Argentina’s Airline Tries Evolving for a Fragile South American Market

October 10, 2019

Argentina’s business and politics are inextricably linked, and aviation is no exception.

Since the inauguration of the business-friendly conservative president Mauricio Macri, the country’s aviation industry has become more competitive in the past four years. Low-cost companies, including Flybondi, Norwegian Air Argentina and JetSmart, have emerged to offer lower prices on domestic routes, and the government has begun to invest millions of dollars in major airports to improve infrastructure. In July, the Argentine airlines ushered in a record of 1.5 million flights a month in Argentina, an increase of 61% compared with four years ago.

In order to keep up with the pace, the flag carrier Argentine Airlines has been making its own changes. The airline’s leadership has been driven by the same government, driving competition in the aviation industry, and the airline has taken a big step to become more efficient, customer-centric and financially sound. However, due to the country’s continued economic hardship and the possibility that the country may restore a populist government by 2020, there is doubt about the future of Aerolineas and the larger Argentine aviation market.

“Argentina’s aviation market has undergone tremendous changes during these four years,” Argentine Airlines President Luis Malvito told Skif in a telephone interview with a Spanish translator.

According to the latest data from the Argentine Civil Aviation Authority, new low-cost airline entrants now account for more than 20% of Argentina’s domestic flight market share. Through this new competition, Aerolineas has been working hard to increase flexibility over the past four years. However, there is more work to be done.

“In this case, we found that our Aerolineas aircraft had many opportunities for improvement in 2015,” Malvido said. “Not only because of the low productivity of their employees and the low fleet utilization, but the company is outdated. Aspects and ideology.”

Customer service focus
Malvido joined the carrier after telecom provider Telefonica held several international positions and has been committed to implementing a three-year strategic plan with a focus on efficiency, customer service, digital systems and networking.

The airline has invested in several projects, including launching new websites and mobile applications, implementing new maintenance management systems and contracting technologies to increase freight revenue. It also made operational improvements, such as reducing the Boeing 737-800’s turnaround time from 50 minutes to 40 minutes to increase utilization. However, it did not reduce the number of employees. The company has approximately 12,000 employees and this level has remained stable over the past few years.

Malvedo admits that the company still has work to do. He said: “Until now, [Aerolineas] has always been a customer-centric company dedicated to transporting passengers.” “But the concept of the customer is almost non-existent.”

Aerolineas sees opportunities to increase revenue by offering more privileges to its highest value customers – 5% of travelers buy more than $100,000 a year, which accounts for about a quarter of all revenue. It also launched a plan in December last year to “match” the elites in the Aerolineas Plus program with the advanced position of the aircraft in the hotel.

“For the vast majority of international companies, the obvious thing is to build our customer base, segment customers according to behavior and value, and give them attention and benefits based on customer loyalty. This is the first for us. One step. Malvedo said.

Financial difficulties continue
These investments may increase customer satisfaction, but Aerolineas still hasn’t made money – it’s not clear when or when it will make money.

Malvedo said the airline currently estimates that it will require $245 to $275 million in government subsidies this year. The estimate is higher than the earlier forecast of $170 million and nearly $200 million for 2017 and 2018. But he stressed that this is much better than in 2012, when it took nearly $900 million in government funding in 2012.

Malvedo said that oil prices have risen. Given the depreciation of the Argentine peso, dollar costs have become an important part of the cost and the engine maintenance costs of the Embraer E190 have increased, contributing to this year’s figures. The E190 is operated by Austral, a domestic airline owned by the company.

As it continues to face the lingering dollar-denominated debt of past aircraft purchases, the airline has been focused on finding ways to reduce costs. Since 2016, it claims to have cut more than $100 million from the budget by renegotiating key contracts and saving on hotel and restaurant expenses. However, due to rising oil prices and the depreciation of the Argentine peso, the airline’s cost in 2018 increased by 18% year-on-year.

With cost control a focus, Aerolineas has delayed some passenger experience improvements so it can focus on short-term revenue gains. It has not yet started a Boeing 737-800 fleet retrofit program announced in 2018. And the carrier has yet to move forward on a plan to install Wi-Fi on its fleet, although airline spokesman Fernando Fagioli said it has narrowed down its options to two technologies.

The carrier also has yet to announce a replacement for Austral’s 26 E190s. Fagioli said this decision is on hold because the still-grounded Boeing 737 Max is under consideration.

As for the five Max aircraft already in Aerolineas’ fleet, Malvido said the grounding has not caused any major disruptions but that airline executives continue to have “very adult, very responsible” conversations with Boeing about how to recoup any costs incurred.

Consumers in Argentina arguably have been big winners of government policies designed to increase connectivity.

However, not everyone is thrilled about Macri’s so-called “aircraft revolution”— namely labor unions, which have raised concerns about how the plan has affected wages, among other issues. They are also worried about the role of international companies in Argentina’s aviation industry.

So, even as Aerolineas seeks to make structural improvements to its customer service, labor tensions have affected its operations in practical ways. The carrier calculates 12 demonstrations this year have affected flight plans of more than 140,000 passengers, and two more strikes have taken place in recent days. That’s the same number of disruptions in all of 2018, and four times as many as in 2015, Malvido said. Strikes of airport personnel and pilots have affected other airlines as well, but Aerolineas is significantly exposed because of its extensive operations.

Still, Aerolineas’ strategy and leadership could become more sympathetic to labor issues if Argentina sees a new president after elections on Oct. 27. After a preliminary round of voting in August, pollsters are predicting a huge win for a ticket consisting of Alberto Fernandez and former president Cristina Fernandez de Kirchner. (Aerolineas was re-nationalized in 2008 under her leadership.)

Rice University political science professor and Argentina expert Mark P. Jones said Aerolineas and the wider market could see changes with a Fernandez win, noting it would be “shocking” if Aerolineas didn’t see new leadership under that scenario.

“We’re likely to see both a new CEO as well as a change in the business model that’s more sympathetic to the unions,” he said. Fernandez would be able to determine who runs the airline, as well as its policies on a “variety of issues ranging from labor to markets,” he said.

Jones said one silver lining of a Fernandez win could be fewer disruptions, work stoppages and cancellations, although the carrier could run a higher deficit. He said he thinks the administration could also try to stymie low-cost carrier growth.

“One way to reduce the deficit in Aerolineas is to reduce Aerolineas’ labor costs—well, they’re not going to do that,” he said. “The other way, though, is to allow Aerolineas to charge higher prices, and one way you can effectively allow Aerolineas to charge higher prices is by squeezing the competition.”

While these new airlines have successfully helped boost new passengers in Argentina, they have also faced challenges. For example, Avianca Argentina (technically a separate company from the Colombian airline) ceased domestic operations in June after facing financial issues, and the low-cost airlines now operating at El Palomar Airport near Buenos Aires are now preparing for restrictions on nighttime flights there.

While Malvido hopes the investments in digitalization, efficiency improvements and customer service focus continue, he said the network strategy could change under new leadership. The carrier has added an aggregate of 18 routes in the past three years, focusing on increasing domestic flights that do not touch Buenos Aires and cementing Argentina’s second-largest city of Córdoba as a hub. It also closed routes, including flights from Buenos Aires to Barcelona and Havana, plus Brasilia and Belo Horizonte in Brazil.

Even with the low-cost competition, Aerolineas currently leads in market share and has been growing its passenger numbers. It raised its passenger count in August by 6 percentage points compared with the previous year, and government statistics show the flag carrier currently leads Latam Airlines in domestic and international market share. Malvido said Aerolineas has been responsible for 40 percent of the 62 percent growth in domestic flights in the past four years.

While there are many outstanding questions about what Aerolineas will look like in the next few years, Malvido said he continues to stay focused on the day-to-day operations.

“It’s still very early to start to speculate about what will happen inside one of the state companies in the hypothetical case that there is a change in the government,” Malvido said.