Aerolineas Argentinas seeks new fleet to overcome its troubles

From humble beginnings in the 1950s, Aerolineas Argentinas enjoyed a period of rapid expansion during the 1960s and 1970s, when it entered the jet age and extended its international services to the USA and Europe. It later incorporated as a subsidiary the domestic carrier Austral Air, giving the group a domestic market share of some 85%.

Under the administration of Argentina's "new-Peronista" President Carlos Menem, from 1989 to 1999, many sectors of the Argentine economy that had been put under State control under Juan Peron, were sold back to the private sector.

In Dec-1989, the government authorised the privatization of the airline, which led to a convoluted series of moves over the following two years. Spain's national airline Iberia acquired a 30% stake, which later increased to 83.5%, but continuing poor performance by Aerolineas Argentinas led Iberia to reduce its stake to 20%, which was transferred to a Spanish state holding company, SEPI, and the company was reorganised as a subsidiary of international investment company, Interinvest.

In Jul-1998, American Airlines acquired a 10% stake in Interinvest, giving it an 8.5% stake in Aerolíneas Argentinas and an interest in the carrier's management. This stake was soon disposed of, and plans were floated for employees to take an 85% share in the airline in 2000, which were never realised.

Several complex attempts at restructuring were made during this period, but by the late 1990s, the airline was close to insolvency.

In 2001, Spanish travel conglomerate Grupo Marsans acquired more than 90% of Aerolineas Argentinas, but the company remained overstaffed and plagued by industrial disputes. Mere months later, Argentina was plunged into economic chaos that left Mr Menem's free-market policies discredited, paving the way for a resurgence of back-to-the-roots populist Peronism.

Under President Nestor Kirchner, elected in 2003, and his wife Cristina Fernandez, who succeeded him in 2008, many privatised firms have been re-nationalised, including postal and water services.

The Argentine government determined to acquire the 99.4% of the airline (all but a 0.6% stake retained by employees) held by Marsans, and in parliamentary votes in 2008 it was determined that the airline would once again fall into state hands.

Marsans would have been happy to exit the troubled carrier, plagued by seemingly constant operational deficiencies and labour unrest, so long as a fair price could be struck.

A takeover by dubious means?

While popular and political sentiment supported the re-nationalisation of Aerolineas Argentinas, a dispute lingered on what payment would be appropriate. The airline was operating at a loss, and was saddled with some USD900 million in debt - leading politicians to declare that nothing should be paid to Marsans - for what amounted to government expropriation of the airline.

The government claimed it had pumped in more than USD100 million since Jul-2008 and earmarked another USD193 million for 2009, and said it was "rescuing" the airline, making it reluctant to pay Marsans any extra cash for the take-over.

Negotiations stalled, and it appeared Marsans might exit empty handed.

Marsans filed a multimillion-dollar claim against Argentina at the World Bank's International Centre for Settlement of Investment, with the claim for damage and financial loss potentially as much as USD1.6 billion, but this did not proceed.

A compromise to suit both sides

However, Marsans, which runs other airlines and holds wide travel interests, (including Spanish airline Air Comet with routes mostly between Spain and Latin America) had placed an order with Airbus for 73 aircraft, many of which were intended to re-equip the Aerolineas Argentinas fleet.

Aerolineas Argentinas desperately needed to upgrade its fleet, which had an average aircraft age of 22 years, and if the order was cancelled, Marsans stood to forfeit some USD210 million in deposit payments. It was therefore in the interest of both the Argentine government and Marsans to strike a compromise.

In February-09, coincident with a State visit to Spain by Argentina's President Cristina Fernandez, an agreement was reached that involves the Argentine government buying about 40 of the aircraft ordered by Marsans, thus allowing the travel company to recover its down-payments on the aircraft.

It is understood this arrangement has completed the takeover process, with Air Comet and Aerolineas even to set up a code sharing agreement.

Further fleet enhancements announced

As Aerolineas Argentinas had purchased no new aircraft for over 16 years, new aircraft orders in 2009 hopefully herald a change in fortunes for the long embattled carrier group. At the time of the completed takeover, it was reported that only 26 of the group's 85 aircraft were in full operating condition.

Both Aerolineas and its domestic Austral subsidiary are to receive new equipment under arrangements recently announced.

In addition to the Airbus aircraft included in the arrangement with Marsans, the carrier has signed an agreement to buy 12 B737NG aircraft, which will be made up of -700 and -800 models, on which deliveries have already commenced.

The B737NGs will gradually replace aircraft such as B737-200s and the MD-80s, and will provide operating economies and lower maintenance costs.

On 21-May-09, a contract was signed for the purchase 20 mid-range Embraer 190 aircraft from the Brazilian manufacturer.

The agreement involves costs of USD700 million, of which USD585 million is a loan from Brazil's development bank, BNDES.

The first of the 114-seat aircraft are to be delivered to Aerolineas Argentinas in Apr-2010, and from then on at a rate of two per month. These aircraft will primarily be for Austral Air domestic operations. The deal stipulates that repair and maintenance on the aircraft must be carried out in Argentinean workshops.

"The fact that after 16 years, Aerolineas Argentinas is buying new planes isn't just economic news it's also about getting back some of our national pride," President Cristina Kirchner said in a speech to mark the signing.

According to the Buenos Aires press, Aerolineas continues to accumulate significant monthly operational deficits.

It is unclear how the government hopes to succeed in making the business viable - where private enterprise has failed - by putting an end to the operational delays and cancellations that have long tarnished the airline's image.