Southern Strategy.

Grupo TACA looks south for more revenues.

GRUPO TACA, THE ALLIANCE OF CENTRAL AMERICAN AIRLINES, has traditionally looked north for its salvation. But its officials now see a new promised land in South America.

"Presently, our growth is all south," says Federico Bloch, CEO for Grupo TACA.

In the past year, the Central American group has added just one northern route-Montreal--to the U.S. and Canadian markets. An alliance with American Airlines allows it to code share to any U.S. city on American's extensive network, and the partners have asked Washington for antitrust immunity so they can set joint fares and routes without charges of price fixing. (Delta and United Airlines have vigorously opposed the request.)

Until recently, half of Grupo TACAs traffic had been to and from North America, while the other half had been within Central America. Currently, 40% of TACA flights go to North America, 40% to Central America and 20% to South America--but Bloch expects each region to generate one-third of the airline's revenues within the next two years. "We want a network that is geographically diversified and well balanced between regions," he says. "Basically, we don't want all our eggs in one basket."

TACA's new strategy comes as more North American and European tourists, as well as Latin American business travelers, are flying to South America. Robert Booth, chairman of Aviation Management, a Miami-based consulting firm, says Latin America was the fastest growth market in the airline industry from 1990 to 1998, with overall traffic rising 120% during that period. Air travel slowed in 1999 when South American economies also slowed, but the region is recovering economically. "The best is yet to come," Booth predicts.

TACA's three-pronged attack calls for the airline group to transform SanJose, Costa Rica, into a regional hub to link North and South America. The group is also starting TACA Ecuador. TACA will launch flights linking San Jose with Quito, and Quito with Caracas, Bogota, Miami and New York.

The third and key part of the alliance's strategy is a Lima hub. Because Jorge Chavez International Airport is centrally located in regard to most of the continent's capitals, Lima is a natural South American hub-a fact not lost on Continental Airlines, which is toying with the same idea. The plan comes just as new upgrades, including an additional runway, begin at the airport, which was privatized in early 2001.

The Lima hub plan surfaced last year when TransAm, a defunct Peruvian airline, was reborn as TACA Peru. TACA Peru hired Daniel Ratti, the former CEO of Carnival Airlines, as its head, and the Central Americans bought a 49% stake and gave the re-launched airline their name, fleet and marketing savvy.

TACA Peru began as a domestic airline, but Peruvian Ratti won the rights to the routes of bankrupt AeroPeru. As a result, the carrier can serve Sao Paulo, Caracas, Quito, Guayaquil, Panama City, San Jose, Mexico City, Bogota, La Paz, Santa Cruz, Santiago and Miami. Some analysts predict TACA Peru could become the biggest revenue producer for Grupo TACA. Risky approach. Booth notes that the South American expansion places TACA in head-to-head competition with Panama's Copa airlines and its U.S. partner, Continental--an alliance with experience handling a north-south connection out of the Panama City hub. He also says most passengers don't want to stop in Central America when traveling south. TACA Peru's nonstop Miami-Lima flight could be the undoing of a Costa Rica hub.

Other analysts say TACA is not only betting on a surge in South American traffic but on successfully navigating the foreign exchange dangers of such growth. Like most airlines, some of its biggest expenses--fuel and aircraft payments-are paid in U.S. dollars. As a hedge against currency fluctuations, airlines typically try to match their dollar expenses with dollar revenues. But Grupo TACA's South American strategy means the group will be earning more of its revenues in pesos, reais and soles. That puts it at the mercy of foreign exchange rates.

CEO Bloch is unfazed. "This is the future," he insists. "We are going to see fewer carriers with broader coverage."