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Entries in LAN Airlines (2)


Swelbar: Just Thinking About A Few Things

Yesterday’s Wall Street Journal

Susan Carey, Gina Chon and Mike Spector report that Delta Air Lines and TPG Capital are separately evaluating potential bids for American Airlines’ parent, AMR.  This story, along with the myriad of others discussing a US Airways bid for the Fort Worth, TX carrier, is just a warm-up for the main event of AMR’s trip through court-assisted restructuring and the ultimate filing of a plan of reorganization acceptable to creditors.

Delta might seem like an odd suitor.  First, we have to accept the fact Richard Anderson’s Delta is not your father’s Delta.  He and his team are aggressive and understand American holds many assets and relationships that are valuable and thus important to Delta (and SkyTeam) like:  Chicago (where Delta has been adding select domestic flying), a relationship with British Airways, a relationship with JAL, a relationship with LATAM, more of New York (this is where regulators will really struggle along with the absolute size of the combination), a deep South America presence, more of Mexico, Miami (where Delta has been adding select domestic and international flying), and a way to defragment Los Angeles. It could also simply be an attempt to keep a restructured competitor from emerging.

Delta is reported to have performed an antitrust analysis that concluded - with certain carve outs - the massive combination could pass regulatory scrutiny.  While I can see such a combination would bolster Delta’s market positions in many areas including the middle and eastern regions of the U.S., across the Pacific and into burgeoning Latin America, there is also a lot of overlap between hubs.  If Detroit and Cincinnati competed before, imagine the hub competition – and redundant flying – with Chicago thrown into the mix.  Nonetheless, just on sheer size alone, I think an American-Delta combination would  prove hard for U.S. regulators to grasp and approve. Delta would also have a difficult task of selling such a merger to an already skeptical European Union.

Fort Worth-based TPG, on the other hand, likes to work with strategic partners according to the Journal.  TPG has strong ties to the current management team at US Airways.  Richard Schifter, TPG partner, served on US Airways Board of Directors.  Schifter is currently a director at Republic Holdings.  Schifter and another TPG partner, David Bonderman, have extensive ties to the airline industry stretching from Continental to Ryanair.  No one should be surprised a private equity concern like TPG Capital might have an interest in a restructured AMR.  For TPG, the strategic partnership possibilities are many and include US Airways, British Airways or any oneworld partner that fears the loss of its only meaningful access to the traffic rich U.S. market.

This Wall Street Journal story highlights something I think is very important; AMR is attractive to strategic buyers as well as a financial buyer like private equity.  Today, the list of names publicly discussed as interested in AMR is three.  That list will grow over the coming months. 

It is also highly likely that this story was leaked by a party to mask something else.  We will see. It is important to remember potential bidders will likely wait a few months until a lot of difficult decisions regarding network and fleet are largely complete. They’ll wait until contentious negotiations with labor are complete – probably including layoffs -  as any new owner will not want to get their fingernails dirty in that process. Potential bidders will also likely wait to see how creditors are treated in a debtor negotiated exit plan.

A question remains however:  will any bid attempt by a strategic or a financial buyer for AMR be friendly or hostile?  US Airways tried an unsuccessful hostile run for Delta. There are a myriad of possibilities here and all that is guaranteed is the debtor has the exclusive right to file a plan of reorganization until the court says otherwise.  That plan may include an offer from a strategic or a financial interest, but at this point, it is all conjecture providing an opportunity to opine.  That said the news reported yesterday officially begins AMR’s journey through bankruptcy.


If there is an airline company built with more innovation and creativity than LAN, then someone give me a call and let me know who it is.  Or was it just being in the right place at the right time?  Either way, LAN Airlines has quietly grown into one of the global elite carriers and has earnings and a market capitalization to match.

LAN is an airline I rarely mention, but have a deep admiration for.   Based in Santiago, Chile, LAN’s strategy of taking equity stakes and, in effect, becoming a surrogate flag carrier for a country in an economically struggling region where other airlines have failed, has been brilliant. The strategy has allowed the former Lan Chile to diversify its traffic base away from Chile-only and grow to become the de facto flag-carrier for other countries on the continent. LAN’s ability to take advantage of non-Chilean country bilaterals has produced growth opportunities where a reliance on Chile-only would have only led to diminishing returns.

The carrier began as Línea Aeropostal Santiago-Arica in 1929 before becoming Línea Aérea Nacional de Chile (Lan Chile) in 1932. The Chilean government privatized Línea Aérea Nacional de Chile in 1989, and the carrier absorbed Chile’s second carrier, Ladeco, in 1995. Today, the LAN umbrella covers LAN Chile; LAN Peru; LAN Dominicana; LAN Ecuador; LAN Argentina; LAN Cargo; and LAN Express, among others. Some said LAN refers to Latin American Network. Any way you cut it, LAN is a brand!

LAN was just given authority to complete its merger with Brazilian-based TAM and the combined entity will be LATAM.  To become a true South American airline powerhouse, LAN absolutely needed a significant stake in Brazil, which it now has.

One of the merger problems is each carrier is currently a member of a competing alliance.  LAN is a member of oneworld and TAM is a member of STAR.  If Brazil was essential for LAN, imagine just how important the emerging market is to each of the global alliances.  This story might take on the characteristics of the fight for JAL between SkyTeam and oneworld.  South America is yet another critical geographic area where oneworld is under attack.

American Eagle

Two months ago, most industry watchers were scratching their heads about the investment reasoning for American Eagle as parent AMR intended to spin it off.  High unit costs largely stemming from a very senior workforce, along with a fleet that was built around an archaic scope clause at mainline American Airlines, defined the carrier.  I am confident virtually every carrier comprising the regional industry had little to no fear that Eagle was going to steal any potential business. 

Now with bankruptcy and the freedoms to cut costs, American Eagle may look very different coming out of court-assisted restructuring.  Fleet alignment is sure to occur, and is happening, with any and all 37 and 44-seat aircraft immediately being taken out of service.  Certainly there are numerous out-of-market leases on aircraft controlled by the parent that can be reduced.  In fact, we may see a new market rate established for a 50-seat aircraft that takes into account a $120 per barrel jet fuel environment.  Labor rates and rules are sure to be reduced.  If the ground handling services Eagle offers were the crown jewel pre-bankruptcy, just imagine how much more attractive Eagle’s rates to other carriers will become after the restructuring.

Don’t let the point regarding a new ownership market rate that takes into account the high cost of jet fuel get lost.  While Eagle might be successful, it is likely that Pinnacle will not.  This factor is potentially significant.  If a new rate can be found through the bankruptcy process along with reduced labor rates, suddenly for American, a number of small markets served could be removed from the chopping block and remain a part of the reorganized American network.   

Whatever the size of Eagle when it emerges, it is going to be much leaner than the majority of its competitors.  My guess is SkyWest, Pinnacle, ExpressJet and others are watching this restructuring with bated breath because a new market rate for 50-seat flying, and other flying for that matter, will present itself in the coming months.  And a new competitor for future regional flying will emerge.

American Pilot Scope and Pilot Negotiations at United-Continental

As American and its pilots union attempted to negotiate a new agreement up until the time the company filed for bankruptcy protection, certain aspects of what was being discussed were leaking into the mainstream media.  The game changer being discussed was the new A319 fleet would be flown at rates and rules much lower to reflect the difficult economics of the domestic business and appropriately reflect the market/aircraft size. 

If this is indeed the road American travels down in its Section 1113 negotiations, there are significant and immediate ramifications for the negotiations taking place between United-Continental and its pilots.  As the UA-CO pilots spend more time taking on the company using safety as a hot-button, a new baseline is about to be established as to how pilots work and get paid.  If the UA-CO are hung up on nothing more than 50 seats, then I ask:  what about 115 seats? 

The United-Continental pilots’ strategy to exert a leverage point blew up in their face on November 29, 2011.  Where AA is going is in the right direction as it accomplishes multiple things that will benefit their business:  1) it is better able to match costs with the domestic revenue environment; and 2) it puts an end to the pilot scope discussion.  Regional partners will not be doing any 100 seat flying because, in this seat range, mainline pilots have a better ability to match the cost of flying done by the regionals.

Whether United-Continental pilots either figure it out (or not), the focus then shifts to Delta where scope is already a hot button issue.  In 2013, US Airways pilots are absolutely going to be forced to consider something similar to what the AA pilots are likely to agree to. 

Then you just have to wonder what Gary Kelly is really thinking.  The tables just may be turning.


In the Spirit of LAN: Another Emerging Strategy?

Airline and Air Service Thoughts -- Again

Never did I think I would write about LAN Airlines and Spirit Airlines in the same story, let alone refer to them in the same title. Never! On Sunday, Benet Wilson with Aviation Week’s Things With Wings blog asked: Has Spirit Airlines bought Air Jamaica? Benet was following through on an Associated Press story reporting that Spirit had indeed bought forever-struggling Air Jamaica, albeit citing unnamed sources. Today, it appears true.

Ms. Wilson first reported on the bizarre nature of Air Jamaica’s privatization in December 2008. On July 4, 2009, The Gleaner in Jamaica went so far as to suggest the new name for Air Jamaica might be the Spirit of Jamaica. Then I started thinking.



An airline that I rarely mention, but have a deep admiration for, is LAN based in Santiago, Chile. LAN’s strategy of taking equity stakes, and in effect becoming a surrogate flag carrier for a country in a continent’s economic woes by filling the gap left by an airline's corporate failure in South America, has been brilliant. The strategy has allowed the former Lan Chile to diversify its traffic base away from Chile-only, and grow to become the defacto flag carrier for other countries in the continent. LAN’s ability to take advantage of non-Chilean country bilaterals has produced growth opportunities where a reliance on Chile-only would have only led to diminishing returns – much like the US carriers are realizing today.

The carrier began as Línea Aeropostal Santiago-Arica in 1929 before becoming Línea Aérea Nacional de Chile (Lan Chile) in 1932. The Chilean government privatized Línea Aérea Nacional de Chile in 1989, and the carrier absorbed Chile’s second carrier, Ladeco, in 1995. Today, the LAN umbrella covers LAN Chile; LAN Peru; LAN Dominicana; LAN Ecuador; LAN Argentina; LAN Cargo; and LAN Express, among others. Some said LAN refers to Latin American Network. LAN is a brand!


Spirit’s L-A-N (Local Area Network?)

Born during the global recession in the early 1990’s, Spirit, a perpetual “bottom feader”, then based in Detroit, focused on providing ultra cheap flights to popular leisure destinations and gambling meccas. It took advantage of the failures of Eastern, Pan Am and others to build a cheap fleet staffed by cheap labor, offering few amenities in exchange for fares that were often 70 percent or lower than those offered by the competition.

As many legacy carriers began to recover in the mid 1990’s and the wave of new low cost carrier growth accelerated, Spirit had several brushes with financial disaster. Written off for dead many times, the company pushed ahead and adapted its strategy to the competitive environment. It moved from Detroit to South Florida in 1999 and pursued new growth built on its ultra low-cost roots. Like most of the industry, Spirit struggled after 9/11. But in the process of adapting and taking advantage of its new home base, Spirit received an important injection of $125 million from OakTree Capital and landed as its CEO Ben Baldanza, who previously held executive posts at US Airways, American, Continental and Northwest.

With capital raised, a fleet renewal plan in place, and a new CEO, Spirit began to think less about Detroit, Flint and Atlantic City and more about the Caribbean and Latin America. The carrier continues to seek route authority into many of the northern South American countries like Colombia and Peru. Today the company boasts that it is the leading low cost carrier to the Caribbean, the Bahamas, Central and Latin America. In fact, more than half its 43 destinations served are to the Local Area Network called loosely – Latin America. Its model looks more like RyanAir and Air Asia and Allegiant than it does the more traditional carriers serving North America.


Air Jamaica?

The Local Area Network of Latin America is highly dependent on tourism. Most island economies are incapable of raising sufficient capital to fund their own airlines. If Air Jamaica is losing tens of millions of dollars then imagine what airlines in other, less developed, island economies must be experiencing.

In Ms. Wilson’s first piece, she quotes an economist friend’s take on why would anyone want to buy Air Jamaica, noting that the carrier was "the classic case" of an airline’s importance to a region’s economic health.

"From a pure privatization play, Air Jamaica has a value of zero," Wilson said, quoting the economist. Yes there are short-term gains to bolster [Air Jamaica’s] the bank account, but in the long term, a perpetually losing airline stands a high risk of becoming extinct as it holds little to no value for any financial player. The value of Air Jamaica to me seems to only lie with the Jamaican government and the Jamaican tourism industry.”

I concur. And the Jamaican government might finally be realizing just that. Island economies absolutely need airline(s) service to enable economic activity. In a piece I wrote last October, I challenged whether airlines should be bearing the cost of providing service to certain communities, or the other way around.

As an example - and let's think for a moment - (these are not actual numbers), if Air Jamaica is losing $100+ million per year and yet is responsible for enabling $1 billion in economic activity, then what amount of the sum total of direct, indirect and induced economic activity should the Jamaican government be willing to spend to keep critical airline service? The answer lies somewhere between $0 and $100+ million – at any figure a good investment to keep a billion dollars in economic activity that supports the island economy. But total cash outflow is not directly timed with direct, or even indirect, let alone induced inflows.

Without a doubt, Spirit can be that airline at significantly lower cost than Air Jamaica is today with its legacy issues.


Spirit Could be On to Something

Like many other industry observers, I have serious doubts about Spirit’s future as a sustainable enterprise in its current form. On the other hand, LAN discovered there are many opportunities within the Local Area Network of Latin America where a Spirit of Jamaica brand could be duplicated if successful.


Island Economies and US Small Community Air Service

In the US, small community air service is a lot like small island economy air service. It is not for the faint of heart.

Not unless, and until, island nation governments appreciate the fact that if I have a runway, a terminal building and security that I am forever entitled to receiving air service. No one is entitled.  Moreover it is wrong to think that a country can support an airline because that country has a flag; a currency or a dialect.

Just ask the people in Peru, Argentina, Dominican Republic and Ecuador if the air service they receive from the LAN brand leaves them disadvantaged on the global map. My guess is that they have been enhanced from a service provider that can do it better. May(be) the Spirit be with those island economies dependent on tourism to find a similar alternative to their own fledgling flag carrier. Or maybe Spirit has finally found a niche.

I only hope that Spirit, and its investors, are being supported in this Jamaican investment by a government that understands the correlation between direct cash outflows and economic activity. If not, run Spirit run.

Why not the Spirit of Aruba? Why not the Spirit of Trinidad and Tobago? Why not ……… ?