTeam carriers have already been signed and implementation works are now underway. Once it formally joins SkyTeam and therefore begins frequent flyer reciprocity with all SkyTeam members, Aerolineas plans to also start looking at potential codeshares with other SkyTeam carriers.

Of the five SkyTeam carriers that currently serve Argentina, Aerolineas currently only lacks a codeshare agreement with Aeromexico. Mr Radaeff says Aerolineas and Aeromexico continue to discuss a possible codeshare but it is not necessary for the carrier to have codeshares with all SkyTeam carriers.

Aerolineas remains Latin Amercia's weakest major airline group

SkyTeam membership should lead to higher standards at Aerolineas and more global exposure. But profitability is hardly guaranteed even if the flag carrier remains heavily protected by the Government. Of Latin America's six leading airline groups (LAN-TAM, Gol, Avianca-TACA, Aeromexico, Copa and Aerolineas), only Aerolineas is government-owned and gets the privilege of operating in an unlevel playing field. It is no coincidence that among this group only Aerolineas is unprofitable and that Aerolineas is growing at the slowest rate.

Argentina along with Venezuela are two exceptions in a region which otherwise has seen significant liberalisation over the last several years, leading to a much healthier and now thriving Latin American aviation industry. The decision to rescind authorisation for LAN to operate international flights at Aeroparque is only the latest in several moves by Argentinean aviation authorities to restrict competition. In recent years, several Latin American carriers have been denied attempts to increase frequencies on existing routes to Argentina and have been rejected in applications to launch services to secondary Argentinean cities.

For example, Copa CEO Pedro Heilbron told the ALTA Airline Leader Forum in November that Rosario and Mendoza are two large Argentinean cities which should be connected to other Latin American gateways but are not due to the current restrictive policies of the Argentinean Government. As a result, these cities are losing an opportunity to develop and their economic growth is stunted. "We're following a model that doesn't work," Mr Heilbron said.

Copa currently serves Buenos Aires and Cordoba from its Panama City hub but has been unable to secure traffic rights for Rosario and Mendoza. Uruguay's Pluna has also failied in recent years to secure traffic rights to serve secondary cities in Argentina from its Montevideo hub. The Argentinean Government view hubs such as Montevideo and Panama City as threats because they offer an alternative over Buenos Aires for traffic between secondary Argentinean cities and the rest of Latin America. The economies of these cities suffer as a consequence because passengers are forced to fly longer more expensive routes via Buenos Aires, where switching airports is also typically required for domestic to international connections.

Lack of liberalisation can slow economic growth. In recent years Chile, for example, has outpaced Argentina in growth rate and size. Chile's domestic aviation market is even growing faster than China and India. There are implications for intercontinental airlines. Qantas in Aug-2011 announced it would end its Buenos Aires service in favour of a link to Santiago. Qantas cited factors including Argentina's slower growth rate as well as the Argentinean government blocking a codeshare agreement between Qantas and LAN Argentina that would have given Qantas regional traffic feed. Aerolineas Argentinas also links Buenos Aires with Sydney, but via Auckland and with an antiquated product.

See related article: Santiago to deliver Qantas opportunities Buenos Aires failed to

Aerolineas' struggles come despite lack of LCC competition

Argentina's current aviation policy also makes it impossible for LCCs to enter the domestic market. The market is now significantly underserved because of a zero LCC penetration rate. It is the last of the major Latin American domestic markets to not have any LCCs. The launch of LCCs, if allowed, would stimulate demand in the market and lead to rapid growth. If the current policy ever changed, there would likely be several airlines quickly submitting applications to launch services in Argentina, primarily following the LCC model.

LAN was able to enter the Argentinean domestic market before Aerolineas renationalised and the current government took over. Under the current government, LAN would never have been able to launch an affiliate in Argentina. As reported in CAPA's boardroom strategy journal, Airline Leader, in Nov-2011:

LAN was able to establish an affiliate in Argentina in 2005, gaining access to the country's domestic market during a period in which the Government needed to allow a second - more reliable - operator to enter trunk routes, as Aerolineas was languishing and suffering from reliability problems due to what Argentina claims was mismanagement by Aerolineas' prior private owners. But LAN Argentina has only been permitted to establish a limited presence in the international market and has also not been expanding domestically over the past year.

See related article: Latin America's aviation industry becomes a world force

The situation in Argentina is unlikely to change anytime soon. The current government, which came to office in late 2007 and made renationalising Aerolineas one of its early priorities, was re-elected in Oct-2011 to a second four-year term.

Aerolineas may be able to use the next few years to finally complete a successful restructuring, potentially enabling the next government to pursue re-privatisation and long overdue liberalisation. But the unions, knowing the government will continue protect Aerolineas and if necessary cover losses, will make it very difficult for the management team to complete the restructuring it began in 2009.

Aerolineas continues to bleed cash

Fixing Aerolineas could prove to be an impossible mission. In the meantime, the Argentinean Government will have little choice but to continue recapitalising the carrier. Unfortunately, the more money it pumps into the flag carrier the more likely the Government will feel it needs to continue its protective ways. It is a vicious cycle.

The Argentinean Government has already had to pump about USD1.5 billion into Aerolineas since the carrier was renationalised. The carrier lost USD480 million in 2009 and another USD600 million in 2010. Aerolineas' original budget for 2011 projected a loss of USD300 million on revenues of USD1.65 billion. But higher than expected fuel prices, several weeks of flight disruptions caused by a volcano in Chile and a string of strikes meant the carrier ended up losing closer to USD600 million in 2011.

Aerolineas is now hoping to narrow its losses in 2012 and return to profitability in 2013. But Aerolineas is one of those perennially unprofitable carriers that always believes they are one year away from finally turning the corner. For Aerolineas, the road ahead remains very long and full of potholes.

Background information

Buenos Aires Aeroparque Jorge Newbery international market share by carrier (seats per week):
02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

Buenos Aires Aeroparque Jorge Newbery domestic market share by carrier (seats per week):
02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata

Buenos Aires Ezeiza Airport international market share by carrier (seats per week):
02-Jan-2012 to 08-Jan-2012

Source: CAPA - Centre for Aviation & Innovata