Cleared for Takeoff.

LanChile, Latin America's most profitable carrier, circles Argentina.

WHEN LANCHILE'S NEW PERUVIAN START-UP LANPERU TOOK off in July, the airline industry started buzzing about which Latin American country would be next to have a Lan airline flying its friendly skies.

Many are placing their bets on Argentina, whose own flagship carrier, Aerolineas Argentinas, is looking for investors. The majority shareholders are seeking an out, and the potential investor that carries the most weight is LanChile. Industry observers say that the airline, along with some institutional investors, might come in and buy a majority stake with some US$250 million.

The move would follow a pattern that Chile's largest carrier has been flying for some time. Given the size of the domestic market, expansion can be found only outside. "Four years ago, 60% of our business was in Chile. Today 80% of our sales are outside of Chile," says LanChile's chief operating officer, Luis Ernesto Videla.

A marketing alliance with American Airlines, Chile's open-skies agreement with the United States and admittance to global airline alliance OneWorld will all keep LanChile flying in that direction. The agreement with American, Latin America's largest U.S. carrier, was signed in October 1999, and the Miami-Santiago flight began operation last October. More code-shared flights to Los Angeles, Dallas and San Francisco were added in November. The third phase, which involves adding Orlando, Houston, Denver and Atlanta, is scheduled for the second quarter of 2000.

The agreement with OneWorld, which includes American, British Airways, Canadian, Cathay Pacific, Finnair, Iberia and Quantas, should be implemented by June. Meanwhile, LanPeru started flying to Miami in November and is awaiting approval for Mexico City, Buenos Aires and Los Angeles. "They are really trying to make the transition to an international airline," says Jean Winslow, a Santiago-based analyst for Merrill Lynch.

A LanChile investment in Aerolineas Argentinas--which is part owned by American Airlines, whose former executives run the airline--would represent a quantum leap. "Argentina is so much bigger than Chile. I think they'd have a tough time," says Glenn Engel, New York-based airline analyst for Goldman Sachs, adding that obtaining the necessary capital would not be easy.

Flying solo to Argentina? LanChile's management has indicated it understands the concerns. "The issue is that [Argentina] is a much larger investment than LanPeru because the Peruvian domestic market is half the size of Chile, and the Argentine market is three times the size of the Chilean domestic market," the company's executive vice president, Enrique Cueto, said in November 1999.

Instead of buying into Aerolineas Argentinas, LanChile could also do what it did in Peru, starting up a LanArgentina. The advantage to that, LanChile's Videla says, would be to keep the Lan brand name. Robert Booth, president of Miami-based consulting firm Aviation Management Services, thinks LanChile will enter Argentina one way or another "It makes sense; there is a lot of synergy there," he says.

The fact that LanChile is even looking into expanding outside its borders could come as a surprise. Chile was hit hard by the Asian crisis and the Brazilian devaluation. Consumer spending has dropped drastically in the past couple of years, and travel was not at the top of many Chileans' to-do lists. Indeed, LanChile's domestic passenger volumes dropped 10.6% during the first nine months of 1999 over the same period in 1998.

Despite the crisis, the company has stayed profitable. In fact, while it is not the largest airline in the region in terms of revenues (Brazil's yang, followed by Mexicos AeroMexico and Mexicana, holds that honor), it has been the one of the most profitable, bringing in $29 million during the first nine months of 1999.

LanChile's ability to successfully weather Chile's economic recession can be attributed in part to its focus on the international market. However, its cargo business shares some of the credit for its profitability, too. While revenues from passenger traffic stayed low, cargo-driven revenues contributed 36% to LanChile's revenues last year, up from 32% in 1998.

While the future does hold some obstacles--rising fuel prices, the slow recovery of the Chilean economy and increased competition in the international market as more airlines fly to Santiago--the airline is planning more of the same strategy for 2000.

The carrier is also increasing its cargo capacity by investing in freighter planes. It has built a new Miami warehouse and started a joint venture for cargo with Aerolineas Argentinas. So even if there's no deal, LanChile will still fly boxes to Buenos Aires this year.