Bouchard 547
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Aerolíneas Argentinas S.A. is the flagship airline of Argentina, with its hub in Buenos Aires and boasting an estimated 2,000 flights a day. Despite its size and strategic location (making it a key player in the world of global marketing alliances), the company's financial performance has been less than stellar. Decades of economic crisis and an extended, painful privatization have left the carrier still struggling. With years of losses, Iberia Airlines and other investors spent 1999 unsuccessfully trying to sell their stakes in the troubled carrier--not a terribly jubilant way to spend the company's 50th anniversary. However, a new infusion of management talent from American Airlines hoped to reverse the airline's disastrous path.
Origins
Argentine civil aviation has its roots in the French air mail line Aéropostale and its South American subsidiaries, one of which was Aeroposta Argentina. Aeroposta was established in 1927 primarily as a mail carrier. Early flights in this country were often perilous; rudimentary equipment, strong winds, and poor landing strips inspired flying adventures of the kind recounted by the famous French aviator and writer Antoine de Saint-Exupéry. Moreover, the company was battered by worldwide economic depression in the early 1930s, during which time the French government withdrew much of its financial support for parent company Aéropostale. In 1932, control of Aeroposta underwent several changes, including temporary ownership by the Argentinian post office, but the company ultimately survived as Aeroposta Argentina, S.A., the national airline of Argentina. In 1937, Aeroposta's economic woes were somewhat allayed when Argentina's Pueyrredon financial group, a conglomerate of banks and insurance companies, bought out the remaining French interests in the line. Although Aeroposta came under the control of Ernesto Pueyrredon, it also continued to receive a subsidy from the Argentinian government.
Beginning in the late 1930s, other airlines were starting to crop up in Argentina. In 1946, the government of Argentina imposed some organization on the country's airlines (and fended off competition from foreign airlines, such as the U.S.-based PANAGRA), forming a system of mixed-stock companies. Besides Aeroposta, three new joint stock companies were created out of the airlines that had sprung up in the 1930s. The first was FAMA (Flota Aérea Mercante Argentina), which set the precedent for the nation's international air service. ALFA (Aviación del Litoral Fluvial Argentina) was formed by merging one private, one military, and one civil airline. ZONDA (Zonas Oeste y Norte de Aerolíneas Argentinas) took over PANAGRA's domestic trade network in the northwest.
1950s-70s: Striving to Stay Aloft Amidst Government Upheaval
On May 3, 1949, a new nationalistic government in Argentina, led by Juan Perón, merged the four joint-stock companies--Aeroposta Argentina, FAMA, ALFA, and ZONDA--into the new state airline, Aerolíneas Argentinas. This monopoly would last until 1956. After working to integrate the aircraft and routes of all four operations, Aerolíneas Argentinas achieved operating efficiencies and became a member of the International Air Transport Association (IATA).
However, when a military coup ousted Perón, a new provisional government liberalized the aviation market again. Competition ensued as Argentinian investors formed new airlines. Privately-backed Transcontinental, S.A., for example, provided six years of competition before financial woes resulted in its being taking over by Austral, another new private carrier. Aerolíneas Ini and Transatlántica were two other competitors for Aerolíneas Argentina's business during this period.
None of the new entrants had the experience or resources of Aerolíneas Argentinas (AR). AR was able to launch South America's first commercial jets in March 1959: six Comet IV's received to settle a bill for harboring British troops during World War II. Within a couple of years, however, half of these had crashed, and though no fatalities were reported the company's president was forced to resign. Under new leadership, AR continued to expand and modernize its fleet, retiring older aircraft and establishing service to popular resort destinations.
By the 1960s, AR was the leading South American airline, flying more than 600 million passenger-kilometers a year. However, financial and managerial woes were emerging. In 1963, the airline dropped out of the International Air Transport Association (IATA), a cartel of world airlines, when that organization denied AR the right to impose a surcharge for flights on jets. Both AR and its competitor Austral had been losing money on the regulated domestic fares and had been granted government subsidies to help offset the losses. A new board of directors took over AR in June 1964 amid charges of mismanagement and corruption at the airline. The next year, the new leaders set about improving the airline's fleet, establishing a relationship with Boeing, by ordering several of that company's 707s, that would last for many years. AR rejoined the IATA during this time; the year after that saw yet another change of administration.
In 1967, in order that AR and Austral might co-exist under government control, a new Argentinian president divvied up domestic air routes between Austral-A.L.A.(Aerotransportes Litoral Argentina, its new partner) and AR. By now, AR's Boeing 707s were flying the world's longest nonstop scheduled flight at the time: 5,700 miles from Rio de Janeiro to Rome. Service to New York had also begun, and by the end of the decade, AR had obtained clearance to open service to the west coast of the United States.
In 1972, Argentinian and U.S. authorities briefly locked horns over the rights of Pan American and Braniff airlines to serve Argentina. When Argentina officials denied these American airlines the right to expand their routes in Argentina, the U.S. government responded by attempting to curb AR's presence in the United States. Settlements over the routes were eventually made, and AR was able to add nonstop service to Miami and Cape Town in 1973, the latter in conjunction with South African Airways. In December, new management installed by the returning Juan Perón (the second executive shuffle in a year) gave the airline a new emphasis on commercial viability in route selection and fare determination.
Although Perón died in 1974 and his wife, Isobel Perón, was overthrown in 1976, the structure of the airline remained relatively unchanged. The company continued to weather upheavals in management, intense competition from Austral, and ever-changing government policies. AR began operating massive Boeing 747 widebody jets to Madrid in January 1977, launching a period of expansion. After testing the route with charters, AR pioneered the first scheduled (monthly) service across Antarctica, to Auckland, New Zealand. AR began the 1980s as the third busiest airline in South America after VARIG and Mexicana, flying six billion passenger-kilometers a year.
The Path to Privatization in the 1980s
The disastrous Falklands War in April 1982 did not help Argentina's economy, which fell apart in the mid-1970s during Isobel Perón's rule. Inflation reached triple or quadruple digits, depending upon the estimate, and in 1986 the government of Argentina planned for the privatization of several large companies in order to satisfy its creditors. AR was to be one of the first.
In February 1988, the Directory of Public Enterprises (DEP) announced the sale of 40 percent of AR to SAS for $204 million. Cielos del Sur, which owned Austral, itself privatized in 1987, put forth an informal but well publicized counteroffer with the support of Swissair and Alitalia. SAS withdrew its bid in December 1988 after a highly politicized debate pitting President Raul Alfonsín against incumbent Carlos Menem. However, the Cielos del Sur group was not able to finalize its bid, due to a lack a financial disclosures from the government. Then, Swissair withdrew from the group, scuttling the offer. Menem renewed efforts to find a buyer after winning office in May 1989.
Menem's efforts were frustrated by the company's poor financial health; it was losing $10 million a month in 1990, which was a terrible year for the airline industry as a whole, with most of the world's major carriers posting losses. Nevertheless, a consortium led by Spain's carrier Iberia made a bid in June 1990, kicking off AR's tortuous, extended privatization process. In its initial offer, Iberia would control 30 percent; three Spanish banks another 19 percent; Argentinian investors 36 percent; employees ten percent; and the government, five percent; resulting in 51 percent Argentine ownership. Iberia and its partners agreed to pay more than $2 billion for their 85 percent share, including a $130 million initial cash payment. Not included in the new deal were AR's lucrative ramp service and duty-free businesses.
Several factors soured the deal for Iberia once it was committed to the buyout. When Enrique Pescarmon sold Cielos del Sur (and thus Austral) to Iberia in March 1991, leaving the partnership, his share was split between other Argentinian interests. Mounting losses through 1992 (when AR lost $189 million on revenues of $911 million) necessitated a capital infusion from the Spaniards and the Argentine government, diluting other shareholdings of the private local investors. However, the Spanish holdings remained the same. The government owned 43 percent, which it intended to reduce to ten percent once the market allowed. In addition, $2.1 billion of foreign debt, part of Iberia's purchase requirement, ended up costing more than originally estimated. Finally, postponed layoffs of 775 workers incited labor protests. Moreover, Iberia suffered serious losses at home, $264 million on 1992 revenues of $3.6 billion.
New Investors in the 1990s
As costly as it proved to Iberia, AR still controlled one-third of South America's air traffic, making it a somewhat attractive investment to global competitors. Since Iberia needed government subsidies for its own survival, the European Commission mandated it reduce its holdings in AR. Merrill Lynch and Bankers Trust bought into the company in 1996, and American Airlines parent AMR Corp. beat out Continental to take a ten percent share of Interinvest, AR's holding company, in 1998.
The number-crunching methodology of American Airlines (AA) brought quite a culture change to the airline, accustomed to decidedly less formal decision-making. AA managers immediately set out to reduce short-term debt of about $700 million and slashed the payroll. They also used AA standards to improve customer service, starting out a process that could make AR eligible for membership in the OneWorld global alliance. Reducing the number of aircraft types was also a priority; still, the company ordered a dozen Airbus A340s, a type new to Latin America, for its long-haul needs.
AR faced stiff international competition from LAN Chile and VARIG. New open skies agreements cleared the way for Continental and Delta into the Argentine market as well. A recession at home compounded the carrier's difficulties in 1999, even as local cut-rate upstarts such as Southern Winds Líneas Aéreas plagued the airline. Losses for 1999 were expected to reach $125 million. AR's owners had failed to find a buyer--or a way out--by the end of December. Interinvest, which then owned 85 percent of AR, was in turn 80 percent owned by the Spanish government via SEPI, ten percent owned by Iberia, and ten percent by AA. Employees owned ten percent of AR and the Argentine government the remaining five percent. Nevertheless, company literature remained optimistic.
Principal Competitors: VARIG S.A.; LAN Chile S.A.
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