Argentina, a vast mountainous paradise, took steps to deregulate its aviation industry in recent years – opening up the market to new carriers, international brands, and unleashing state airlines. But has this move actually allowed to lower the ticket prices in the country? Have these airlines been able to leverage a more profitable status quo? Or has the whole process been a blunder? Let’s explore Argentina’s diverse and developing aviation landscape, its airlines, and its industry casualties, in today’s article.
Who are the main commercial carriers of Argentina?
There are several key players in the Argentina aviation game.
- Aerolíneas Argentinas is the national carrier of Argentina (initially national, then privatized, and then renationalized in 2008), operating a fleet of 54 aircraft. This fleet is surprising: either A330-200s (10) or Boeing 737 aircraft (44), a streamlined fleet mix that would make any airline jealous. Aerolineas is just completing a merger of sister airline Austral, incorporating the regional Embraer aircraft into the fleet in an effort to save $100 million in operations per year. Lastly, Aerolineas has eight Boeing 737 MAX on order and plans to resume operating the existing five in its fleet by the second quarter of this year.
- Andes Líneas Aéreas – Originally a charter airline, Andes Líneas Aéreas entered the commercial aviation scene in 2017 in preparation for the deregulation of the industry and even expanded to include its first modern aircraft – an ex-Malaysian Boeing 737.
- Flybondi – A low-cost carrier founded in 2017 in order to enter the market during deregulation, with a fleet of five Boeing 737s. The Bondi part of the name is a slang term for bus.
- JetSmart Argentina – The local branch of the bigger Chilien JetSmart family (and part of the bigger Indigo Partners group). It was initially a start-up called Southern Wing Airlines, but after a failed attempted to become certified in 2017 was bought by the larger JetSmart as an entry to the newly deregulated market. It has four Airbus A320s.
- LADE – A special airline operated by the Argentian airforce, Líneas Aéreas del Estado (LADE), operates regional routes throughout Patagonia to ensure connectivity between remote regions. Technically it only has a small fleet of four Saab 340s, but it also has cargo aircraft for freight routes and operates the presidential fleet.
- LATAM Airlines Argentina – This airline previously ran a large operation in the country and competed directly against Aerolineas. However, since the primarily LATAM airline went bankrupt in 2020, the local carrier has become a ghost and vanished from the airports of the state. There are plans for it to return (via other group affiliates) when market conditions improve.
“Argentina has always been a fundamental country for the group and will remain so, with LATAM’s other affiliates continuing to connect passengers from Argentina with Latin America and the world (…) The announcement is a result of current market conditions, exacerbated by the impact of the COVID-19 pandemic and the difficulty of building structural agreements with local industry actors, which has made it impossible to foresee a viable and sustainable long-term project,” Roberto Alvo, CEO of LATAM Airlines Group, said in a statement.
The last airline to mention isn’t on this list, but it would have been at the time of deregulation. Norwegian Airlines Argentina, a branch of the huge low-cost carrier in Europe, had aspirations to enter the country. It arrived with four Boeing 737s, but actually withdrew before the launch date as the main European airline ran into hard times back north. Since withdrawing from the market in December of 2019, its aircraft and operations were rebranded as part of JetSmart Argentina who, following the market uncertainty this year, chose to store the aircraft.
Why did Argentina choose to deregulate the industry?
Back in 2016, Argentina’s aviation industry was stagnating. Commercial operations were dipping into the red, and demand was at an all-time low. This was because the industry in the country was fully regulated, with the government giving final sign off on routes, aircraft, and most importantly, price. Airlines were not able to sell tickets below a certain price (called a price floor), ensuring that legacy carriers maintained a certain level of profit and that no newcomer (domestic or international) could undercut a state airline.
However, the issue came to a head in recent years when passenger numbers fell thanks to a dwindling local currency. As passengers paid for tickets in local pesos, but airlines paid operation costs in US dollars, ticket prices rose while wages lowered. This drove demand to all-time lows and caused a crisis, with even the national carrier facing a loss of $90 million.
Thus the government decided to step in to save the industry and local carrier Aerolíneas Argentinas. Spearheaded by Argentinian President Mauricio Macri, the plan was called the “Revolución de Los aviones” and would fix the problems by removing the price floor of the industry. Officials believed that without a price floor, airlines could match what passengers were willing to pay and spur demand to profitable levels. Tickets could be had for any price, as long as they were thirty days in advance and were a return trip. To help things along, the government would also invest a total of $1.5 billion over the next three years (2017 to 2020) to fix up airports and grease the wheels of the industry.
On the eve of August 1, 2018, Argentina flicked the switch and everything changed. Airlines were now free of the price restraint and able to offer fares for as low as $20 US. Passengers snapped up over 100,000 tickets overnight, breaking websites and setting records. By June 2019, about 1.2 million passengers flew on internal revenue-generating flights, up 26% year on year. For Argentina, it looked like that the ‘Aviation Revolution’ was a huge success.
What was the true impact of deregulation?
Flash forward two years later and by the start of 2020 (pre-coronavirus), the airline industry had not only failed to properly start, but was even sliding backward. Of the airlines that had flourished since that winter’s morning in August 2018, only a few had broke even with some even closing up shop.
When the government deregulated the pricing of tickets in Argentina, they failed to realize just how cut-throat these airlines would be. Aerolíneas Argentinas for example was having a loss of around $6 per passenger at a ticket price of $20. Demand was high, but they were not making any money. While this an interesting promotional strategy, when you add in falling economic wages the situation became much worse. As the peso fell against the US dollar, the leasing payments for airlines went up for their aircraft (lessors are paid in Euros or USD, not Argentian Pesos). That $6 loss per person slowly became $7, then $8, and so on. Soon the airlines had no money to pay lessors and had to return aircraft. With no seats to sell, they made even less and began an inescapable downward spiral. Then, of course, the industry was hit by the Coronavirus crisis.
For flag carrier Aerolineas, these impacts amounted to a colossal loss of $489 million in 2018 and $680 million in 2019 – a far cry from the loss of $90 million they were trying to avoid. The carrier paused all operations until September of 2020 and had to default on loans it owed. The government had to step in with a huge $880 million bailout to save the airline, with plans for several restructures for profitability by 2022.
“We’re planning to curb structural losses in a sustained way from 2022 onwards. That’s the reasonable horizon in this situation,” president Luis Pablo Ceriani told Bloomberg on May 31 last year.
Other airlines like FlyBondi reduced their fleet dramatically. While it had plans when times were good to expand up to ten aircraft toward the end of 2020, it has since reduced operations down to two aircraft – one of which is undergoing maintenance abroad and may not return anytime soon. JetSmart has managed to survive thanks to its Indigo Partners connection, but it needs to hibernate until operations resume. Andes Líneas Aéreas has had to severely reduce its fleet to four MD-83s to maintain a foothold in the industry, as interest rates on renting the new aircraft were much too high. Lastly, Norwegian and LATAM have withdrawn completely from the market (as listed above).
Time to heal for an industry in crisis
Perhaps the current crisis in 2021 has given the industry the reset it needs – causing companies with weak financial backing (that may have been propped up by the government) to collapse, and those with a more solid business model to survive. Come to the end of the crisis, there will be breathing room and enough demand for the remaining few to slowly return to growth. But until the bigger political, economical, and social problems are solved in the country, any airline trying to thrive in Argentina will only be able to tread water.
“When a competitor leaves the market, it creates opportunities for those who remain. But we’re still dealing with a crisis. LATAM had around a 15% market share in Argentina, and demand will only reach 50% by December 2020… Today, our priority is to take care of our operations in Chile and Peru. This is not a moment to start adventures in other countries which would mean two years of losses,” Chief Executive Holger Paulmann of Chilean airline SKY told El Cronista business daily.