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Monday
Jul062009

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.

 

LAN

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 ……… ?