LanAmerica: while competitors struggle on the tarmac, one airline takes off. (Aviation Report).

Behemoth American Airlines' parent company AMR Corp. has lost 90% of its value on the stock market in the past year. Money-troubled United Airlines, which has pulled out of several Latin American countries, talks of selling off assets. Varig, Latin America's largest airline, stranded a planeload of passengers in a brouhaha over unpaid fuel bills--just one incident in a series plaguing the heavily indebted company.

But the scene is very different at LanChile.

The Chilean carrier ended 2002 with profits of almost US$31 million, tripling the year before. Arguably the strongest airline in the Americas, LanChile is not done yet. Lan's goal is "to become one of the 10 best airlines in the world," says Roberto Bianchi, newly named senior vice president of marketing and sales for LanChile's cargo operations in North America and Asia.

Globally, airlines have accumulated $30 billion in losses since the 9/11 terrorist attacks, according to the International Air Transport Association. A travel slump sparked by the U.S. war in Iraq could add at least $10 billion more to the red ink this year. Only one major U.S. airline, Southwest, made money in 2002. Among the U.S. carriers that serve Latin America, United Airlines is on the verge of bankruptcy, American is scrambling to cut costs enough to stay in the game, and Delta predicts losses of $397 million for the first quarter of 2003, matching its dismal performance for the same period in 2002.

While airlines across the region--indeed, around the world--worry whether they'll survive through the end of the year, LanChile has coolly posted profits, expanded its fleet and moved ahead on plans to boost its presence in Latin America. The carrier steers clear of short-term debt; its cash balance exceeded $150 million at the end of 2002. International ratings agency Fitch ranks LanChile investment grade, one of the few airlines in the world considered so.

"It's all about management. LanChile has exceptional management," says airline industry consultant Bobby Booth, president of Aviation Management Services in Miami. "It's also about ownership--and in this case the managers are also the owners of the company." Chile's Cueto Group, which had successfully run an air-cargo company, became LanChile's majority owner in 1994, completing the privatization of the former state-run company.

Cargo remains at the heart of LanChile's operations, accounting for more than 40% of revenue. The unusually high level of cargo on board the commercial airline protects income flow when passenger traffic slumps. "The Cueto family understood the cargo business--in fact, they had to learn the passenger business--so they brought a completely new perspective to the industry," says Booth.

That perspective included splitting passenger and cargo services into separate divisions in 2001. Lan customizes cargo areas in its 737s so it can transport perishable Latin American products such as fish and flowers and tailors cargo services to meet corporate needs. It pumped $55 million last year into a mammoth expansion of an air-cargo facility at Miami International Airport.

LanChile also has set up local cargo operations in Mexico and Brazil. Booth says it's almost certain the carrier will eventually follow with passenger service. However, competitor airlines in the two countries don't expect anything in the short term. "I suppose there's always a possibility" of a LanMexico, says Anthony Batista, Aeromexico's sales manager for the United States. "But I just don't see LanChile coming into Mexico. We code-share with them now."

TACA uses a hub system serviced by affiliate carriers in different countries.

Lan elan. As it grows, LanChile has placed its own stamp on an expansion model pioneered by Grupo TACA, which operates six Central American airlines under one corporate umbrella. Although Grupo TACA does not report its earnings, industry insiders say the company posted a profit in 2002, putting it in an elite quartet of money-making Latin American carriers that includes LanChile, Panama's Copa Airlines and Aerolineas Argentinas.

The strategy creates a renegade form of open sides agreements--formal arrangements that allow unrestricted air service between countries. In the absence of bilateral aviation agreements, carriers otherwise are hamstrung as to where and when they can fly, the frequency of their routes and even the types of planes they can use. TACA-style multi-carrier groups not only bypass those roadblocks, but they also provide opportunities for group procurement when it comes to jet fuel purchases and aircraft leasing, as well as contracts with suppliers.

In its fledging group, LanChile counts on sister airlines in Peru and Ecuador. Two years ago, Santiago-based Lan launched LanPeru, giving it a more centrally situated hub in Latin America. By structuring LanPeru as an independent carrier--LanChile owns 49%--the airline won permission to serve the important Lima-Miami route. TACA, through TACA Peru, entered Peru with the same idea four years ago.

LanChile tried to repeat the strategy last year, setting up LanEcuador, but the carrier ran into obstacles. The U.S. Federal Aviation Administration initially denied LanEcuador permission to fly from Quito and Guayaquil into New York and Miami, calling the new carrier nothing more than a subsidiary of its big brother. Since then, LanEcuador has restructured its ownership--the Chilean carrier now owns 45%--and daily flights to both U.S. cities were slated to begin April 28. Service to Madrid from Guayaquil and Lima will debut in June.

Overcoming government regulations regarding ownership is one of the challenges facing the multi-partner airline strategy. It is burdensome for a company to set up affiliates in every country where it wants to operate. "Expanding via affiliated airlines can be an expensive proposition," says Pedro Heilbron, CEO of Copa Airlines. "However, it seems to make sense for LanChile to do so."

LanChile moved into Peru and Ecuador when those countries' flagship carriers, AeroPeru and Ecuatoriana, ended operations. Through a holding company, the Chilean carrier recently set up LanDominicana in the Dominican Republic. If it receives permission from the U.S. Department of Transportation, flights from Santo Domingo to the United States could begin as early as June.

"We make sure that every move we take has to be profitable in the very short term. We do not seek expansion when it is not tied with profitability," says LanChile's Bianchi. "We have grown this company threefold over the past eight years and we have been profitable every single year, including 2001 and 2002."

LanChile has also sought to expand its existing service in Bolivia, although not through a separate affiliate. Lloyd Aereo Boliviano is vociferously fighting Lan's push for more of the Bolivian market. "Bolivia lost its sea coast to Chile and now we're landlocked," says Ernesto Asbun, CEO of Lloyd Aereo Boliviano. "We don't want to be airlocked, too."

Argentina long ago was earmarked for a Lan affiliate, "but we have not found in the last four years the right way to increase our participation in that market," Bianchi says. If and when it does, the Chilean airline could face stiff competition from a resuscitated Aerolineas.

Aerolineas Argentinas, eyeing results at TACA and LanChile, has earmarked $30 million to create spin-off carriers of its own that could begin service as early as 2004 in Chile, Bolivia, Paraguay and Uruguay. It also plans to merge its international and domestic carriers, Aerolineas and Austral, virtually eliminating Austral. Aerolineas President Antonio Mata has projected that Aerolineas and its subsidiaries, now controlled by Spanish tour operator Grupo Marsans, will post profits of at least $35 million in 2003, its second year in a row in the black and a significant turnaround for the once-government-owned carrier.

Strength in numbers. Clearly, LanChile will concentrate on the bottom line in the short term. Latin American carriers are scrambling to stay financially healthy against a backdrop of high fuel costs, rising insurance and security expenses, swelling airport-use fees and lost income from the global travel downturn. Skyrocketing fuel prices alone have added 10% to operation costs in Peru, says Lupe Zevallos, chairman of Peru's AeroContinente airline. Currency devaluations in Brazil and Argentina have multiplied the cost of airlines' dollar-based debt.

At the end of March, LanChile renegotiated the terms of several aircraft lease agreements, a move it says will save $15 million this year. Bianchi says synergies among the airlines within the Lan group, as well as pooled procurement with alliance partners, have helped keep costs lean. "As an example, we bought an Airbus in a deal in conjunction with [Brazilian airline] TAM and Grupo TACA," says Bianchi. "Our participation in the Oneworld alliance also deals together with many vendors."

Airline insiders and analysts maintain that the way for carriers to avoid writing their own epitaphs is through such alliances and mergers. "What other global business is more fragmented than air transport?" IATA Director General Giovanni Bisignani asked a recent International Civil Aviation Organization conference in Montreal. "We need the economies of scale that mergers or acquisitions can provide."

In Latin America, alliances and cooperative networks involving equity have proven their worth. When talking about its profitable position, Panama's Copa quickly cites its relationship with Continental Airlines, which owns 49% of the Central American carrier. In addition to jet fuel and aircraft procurement, the two carriers share airline lounges, ticketing offices and food service supplies. "I am sure that some niche carriers will be able to survive without partnerships," says Copa's Heilbron. "However, for pan-Latin American players, alliances will continue to be a key element of their success."

In a merger last year, Colombia's Avianca and Aces airlines, as well as small carrier Sociedad Aeronautica de Medellin, or SAM, created Alianza Summa and, in the process, claimed more than 62% of the domestic market and half the international tickets for Colombia. Latin America's biggest airline, debt-ridden yang, and one-time rival TAM Linhas Aereas are now trying something similar.

Meanwhile, the troublesome U.S. aviation landscape could clear the way for the profitable Latin American carriers like LanChile to bolster their positions. United abandoned its Santiago service on Jan. 6, a move that Luis Ernesto, LanChile's general manager in Santiago, has said paves the way for company to grab a greater market share. American Airlines, meanwhile, announced a 6% cut in its international routes beginning in April. Although European service was most heavily affected, frequencies were also reduced on service from Miami to Guatemala, Panama and Belize.

Still, LanChile is not expected to make any quick moves in uncharted skies. "LanChile is planting its seeds," says analyst Booth. "But they don't rush in. They do things carefully."

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RELATED ARTICLE: COPA

Copa is forging ahead with its six-year fleet expansion, which includes two B737-700s and two 737-800s this year and two more new jets in 2004. The Panamanian airline, which posted 2002 profits of about US$20 million, is anxious to increase its presence in Colombia; one of the B737-700s debuted recently on a Panama City-Barranquilla, Colombia route. Copa is also looking at daily service from Panama City to Caracas, which it now serves four times a week, as well doubling to 14 the number of flights it offers to Mexico weekly. With partner Continental, Copa expects to launch service to Tegucigalpa and to New York.

GRUPO TACA

Grupo TACAs legal battle over the status of its subsidiary TACA Peru cleared several hurdles early this year. In 1999, TACA began seeking permission to operate routes between Peru and Argentina, Brazil, Chile, Mexico and the United States. The company invested US$300 million in a new fleet, hired more than 400 employees in Lima and began setting up the Peruvian capital as its South American hub as it worked with provisional permissions that let it offer about 70 flights a week. The routes are now permanent and TACA is a full-fledged player in Peru.

AEROMEXICO/MEXICANA DE AVIACION

Privatization of Mexico's flagship carriers remains on hold. "Although there is a desire to get the situation settled, many people believe this is not the right time," says Anthony Batista, U.S. sales manager for Aeromexico. Bastista notes that there is general agreement that holding company Cintra will sell the carriers individually. Until then, the airlines are renegotiating commercial and labor contracts, refinancing loans and restructuring payment schedules with suppliers. Both airlines are expanding U.S. flights.

VARIG/TAM

A month after a merger with TAM Linhas Aereas, yang, Latin America's biggest airline, revealed record losses of nearly US$594 million for the first nine months of 2002. (TAM, Brazil's No. 2 airline, lost $480 million in 2002.) Varig, which also carries nearly half a billion dollars in debt, was in such bad shape at the end of 2002 that it barely flew in December. Two of yang's jets were impounded because of overdue lease payments and 13 more were returned to the lease company. yang and TAM began code-sharing flights in March. At press time, they were still hammering out merger details.

AVIANCA/ACES

Alianza Summa, the alliance of Colombia's Avianca and Aces, plans no new routes but is increasing frequencies on some existing ones as it moves to finalize its mergers May 2004. The two-month Venezuelan protest dramatically eroded Summa's revenues on service to its eastern neighbor while a weakened peso added to the dollar-based debt burden. In March, Avianca and its U.S. subsidiary, Avianca Inc., sought permission under Chapter 11 of the U.S. bankruptcy law to restructure US$130 million in debt. Avianca posted losses of nearly $35 million in 2002, compared with $94 million in 2001.