Aerolineas Argentinas focuses on fixing highly unprofitable long-haul operation
Aerolineas Argentinas plans to pursue further capacity and fleet expansion as the renationalised carrier enters the next phase of its transformation. Aerolineas, however, has had to push back expectations for returning to profitability until at least 2H2012. With a highly unprofitable international operation and a roughly break-even domestic business, Aerolineas now stands alone in Latin America as the only loss-making major carrier in the region.
The Argentinean government took back control of Aerolineas in late 2008 from Spanish tour company Marsans, which had managed the perennially unprofitable flag carrier since 2001. Aerolineas’ new management team has since been working on restructuring the airline and rebuilding its once mighty network.
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.
A330s to join long-haul fleet by end of 2011
The addition of A330s is a key component in Aerolineas’ strategy for turning around the long-haul operation, which now relies entirely on inefficient four-engine aircraft – B747-400s and A340-200/300s. Aerolineas has been looking for A330s since 2009 but has had trouble securing the type, which are in high demand. Aerolineas Argentinas CCO Juan Pablo Lafosse told CAPA last month that the carrier has finally secured three A330s, two of which will "likely" be delivered before the end of this year.
Mr Lafosse said Aerolineas also has secured additional A340s and now expects three more A340-300s to be delivered by the end of 2011, giving the carrier a fleet of six A340-300s and four A340-200s. The additional A340s and A330s will allow Aerolineas to finally phase out its remaining B747-400s by the end of this year. Mr Lafosse says Aerolineas operates two B747-400s, which are used on the Buenos Aires-Madrid route, and has a third B747-400 which is already parked. The exit of the B747 will allow Aerolineas to reduce maintenance costs and improve the product on its Madrid route, in particular in the premium cabin where Aerolineas now struggles to compete against Iberia.
The additional A340s and A330s will also allow Aerolineas to increase capacity on its long-haul network, which unlike the short and medium-haul networks have not been significantly boosted since renationalisation. Mr Lafosse says the short-term priority is to increase the frequency of Aerolineas’ existing long-haul destinations rather than launch new destinations.
Only two of Aerolineas’ eight widebody routes are now served daily – Madrid and Miami. Mr Lafosse expects the carrier’s other two European destinations – Barcelona and Rome – and three long-haul Latin American destinations – Bogota, Caracas and Mexico City – will be upgraded to daily by the end of 2011. That will leave Buenos Aires-Auckland-Sydney route, which is served three times per week, as the only non-daily route in the long-haul network. According to Innovata, Barcelona, Caracas, Mexico City and Rome are all currently served four times per week while Bogota is served three times per week.
Aerolineas has been aiming to resume several other long-haul routes – including New York, London and Paris – as part of a business plan first unveiled in 2009. But Mr Laffose says further expansion of the long-haul network (the Mexico City service was launched in Mar-2011) is now on hold "and our focus is to increase the international operation to daily flights".
Mr Lafosse says Aerolineas still hopes to launch New York in 2012. London and Paris, however, are not realistic options until at least 2013. The original post-renationalisation business plan also envisioned services to Johannesburg, Cancun, Havana and Puerto Plata but these have been scrapped for now as Aerolineas has decided to focus more on business rather than leisure destinations.
Aerolineas’ current medium-term business plan envisions a relatively modest widebody fleet of 15 widebody aircraft, up from nine currently and the 12 expected at year-end. The carrier plans to focus primarily on the A330 with the aim of acquiring additional A330s to replace most of the A340s as the A340s start to come off lease in 2013. Aerolineas’ seven A340s are all 16 to 17 years old, according to Ascend data. The A330s, however, are seen only as a medium-term solution as eventually Aerolineas envisions operating a fleet of 15 B787s or A350s.
Renewal of entire narrowbody fleet to be completed next year
The business plan calls for a narrowbody fleet of about 60 aircraft, which are used for domestic routes as well as Aerolineas’ significantly expanded short/medium-haul international operation. The renewal of the narrowbody fleet began quickly after renationalisation, with 12 B737-700s acquired in 2009 (including two new aircraft which were purchased and 10 second-hand aircraft which are being leased from GECAS). These 12 B737-700s took over for B737-500s on short and medium-haul international routes. As the B737-700s came in, Aerolineas shifted its fleet of B737-500s to domestic routes, where they replaced B737-200s.
Before 2009, Aerolineas operated domestic routes with an ageing fleet of B737-200s and MD-80s, with most of the MD-80s at its Austral subsidiary. The MD-80s are now being rapidly replaced with 20 new E190s. Austral, which only started taking E190s in 3Q2010, has already taken delivery of 15 E190s with the last five slated to be delivered over the next few months.
As part of the last piece of its narrowbody fleet renewal project, Aerolineas in 2Q2011 received the first aircraft from a second batch of B737-700s. There will be 10 second-hand B737-700s in this second batch, which will be used to phase out the B737-500s now operating domestically. In addition to the two which were already delivered in 2Q2011, Mr Lafosse says two more B737-700s from this 10-aircraft batch are slated for delivery in 2H2011 with the final six to be delivered next year. All 10 of the additional B737-700s are being leased from ILFC and were previously operated by Australia’s Virgin Blue.
Aerolineas Argentina's B737 fleet
In addition to the 20 E190s and 22 B737-700s which will be in the Aerolineas group’s fleet by the end of next year, Mr Lafosse says the carrier is now seeking eight more B737-700/800s. These aircraft could be used to further grow the domestic and short/medium-haul international operation.
Aerolineas has already been able to significantly expand capacity on regional international routes without growing the size of its fleet because switching to B737NGs allowed it to increase average aircraft utilisation rates by nearly 50%. Reliability also has improved significantly as the carrier has focussed on on-time performance, which historically has been extremely poor, as part of its revitalisation efforts.
Increased focus on regional international routes
Another major part of the carrier’s transformation plan was the shifting of its short and medium-haul international operation from Buenos Aires Ezeiza to closer-in Aeroparque Jorge Newberry, which was previously limited to domestic and Uruguay flights. The move was achieved in Mar-2010 and resulted in Aerolineas transferring about 160 weekly flights to Brazil, Chile and Paraguay.
At the about the same time as the shift to Aeroparque, Aerolineas boosted capacity in several of the affected markets. The carrier’s new business plan focusses on higher frequencies on regional international routes to meet rising demand for travel within South America’s southern cone, in particular from the business sector. The expansion of the regional international operation drove about a 20% increase in traffic last year as well as an improvement in yields. Mr Lafosse says about 15% of Aerolineas’ revenues, or about USD250 million annually, is now generated from regional international flights.
Four of Aerolineas’ five largest international routes are now Aeroparque routes – Sao Paulo, Montevideo, Rio de Janeiro and Santiago. Lower South America accounts for 60% of the carrier’s total international capacity although the region is served exclusively by narrowbody aircraft.
Aerolineas Argentinas international capacity (seats per week) by region, 18-Jul-2011 to 24-Jul-2011
Aerolineas Argentinas top 10 international routes by capacity (seats per week), 18-Jul-2011 to 24-Jul-2011
Mr Lafosse says the group’s domestic operation now accounts for 55% or revenues, or about USD900 million annually. The long-haul operation consists of the remaining 30%, or about USD550 million annually.
Aerolineas now has about a 36% share of the total Argentina airline market based on capacity. Lan Argentina, which operates most domestic trunk routes as well as some international routes, is its largest competitor with about a 24% share of the market.
Argentina capacity (seats per week, to/from/within) by carrier, 18-Jul-2011 to 24-Jul-2011
Aerolineas over the next few years expects to claw back some of the market share lost to Lan Argentina, which was launched in 2005. Aerolineas plans to continue growing capacity at an annual clip exceeding 20% while the growth rate at Lan Argentina is unlikely to exceed 10%.
For Dec-2011, which marks the start of the peak summer season in Argentina, Mr Lafosse expects total capacity will be up by 25% compared with Dec-2010. He says the plan is to grow capacity by another 25% to 30% in Dec-2012 compared with Dec-2011. He says capacity was already up 17% in Dec-2010 compared with Dec-2009.
As a result, Aerolineas is on track to more than double its traffic as well as revenues within five years of renationalisation. Revenues shrunk to only USD820 million in 2009, compared with USD1.1 billion in 2007. But last year revenues again exceeded USD1 billion and are budgeted to reach USD1.65 billion in 2011.
Aerolineas has lost over USD1bn since renationalisation; more losses expected
Mr Lafosse acknowledged the budget for 2011 envisions another loss of USD300 million, which would represent an improvement from the losses of USD480 million in 2010 and USD600 million in 2009. The budget factors in this year’s rise in oil prices, which Mr Lafosse says Aerolineas is unable to completely offset through higher fares. But the budget was put together prior to the eruption in early Jun-2011 of a volcano in Chile’s Puyehue-Cordon Caulle chain, which resulted in several days of flight cancellations in Argentina.
The disruption is expected to lead to even higher than normal losses for Aerolineas in the recently completed second quarter, which is typically the carrier’s weakest quarter. Higher-than-expected losses for the third quarter are also now expected as the volcano has continued to lead to flight cancellations in some parts of Argentina throughout Jul-2011. As the crisis still persists, it is too early to pinpoint the exact impact from the volcano.
Mr Lafosse said while Aerolineas’ domestic operation will be “close to break even” this year, the international remains highly unprofitable. He acknowledged that it is still difficult for Aerolineas to make money with its long-haul operation because “we don’t have the right product”.
SkyTeam membership key to improving profitability of long-haul network
Mr Lafosse is confident the long-haul product will improve as Aerolineas renews its fleet, increases the frequency of its services and joins the SkyTeam alliance. Aerolineas last year was accepted as a new member of SkyTeam and is now slated to formally join in Jun-2012. Aerolineas is banking on alliance membership as well as several codeshares to allow it to virtually expand its global network and therefore improve the profitability of its long-haul operation.
Aerolineas has not codeshared with any carrier for several years because back in 2001 the carrier was kicked out of the IATA clearinghouse over unpaid debts. The carrier finally re-entered the clearinghouse in Mar-2011 and Mr Lafosse says Aerolineas is now working on implementing several codeshares. Mr Lafosse said the priority will be to first codeshares with the five SkyTeam members which serve Buenos Aires – Aeromexico, Air Europa, Air France, Alitalia and Delta Air Lines. Some of these should be in place by the end of this year and once all five are activated, Aerolineas will start to work on putting in place codeshares with other SkyTeam members. Ahead of joining SkyTeam, Aerolineas is now working on an overhauling its IT systems.
Argentina capacity share (seats) by alliance, 18-Jul-2011 to 24-Jul-2011
SkyTeam will particularly help Aerolineas attract more high yielding business passengers. Aerolineas is also aiming to improve its in-flight business-class product. Mr Lafosse says the A330s will be configured with 32 business-class seats that are superior to what is on its A340s and far superior to the very outdated product on its B747s. The carrier is also now working on a plan to retrofit its fleet – the widebodies and some of its narrowbodies - to ensure a consistent product across the network.
Aerolineas also took a major step in improving its long-haul product last week, when it moved into a new terminal at Ezeiza airport. The new terminal, which is being used exclusively by Aerolineas, offers a significantly improved check-in experience and lounge for business-class passengers. The terminal has 20 check-in positions and eight boarding gates.
But until the long-haul operation is improved with a better product and connectivity to a global alliance, Aerolineas is not in a position where it can be profitable. Mr Lafosse acknowledged the carrier also “still has many inefficiencies” and needs to work on further reducing its unit costs in order to achieve profitability. But unit costs will come down as the size of the operation expands, giving Aerolineas a more competitive cost structure. “By the end of 2012 most of the important issues will be solved,” Mr Laffose said.
Overall Latin America has been a profitable region in recent years and is again expected to outperform North America and Europe this year. Aerolineas, as the only carrier among Latin America’s top seven airline groups that is in the red, is an exception. Following the recent IPOs at Aeromexico and Avianca-TACA, Aerolineas is also now the only group among the top seven which is not publicly traded.
Leading Latin American airline groups by revenue
Aeolineas still has a long way to go before it joins its Latin American peers. An IPO or re-privatisation is not on the cards. The first privatisation ended in failure and a big legal squabble with Grupo Marsans, which also owned now-defunct Spanish leisure carrier Air Coment. It is too early to say whether the Argentinean government and its new management team can finally fix the long floundering flag carrier and make Aerolineas another Latin success story.