Capital Flight.

In the era of globalization, airlines need cash to stave off bankruptcy.

A EROPERU, TAESA AND SAETA ABE GONE. AEROLINEAS ARGEN-tinas, Avensa and Vasp sit on the critical list. In the last two years, Latin American airlines have been finding themselves permanently grounded, prompting the region's airline executives to search for strategies for staying in business.

Many aviation executives blame deregulation, now widespread throughout the region. But a recent study says foreign rivals may be the bigger problem. The Aviation Management Services study found that U.S. carriers, led by American Airlines, Continental and Delta, now control 63% of the U.S.-Latin America market, and their share keeps growing. The pattern for European airlines serving Latin America is similar.

Unable to hold their own against the foreign competition, Latin American carriers have relied increasingly on domestic routes, leaving themselves more vulnerable to currency devaluation and recession. Brazil's Vasp, for example, is still struggling to recover from the 1999 devaluation of the real. During Ecuador's financial crisis, which prompted the country to trade the sucre for the dollar, Saeta went broke.

"Deregulation has coincided with difficult times," says Juan Emilio Posada, chief executive of Aces, Colombia's largest domestic airline. He says Latin American airlines can do little about economic downturns--except fly around them with improved technology and clever management. But other industry watchers, such as Miami-based aviation consultant Bob Booth, chairman of AvGroup, say the airline landscape is more complex. "There's never one thing that kills an airline," he explains. "Bad decisions, the market, competition--all have a cumulative impact."

Patricio Sepulveda, Latin American director for the Geneva-based International Air Transport Association, specifically singles out privatization. "Seven to eight years ago, most Latin American airlines were government-owned," he recalls. "Since then, we have had a process of privatization and, in most countries, there has been no provision for capitalizing the airlines.

"The government did require investment in the airline as part of the privatization, but it was just a formality," Sepulveda adds. "Most of the plans are there, but just on paper. All the money went to the government. None went to the airline."

Julius Maldutis, an analyst for the Canadian Imperial Bank of Commerce, agrees that the carriers are undercapitalized. "Privatization is not a success unless an airline is sold to global capital markets, not to six friends of the transport minister," he says.

Family fiefdoms. Indeed, most of the region's airlines are now closely held by families or tight groups of local investors. The Cueto family controls LanChile; the Zavallos family owns Peru's AeroContinente; Brazil's Vasp belongs to Wagner Canhedo and his sons; and Avianca is in the hands of a group of Colombian investors led by Julio Mario Santo Domingo.

With a new Boeing 737 carrying a US$125 million price tag, however, even the wealthiest families cannot bankroll a modern airline. At the very worst, the carriers end up in what Booth calls "family fiefdoms" where "management is accountable to the whims and fancies of the owners, but not to the bottom line."

Posada puts it another way: "In countries without liquid capital markets, airlines are often run by people with big egos."

Legal limits on foreign ownership complicate the carriers' search for capital. When local money is scarce, airline growth is suppressed. In desperation, a few countries have turned a blind eye to their own laws: AeroPeru, for instance, had only 30% local ownership, while Aerolineas Argentinas has a meager 15%.

Lacking access to capital, Latin carriers have traditionally borrowed from banks. LanChile broke the mold when, in 1997, it successfully went to Wall Street to raise $120 million, becoming the first, and so far only Latin American airline to list on the New York Stock Exchange. Central America's Grupo TACA is also reportedly working on its own initial public offering.

How else can Latin American airlines find ample funds without becoming pawns to family fiefdoms or absentee foreign owners? The key may be in the growing strength of local stock markets. Booth points to pension funds in Chile, Peru and some other countries as a source of public money. The fact that LanChile is headed to the Chilean stock market to raise another $120 million already signals this change. "Public ownership of Latin airlines," predicts Booth, "is the wave of the future."