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Pablo de Sala
Pablo de Sala
Articles (9) 

Aerolineas Argentinas: A Flying Brick Up High in the Sky (Part II)

September 19, 2014

In my previous article, I left the plot in 1990. It has been less than one year since Carlos Menem was elected president of Argentina. This president made the '90s the decade of privatizations in every scope. Aerolineas Argentinas was no different.

A sordid privatizAerolineas Argentinasation

On November 21, 1990, a consortium led by Iberia and Austral's owner Cielos del Sur S.A. acquired an 85% stake in Aerolíneas Argentinas offering to pay U.S. $260 million in cash and U.S. $1,610 million in external debt bonds. Reality was far from the truth.

The contract was to be signed with a clause that enabled the buyer to indebt Aerolíneas Argentinas for the buyout process; this was reflected in the airline's 1991 balance, which included debts worth U.S. $390 million for its own acquisition.

Aimed at favoring the privatization process, the government absorbed a U.S. $741 million debt the company took between 1981 and 1982 for capitalization purposes.

Despite the carrier being regarded as overstaffed and bureaucratic, it was debt-free at that time, having an average profitability of U.S. $90 million a year; it actually had U.S. $719 million in revenues for the year prior to the privatization.

It was not until 2009 that this privatization process would be ruled illegal.

Iberia´s monopoly and an edge getting closer

Austral's owner Cielos del Sur S.A. was sold to Iberia in March 1991, further increasing the Spanish flag carrier's stake in the Argentine air market. Aerolíneas Argentinas and Austral never merged throughout the private era, and remained as separate companies with the same shareholder.

In April 1994, the financial situation of the airline was extremely delicate as a consequence of the indebtedness caused by Iberia – Cielos del Sur and due to their poor management. A new agreement was signed to restructure its finance and operations.

Iberia subsequently boosted its stake in the airline to 85% after a U.S. $500 million (U.S. $796 million in 2014) cash injection. Out of the remaining 15%, the Argentine government held the 5% stake it was initially assigned while 10% belonged to the employees. Furthermore, at this stage, the Argentine government resigned the voting privilege it had in the directory of the airline. Iberia was subsequently obliged by the European Commission to cut its stake in Aerolíneas Argentinas as a condition for receiving state aid. It reduced its participation to 20%, transferring the remaining 65% to Interinvest/Andes holding, a consortium comprising the Spanish government holding company (SEPI) – the actual owner of Iberia before it was privatized in 2001 – and banks Merrill Lynch and Bankers Trust, among others.

In July 1997, Iberia cut again its stake in Aerolíneas Argentinas from 20% to 10%, while American Airlines' parent company AMR acquired a 10% stake of Aerolineas Argentinas/Austral's major stockholder Interinvest, equivalent to a participation of 8.5% in both Argentine companies, with the commitment of finding investors for Aerolíneas Argentinas.

AMR's 8.5% operation was finally cleared by the United States Department of Justice in early July 1998. By that time, the Argentine Government still owned a 5% stake in Aerolíneas Argentinas.

By the late 1990s, the airline was near bankruptcy. Losses had mounted to U.S. $927 million since 1992, totaling U.S. $150 million only for 1999. The restructuring plan presented by AMR, mainly aimed at reversing these losses, was rejected by the SEPI. Furthermore, given that the AMR Corporation did not find purchasers for the company, the SEPI put the control of the airline back into Spanish hands. The vacancy left in the management positions that followed the departure of the AMR holding from Aerolíneas was soon filled in by the SEPI. In order to protect the interests of the Argentine national carrier, the government suspended an open skies agreement between Argentina and the United States that would come into force in September 2000.

The Y2K effect? No, just a new millennium, same poor performance

So far, we have allegations of corruption made on the basis of the price paid by Iberia and the Spanish firm's ulterior conduct with the airline paying the price for its own purchase with its assets and subsequent management by American Airlines and SEPI that drove inevitably Aerolíneas Argentinas into an almost terminal crisis in 2001.

In June 2001, the reverberation began after the airline filed for bankruptcy protection from creditors and went into strike. After several misconducted negotiations, the salaries were paid by the Argentine Government, Fernando De la Rua acting as president.

The payment of salaries for the upcoming months was suspended, as the mechanics union refused to accept the reorganization plan raised by the SEPI to keep the company afloat.

Consequently, flights to Auckland, Los Angeles, Miami, New York, São Paulo, Sydney and Rio de Janeiro were halted. Thanks to a U.S. $15 million debt with the fuel supplier, the suspension of the daily flight to Madrid came a week later. After this, most of the fleet was grounded, and only 30% and 10% of domestic and international flights, respectively, were operating.

Below is a chart comparing same characteristics from both privatizations:

Position of the company upon the acquisition by Iberia and when it was sold in 2001

Item

1991

2001

Assets (without routes, brand, etc., US$ mil.)

636-776

N/A

Annual Balance (US$ mil.)

18

–390

Debt (US$ mil.)

0

90

Aircraft (owned/leased)

28/1

1/43

Number of employees

10,372

6,734

Second privatization

In late 2001, Grupo Marsans acquired a 92% stake through its subsidiary Air Comet from the SEPI and committed to inject U.S. $50 million capital with the intention of resuming short– as well as long–haul services.

By July 2002, the airline and its subsidiaries employed 7,090.

In January 2003, the company exited bankruptcy and the first profit was announced after five years, along with an important increase in market share.

Renationalization

In May 2008, an initial agreement between the Argentine government and Grupo Marsans in which the latter would decrease its participation in the airline to 35% was announced; in reducing their holding, Marsans would make room for new private investors as well as for the government of Argentina to increase its stake in the airline from 5% to 20%. Amid accusations from Marsans and following the disclosure of an agreement, the Argentine government took the airline back into state control in July 2008 after acquiring 99.4% of the stake and the remaining 0.6% continued being owned by the company's employees.

In September, the law was approved by the Chamber of Deputies.

In March 2011, the different unions that affiliate the airline staff demonstrated over concerns the government was looking for local private investors to participate in ownership of the company.

In late November 2011, the government announced an austerity plan for the company in order to reduce the deficit it has been incurring since being taken over from Marsans; the plan included the revision of unprofitable routes, the reduction of pilot/aircraft pay rates, and the abandonment of obsolete equipment, among others.

Passenger traffic for the group reached a record 8.5 million in 2013, a 57% increase from the time of its renationalization in 2008. Revenues rose to a record of U.S. $2 billion in 2013, an 85% increase from 2008 levels; losses likewise declined from U.S. $860 million (78% of revenues) to U.S. $250 million (12% of revenues). Corporate assets as of 2012 had tripled to over U.S. $1.6 billion, as the group's fleet grew from 26 to 63 planes and the average age of same was reduced from 20 years to 7.5.

Aerolíneas Argentinas and its sister company Austral Líneas Aéreas operates from two hubs, both located in Buenos Aires: Aeroparque Jorge Newbery and Ministro Pistarini International Airport.

Aerolíneas has a fleet of Boeing 737-700s and 800s for serving domestic and regional routes, whereas intercontinental services are flown with Airbus A330s and 340s. SkyTeam membership was achieved in late August 2012; the airline's cargo division became a member of SkyTeam Cargo in November 2013.

As of April 2014, the airline and its subsidiaries employ 11,515.

As of June 2014, the presidentand chief executive officerpositions were held by Mariano Recalde (former affiliate to La Campora, Kirchner´s private movement).

As of August 2014, AA fleet consisted of:

Aerolíneas Argentinas Fleet

 

Aircraft

In Fleet

Orders

Passengers

Notes

 

C

Y

Total

 

Airbus A330-200

4

4

24

248

272

   

Airbus A340-200

1

32

217

249

Two aircraft stored

 

Airbus A340-300

7

32

252

284

Two aircraft stored

 

Boeing 737-700

22

8

120

128

   

Boeing 737-800

11

28

8

162

170

   

Total

45

32

   

As of this month, September, tension has risen again between the government and the syndicate that rules the employees who work in the airline field (Federación Argentina del Personal Aeronaútico – FAPA). Due to the feeble economic situation of the country, the high inflation and the recent default, the syndicate is claiming an increase of 35% of its salaries. Mariano Recalde, following Cristina Kirchner´s orders, warned them to cease their claim otherwise Aerolineas Argentina will close and the syndicate will be to blame. The official proposal was an increase by 28, 15%. A resolution is expected by the end of the month.

In 2013, the airline deficit was U.S. $247 million, a decrease by 44, 1% less than the U.S. $441, 7 million from 2012.

Different accusations are fired, the syndicates saying that Recalde cannot justify the company´s deficit and is trying to blame the syndicates for this, and on the other hand, Recalde who states that an increase of such magnitude is not applicable under the current situation of the airline.

The end is yet to come.

Pablo de Sala.


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