US Airlines Press Into Latin America

LATIN America is emerging as a highly profitable market for foreign airlines, particularly United States carriers. But local carriers are not exactly putting out a welcome mat at Mexico City's Benito Juarez International airport.

"If we don't protect our national sovereignty and keep our operational wits about us, we'll be displaced from our traditional strongholds," warned Ricardo Garcia Sainz, president of Compania Mexicana de Aviacion, in January. A few weeks later, Aerovias de Mexico (Aeromexico) bought a 55-percent stake in Mexicana, creating a merger of Mexico's two largest airlines.

Analysts say the merger is an act of self-preservation.

"Both Mexicana and Aeromexico were hurt by the competition between themselves and by outside carriers," says Hector Novoa, an industry analyst with Operadora de Bolsa, a Mexico City investment house. "Mexicana was forced to cancel several traditional routes to the US. An alliance is the only logical move."

To reduce political flak over the creation of a near monopoly, Mexicana and Aeromexico planes will keep their different paint schemes but will operate under one management team. The Mexican government and the two companies insist this is an "alliance," not a merger.

Mexico is not the only nation worrying about outside competition. Chile's airline association recently lobbied its government to block American Airlines and United Airlines from expanding service there. United plans to boost capacity 23 percent by using larger aircraft, while American plans to double the number of weekly flights from the US by June 1.

The Latin American attraction is simple: profits. US carriers have been taking a beating in their home market, competing against each other. But they are finding easier pickings south of the Rio Grande.

"Traffic between the US and Mexico is growing at a rate of 17 to 18 percent a year. You've got a growth market with high yields and that makes for very profitable routes, not just in Mexico but especially on the longer-haul flights to South America," says Robert Booth, president of Aviation Management Services, a Miami consulting firm specializing in Latin America.

The boom in traffic is due in part to the regional economic recovery that has taken place over the last four years. Foreign businessmen are coming here in droves.

In March British Airways reopened direct flights between Mexico City and London after an 11-year hiatus from the market. Ticket sales are running 30 percent above expectations, BA's managing director Robert Ayling told reporters.

Foreign carriers are grabbing a bigger slice of Latin America's overseas-travel market because they are bigger and more efficient than most Latin American airlines.

"They have lower operational costs, they've used more aggressive pricing policies, and they manage their yields better than local carriers," says Harold Shenton, vice president of Avmark, an airline consulting firm in Alexandria, Va.

The size advantage means that American Airlines can operate five flights a day out of Costa Rica, while the local carrier offers two flights a day. "The business traveler looks for frequency. If he gets done with his work on Thursday, he doesn't want to wait around until Friday afternoon for a flight," Mr. Booth says. The business traveler typically pays full fare, not discount prices, he notes.

OCAL airlines have been shaken by the sudden influx of competition. American, United, Delta Airlines, and Continental Airlines are the principal US carriers moving into the region. Many countries have "open skies" agreements that permit foreign airlines almost unlimited access to their markets. Until recently, the foundering Pan Am and Eastern airlines were the principal US carriers in the region. But they did not have the resources or the inclination to expand service.

Few complaints were heard about the open skies policies. But local airlines are upset about these agreements now that United and American, which took over Latin American routes from the bankrupt Pan Am and Eastern, are expanding aggressively into the region.

"It's a whole different ballgame competing against American and United. They're seen as two 800-pound gorillas. They're throwing a lot of capacity at the market," Booth says.

Some local airlines have responded by seeking alliances with other foreign carriers. Aeromexico recently purchased 44 percent of Aeroperu - a small, poorly run airline - in hopes of creating a southern hub. Mexicana has a marketing alliance with Air France. Booth predicts that Mexicana may develop an agreement with Continental and Air Canada, because all three airlines have major investors who are closely related. TransBrasil, the No. 2 Brazilian airline, announced May 12 that it had allied itself with U nited. Similarly, Delta and Varig, Brazil's No. 1 airline, recently announced an alliance.