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Argentine Flag Carrier’s Market Opens to Competition

Interview - April 12, 2017

The Macri government came to power promising a cleanup in state institutions, including the state-owned companies.  Flag carrier Aerolíneas Argentinas cost the previous government subsidies of $600 million per year.  While the airline cut its deficit in half in its first year, its new President assumes office at a time of increased competition in the sector with the arrival of low-cost carriers to the country.  Mario Dell’Acqua tells The Worldfolio of his task to make the company break even, and build its market share as more Argentines begin to fly.


There are 135 newly approved air routes in Argentina, and the sector is opening up to the arrival of low-cost carriers to the country. How will Aerolíneas Argentinas remain competitive in this new environment?

While our market share will decrease, our operations will grow, as more Argentines begin to fly. Currently, Argentines fly much less than our neighbors, even with a larger population. Argentina does not have a strong network. Additionally, our roads are in a better shape than those of our neighbors, meaning Argentines are used to driving or taking long-distance buses.

Argentines drive three times longer distances than other countries in the region. The bus network and the number of people riding buses are similar to countries like Chile; the difference is that the Argentine middle-class is used to driving. There are many reasons that contribute to this. One is that rental cars are very expensive. For example, when Argentines go to Mar del Plata they can choose between a six-hour drive and a twenty-minute flight, but without having a car when they arrive, at a place where public transportation is not that good.

We expect to have a stronger network within four years that will allow Argentines to fly with more reliable conditions, such as what happened in Brazil. Brazil used to have just the one main airline, Varig before 2000, but after that year they opened up the competition to companies such as GOL, TAM, Azul, and the network became stronger. Brazilians that were not used to flying started doing so, and the Brazilian market doubled, even tripled, within 10 years. Our vision is to be the leaders in the market in a five-year period, losing market share but in a market that is twice the size. Instead of having 80% of our current 8-million passengers per year market, we would rather have 60% share of a 15-million market.


Under the new Macri administration, Isela Costantini was able to cut the deficit in half, but there is still a long way to go, with the company currently losing $300 million per year. How can you continue to improve the company's productivity in order to improve the numbers?

First of all, I want to commend the great job that Isela has done. We both knew what we were getting into when we took over Intercargo and Aerolíneas Argentinas respectively, at the beginning of this presidential administration. Both companies lacked professional management, and we had to make changes in order to remove the political bias from them. We started managing the company with professionalism, which was the first step to cutting down on costs and increasing sales.

Aerolíneas Argentinas has limited experience in the latter. In an airline, routes are designed according to the traffic. But when roads are chosen for political reasons, there is no way the airline will make money.

Resources were not being deployed correctly in the past; they were not creating the right network. Isela decided to have professional management in order to allocate routes. For instance, we have divided the commercial area into two. One was sales: marketing, product development, clients. The other one, which is a new area, is routes, revenues and itinerary. It is led by a director that has professional experience in other airlines, and uses the new control tools and technology to see where the highest demand is. This means routes and frequencies are now chosen in terms of the demand, not for political or other reasons. In the past two or three months, we have seen that when flight frequencies are allocated in accordance with the demand, we increase the sales and the revenue, and we reduce the company's deficit.

The company has the role of increasing the country's connectivity, offsetting the concentration in Buenos Aires and better balancing the other cities.

During the previous government, Córdoba province was cast aside because there were political differences between the national and the provincial governments. Therefore, Argentina has missed a huge opportunity to create a second hub in the city of Córdoba. Argentina has one hub, which is Buenos Aires.

When Aerolíneas Argentinas started increasing the flight frequency to Cordoba, the city responded quite well. We duplicated the frequency and the number of passengers also doubled.

Managing an airline is not easy, because you have to plan ahead, evaluate all the factors, and deploy crews and maintenance. You also need proper airport facilities, which were not in good conditions. On the contrary, the Ministry of Transportation has had to shut down airports in order to repair them. There is progress being made, and in two or three years' time we will have a solid network of facilities to cope with our plans.

In Cordoba, the first step was to increase the frequency. The second step was to use the city as a hub, combining five flights coming from the North with five flights coming from the South of the country. The plan is to redistribute passengers and luggage within two and a half hours, which is an important challenge from the operational standpoint. But we believe we are mature enough to do so.

One important thing that we started doing last year is being more reliable to our public. Two years ago, our passengers would buy a ticket expecting to fly, and sometimes they would not. This happened many times, even during the busiest holiday period. Our answer was to increase the number of flights that would departure on time. Last year, 86% of our flights took off with less than a 15-minute delay; and only 1% of our flights were cancelled.


Will Aerolíneas Argentinas continue as a state-owned Company?

Aerolíneas Argentinas is, and will continue to be, our state-owned flag carrier.  Argentines do not want this company privatized due to our bad experience when it was. Argentina is a remote country, away from the normal routes of connectivity.  For our own development, it is vital that we develop our domestic connectivity, as well as our links to the region and the world. We will not privatize Aerolíneas Argentinas but we will make it efficient.  The company plays an important role in the country, and in the coming years it will lead the increase in flight passengers.


As you take on this role, what are the main challenges that you see in terms of balancing the balance sheets?

We are in a far better condition than before. Now we have a professional team in place, we have cut the deficit by half, we have a budget and we comply with it, we allocate resources more efficiently and we demand fexplanations behind each expense. Aerolíneas Argentinas implemented the SAP system last year in order to exercise a better control of expenditures, salaries and purchase orders. We still have a gap to fill in, but it is by far much easier to do so than one or two years ago. In fact, we will be presenting the balance sheets and having approved the balance sheets in two months in order to be able to ask for loans from banks; something that was not even possible one year ago.

We want a self-sufficient airline, growing 50% in the next five years in passenger numbers, and the market is responding well.  Last year, we grew 8% even during a year with low macroeconomic growth for the country.  This year, we aim to grow by 12%, and we are already on track.  In January and February, we broke records for passenger traffic. We need to reach a break-even point in four years, and this is possible.  We will get there by choosing routes professionally and getting the right fleet at the best negotiated prices.  Renewing our fleet is key, because it will define the long-term growth of the company.


How will you negotiate and finance the growth of your fleet?

Aerolíneas Argentinas is one of the most solid companies in the region, and we have no trouble accessing credit.  We are working to expand in a market that is set to double in size.


How do you describe the company’s relationship with the unions?

The workers’ unions want this company to be successful just as much as we do.  The fear that this company will be privatized is completely unfounded.  This government is based on a republican structure, with honesty as the bedrock commitment to its citizens. It is our job to offer a service that complies with what we promise.  We commit to take our passengers safely to their destination.  To accomplish that, having just one airline is not the solution.  Aerolíneas Argentinas cannot satisfy the demand of all who want to fly, as no one airline can do so in any other country either.

In the past ten years, air travel has grown exponentially, even with greater security measures on airplanes and at airports.  This is attributed to the internet, which permits our clients to directly choose dates, seats, and prices of their trips.

Aerolíneas Argentinas is now selling 55% of its tickets through its own networks, enabling the company to cut down the fees for travel agencies. That is because we do not need them anymore.


You also have the relative advantage of being the main player in the domestic market, which you will lose as the market becomes more competitive. Will your strategy adapt?

Aerolíneas Argentinas has a strong brand; the company is efficient and secure. The safety measures are outstanding when compared to international standards, and the perception that the public has on this regard is very good. We are also flying at least twice every day to each capital city, which means that customers contact us first when they want to fly. This is a competitive advantage that we are going to keep and emphasize, backing up this perception with operations.

Our goal is to keep the level of punctuality, efficiency and passenger experience that we have and to improve it. We have to position ourselves as a legacy, while others will try to position themselves as low-cost airlines. But Argentina is a heavily regulated country: legally, from the tax and airport facility standpoint, and so on. This means we do not have the same conditions as Europe does. We do not know what will happen with low-cost companies.

They must understand the challenges of the Argentine market. They only see the upside; they see the country is opening up and that the size of the market is small but with growth capacity. But they do not see all the restrictions they will have to face, which makes it less easy to replicate the strategy they implemented in Europe.


Will you try to have a low-cost brand of your own?

We have two brands: Austral and Aerolíneas Argentinas. Austral is doing very well, with a 90-seat plane that is enough for this stage of the market. Its current size is perfect, because we can double the frequency without jeopardizing the revenue. Austral has its own operation, with different pilots and different maintenance.

It also has a different history. Austral used to be a successful private company, and when Aerolíneas Argentinas was privatized it was destroyed. We are prepared to compete with other airlines; because we believe the market is going to increase with the cooperation between airlines.


You only have two international connections with the US – Miami and New York. With the opening of the economy and the growth of the airline sector in Argentina, do you think there will be more?

We are members of the Sky Team alliance, and we have made code share agreements with Delta and Alitalia, along with another 8 companies, in order to emphasize our cooperation. Delta is helping us in many aspects of our operations and marketing, and we are currently selling through Delta. We are carefully analyzing new connections, with our main focus being the Argentina-US routes. Miami and New York are now working very well. They are reliable and in time.

We are intentionally stressing the fact that we have to serve the people who travel abroad. We are also stressing Italy and Spain, for cultural reasons. We are also increasing the frequency to the Caribbean, which did quite well last year.

We are not aiming at being the main airline from Argentina to the world. We are going to concentrate on being the best in the domestic market. We see the opportunity to increase our revenue this way, due to the low level of penetration the airlines have in the country. We have better chances here than competing with international companies to serve routes abroad.


Interview by Nicolas Carver, follow him on Twitter at @WorldTempo