All lined up: Colombia's top two airlines team to withstand a withering market. (Trade Lanes).

Airlines across Latin America are struggling with severe market conditions, but nowhere is the challenge greater than Colombia. To the carriers' problems with declining passenger and cargo traffic, hijackings and faltering economic conditions, President Andres Pastrana added the specter of war in mid-February when he launched an all-out offensive against guerrilla groups.

Avianca and Aces, the country's top two airlines, have devised their own way to weather the woes. After 30 years of fierce competition, they are joining forces. Their alliance will create an airline holding group that controls almost two-thirds of the Colombian market.

That, no doubt, will give the carriers a survival edge they need. But it won't solve their most monumental problem: money. "Integration will not guarantee anything. It has a high probability of success, but the work ahead is also immense," Avianca President Vitis Didziulis told Bogota newspaper El Tiempo after Avianca's shareholders approved the deal.

Avianca, its domestic-service subsidiary SAM and Aces posted combined estimated losses of at least US$70 million in 2001. Valores Bavaria, Avianca's main shareholder, recently injected almost $210 million in capital to keep the carrier airborne. Cost-cutting measures, including scheduling changes and back office integration, could generate another $100 million in savings over the next few years, according to the airlines.

Losing altitude. The airlines will need every peso. As if the recent hijacking of a competitor's flight wasn't bad enough news for business, the kidnapping of a Colombian senator on board the plane prompted Pastrana to abandon peace talks with the Revolutionary Armed Forces of Colombia (FARC) and to order the military to retake a large rebel-controlled zone in southern Colombia.

The political instability and poor economic growth will join a growing list of concerns for the airlines. Air travel has been decreasing since peaking at 9 million in 1996; about 7 million passengers flew in 2001. Cargo has not faired much better. Total volume for 2001 was expected, at best, to match the approximately 100,000 tons transported in 2000.

In the short term, Avianca and Aces will concentrate on pounding out the details of their alliance. If all parties meet their financial commitments in the proposed merger plan, Avianca and Aces owners would each take a 37.5% stake in the airline holding. The combined company will have a total of 5,500 employees, as well as 56 aircraft providing service to 18 international destinations.

Aces CEO Juan Emilio Posada, slated to be named president of the joint company, is expected to cut costs, combine schedules and achieve other synergies so that a coordinated service can be offered by May 20. Posada guided Aces to a better track record than much bigger Avianca. Aces posted a small profit in 2000 and was on track to repeat the feat in 2001 before the Sept. 11 attacks shattered that idea.

Before the attacks, Colombian transportation authorities nixed the Avianca-Aces deal on grounds the alliance would thwart competition. The companies appealed and the government removed the bureaucrat behind the decision, opening the way for Juan Carlos Velez, the head of Colombia's civil aviation authority, to approve the deal in December 2001.

The Colombian air merger may signal the beginning of an even bigger push for partners. Both Aces and Avianca have been discussing new and expanded alliances with major international airlines. Given the tough market conditions, these talks could take on a new urgency and, perhaps, extend to the acquisition of an equity stake.

Late last year in Miami, Posada, who is also president of the International Latin American Association for Air Transport, told LATIN TRADE that current market conditions would foster more mergers and acquisitions. "We'll see more alliances and more alliances across borders," he said.