Mayday! Mayday!

Aerolineas Argentinas heads for a crash landing.

IF ARGENTINA'S TROUBLED FLAGSHIP AIRLINE WERE A PLANE IN flight, its oxygen masks would be dropping, its passengers panicking and its flight attendants readying for an emergency.

"Aerolineas Argentinas is living its most critical moment since the airline was founded 40 years ago," says Ariel Basteiro, general secretary of the Association of Aeronautic Personnel, the airline's main union.

The Spanish management of Aerolineas Argentinas and its hard-line unions have continued hammering at rescue plans, but there may be little of the carrier left to save when the dust clears.

Strapped for cash and burdened with a US$900 million debt, Aerolineas recently filed for bankruptcy protection from creditors. In June, the carrier suspended flights on seven international and four domestic routes, including Miami, New York, Los Angeles, Rio de Janeiro and Sao Paulo.

"The perception is that the airline won't survive--not in its present form," says Bob Booth, chairman of Miami-based Aviation Management Consultants.

Aerolineas' fuel suppliers and caterers have refused service unless paid in advance, and strikes in April and May cost the company $77 million as passengers defected to other airlines.

"Every day we say this is D-day and we can't go any further," says an Aerolineas spokeswoman.

The government of ex-President Carlos Menem privatized the airline in 1990, a year when the airline owned 29 planes and was debt-free. Today the carrier owns only 15 planes, leases more than half its fleet and loses an estimated $1 million a day.

"We used to be the pride of Argentina and now look at us. There is nothing left," says Alberto Salas, a hydraulic engineer who joined a crowd at the presidential palace to protest a proposed rescue plan that includes layoffs and salary cuts.

Aerolineas, which still paints its planes in the powder blue and white of the Argentine flag, is currently controlled by SEPI, a Spanish state holding company with 91.2% of company stock. The Argentine government holds 5.4%, employees have 2.65% and 0.7% is split by American Airlines and Iberia. Other investors hold the remaining fraction.

After investing almost $2 billion since its privatization, the Spanish government now refuses to spend a peseta more until the debt-ridden flagship's seven unions agree to a rescue plan that carries pay cuts of up to 20% and layoffs of more than 1,300 workers. Five of the seven unions have signed on but the mechanics and flight attendants refuse--and that's keeping SEPI from infusing $350 million into the company. The holdout unions say the rescue is short-term. They also argue the governments of Argentina and Spain should be involved in saving the airline.

"It is irrational to expect us to continue injecting funds into a company that loses $300 million annually," SEPI President Pedro Ferreras has said. "We can't turn on the faucet without first plugging the drain."

Payday problems. Behind Ferreras' hard line, Aerolineas did not pay 7,000 employees their April and May wages. In an effort to cool tempers and foster negotiations, Argentine President Fernando de la Rua, who has characterized the privatization of the airline as "disastrous," released $16 million so workers could cash their April paychecks.

The standoff affected other Spanish investments in Argentina as unions made nationalist appeals and called for a boycott of all Iberian businesses. Several Spanish companies had eggs thrown at their offices and disgruntled workers routinely unfurled a huge Argentine flag and plastered posters all over Buenos Aires that read "We are all Aerolineas." The Spanish have been accused of everything from stripping assets to gross incompetence.

"The Spanish have to understand that we can't wait a minute more," says union leader Basteiro. "They have to put the money on the table if they want to stick around."

Spanish investors, who have pumped $30 billion into Argentina in the past decade, fear that they will become scapegoats for the nation's economic woes. Argentina is mired in its third year of recession and unemployment hovers at 15%.

"The performance of Spanish businesses in Argentina is being questioned unfairly," Spanish Foreign Minister Josep Pique told the Buenos Aires daily newspaper La Nacion. "We would like to separate the good experiences of several years from what has happened in just one business."

Spanish Prime Minister Jose Maria Aznar argues that Spain not only has invested in Aerolineas, it is also Argentina's biggest source of foreign investment. "There are people stirring anti-Spanish sentiment," Aznar said, countering that Spain "has contributed [to Argentina] in a very sympathetic way."

Anger with Spain masks a wider frustration that Argentines feel about privatization and free-market reforms that have failed to raise living standards. "Our people feel that what is happening to Aerolineas Argentinas is similar to what is happening to the country," says Victor de Gennaro, head of the Confederation of Argentine Workers. Argentina, too, was "indebted, privatized and forced to fire workers," he says.

Airline analysts routinely describe the Aerolineas privatization as the root of the problem and the worst of several questionable sales of state-owned companies at the beginning of the 1990s when the country was reeling from hyperinflation. The irregularities began in late 1990 after only one consortium headed by Iberia made an offer for 85% of the carrier's stock. (Another 10% was earmarked for employees and 5% for the Argentine government.) Although the airline had been appraised at $650 million, the winning bid was $500 million.

But the buyers didn't have the cash. They offered $130 million upfront, another $130 million divided into 10 payments and the purchase of debt bonds valued at $240 million. They covered the payments by borrowing from Spanish banks.

"I said this can't possibly work," recalls Congressman Alberto Natale, who sits on the Congressional Commission on Privatizations. "There is no way that they are going to balance the books while paying interest on loans and on operative costs."

To raise cash, the new owners sold the company's fleet of airplanes then leased them back. They also sold showy offices on Fifth Avenue in New York, the Via Veneto in Rome and Champs Elysees in Paris, as well as a flight simulator. Today, Argentine pilots pay to train in Spain.

Market changes. The entry of new international air carriers increased the availability of airline seats by 200% from 1990 to 1999 while demand grew at only 160%. Recessions in Latin America sparked a reduction in customers, prompting fares to tumble. Average income per passenger dropped 14% and airplane occupation 5%, according to a SEPI study. At the same time, airport fees swelled 300%, taxes went up 150%, insurance increased 60% and fuel prices began to rise.

SEPI replaced Iberia when the European Community refused to give Iberia loans in light of its involvement with the Argentine airline. Reluctant to manage Aerolineas by itself, SEPI forged an agreement with American Airlines in 1998, allowing American to manage Aerolineas, in spite of its small 10% stake in the company at that time.

The deal lasted a mere 15 months, during which Aerolineas continued to bleed cash. American Airlines executives decline to comment on their short-lived management stint or their abrupt departure. Last year, American divested most of its stock in Aerolineas.

"When American was at the helm it was one of the years when Aerolineas registered its greatest deficits," says congressman Natale. "The complaint of all the executives was that American had done a dreadful job."

The airline's unions banded together to try to buy the company in 1998, but lacked the funds.

SEPI executives argue that their controversial rescue plan will streamline the airline and allow it to recover. They note that Iberia was rescued by n similar plan and went from losses of nearly $1.2 billion from 1991 to 1995 to profits close to $510 million from 1996 to 1999.

Even as SEPI hawks its rescue plan, it may be looking for a way to extricate itself. "SEPI really wants out and if given any kind of an elegant way, I think they would jump at it," says consultant Booth.

There are potential buyers. Juan Carlos Pelligrini, who was Aerolineas president from 1973 to 1983 and is backed by powerful Argentine businessman Gregorio Perez Companc and local banks, reportedly made an undisclosed offer. So did Eduardo Eurnekian, owner of Aeropuertos Argentinos 2000, the company that manages the country's airports. Peruvian airline AeroContinente has also expressed interest, although SEPI officials are reportedly skeptical of the offer.

Despite the trouble, some of the airline's employees still seen silver lining.

"Sometimes you have to touch bottom before you can start climbing up again," says flight attendant Isabel Danico.