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After Past Failures, Peru Plans New State-Run Airline Built On Ryan Air Model

Officials in Lima are hoping to start a low-cost, no frills airline to get lower-income Peruvians off of buses and into the air. If history is a guide, there are few guarantees the ambitious state-run airline scheme will work.

Article illustrative image Partner logo Few Peruvians can afford tickets on the country's private airlines (Santi LLobet)

LIMA -- Accidents, with dozens of people dead and injured. Hundreds of passengers stranded by flights cancelled for mechanical problems. Such were the last few months of TANS Peru, a state-owned airline created in 1963 and shut down in 2005 by the government of then-President Alan García.

TANS Peru wasn’t Peru’s only failed foray into state-sponsored commercial aviation. Six years earlier, Aeroperú – founded by Juan Velasco Alvarado, a populist general who ruled Peru from 1968 to 1975 – also closed. A deadly accident in the Pacific Ocean, a confusing privatization effort, and losses that reached $174 million annually combined to ground Aeroperú for good.

Its dismal track record, however, hasn’t discouraged the Peruvian government – now under the leadership of President Ollanta Humala – from setting its sights yet again on the airline business. Plans are currently underway for a carrier called Aerolíneas del Perú. “We want to see the colors of the [Peruvian] flag back in the sky,” says Julián Palacín Fernández, an aeronautical law expert who put together a feasibility study for Humala’s Gana Peru party.

Belly up

Given current trends in the global airline industry, launching a state-run carrier promises to be a tricky venture. According to the International Air Transport Association (IATA), approximately 200 airlines worldwide have gone belly up over the past decade. To survive in the face of volatile oil prices and the global financial crisis, several large airline companies have had to look for strategic mergers: Air France fused with KLM, Delta with Northwest, Continental with United, and British Airways with American Airlines. Latin American mergers include Avianca (Colombia) and TACA (Central America); Gol and Varig (both Brazilian); and LAN (Chile) and TAM (Brazil).

According to Carlos Adrianzén, dean of the economics department at the Peruvian University of Applied Sciences (UPC), the industry is seeing more and more regional or global companies and fewer national airlines. Exceptions are Cuba, Venezuela, Ecuador, Bolivia and Venezuela, which all maintain state-run carriers – at high cost.

Ollanta Humala “can’t reinvent the wheel,” says Germán Efromovich, president of Synergy, the parent company that controls Avianca and TACA. “He doesn’t have to look far to realize that either. Argentina insists on keeping its airline. But it costs a ton of money. Venezuela created Conviasa, and that too costs an enormous amount of money to maintain.”

Indeed, in early 2011 the president of Aerolíneas Argentinas, Mariano Recalde, presented the Argentine Congress with a report explaining that the company – which the state reassumed control of three years ago – needed nearly $400 million in public subsidies.

Looking to go “low-cost”

Julián Palacín Fernández, however, stands by the Peruvian government’s new airline plan. “It won’t be an airline that’s propped up by the state. That’s been tried before. And it failed,” he says. “Private partners will provide all the capital. The state, working through the various regional governments, will take care of all the airport infrastructure.”

Palacín says the model to follow in this case is the “low-cost” approach used by companies such as Southwest, a U.S. carrier that is able to offer inexpensive tickets by reducing operating costs to a bare minimum. “In order to reach six million Peruvians who normally can’t afford [airline travel], we need to imitate companies like Southwest, Ryanair and EasyJet,” he says.

Government sources suggest the initial investment needed for the new Peruvian airline would be about $70 million, much of which would be used to rent a fleet of six Airbus 316 jets (156 passengers) and six Bombardier planes (80 passengers). With 12 planes, Aerolíneas del Perú would actually have the second largest fleet in the country after LAN Perú, which operates 31 aircraft. TACA Perú has just six planes.

Palacín – whose brother, Carlos, headed a failed private airline called Aerocóndor – has the support of key members of President Humala’s cabinet, including José Luis Castilla, the minister of the economy. Castilla, a conservative technocrat, believes a new state airline is indeed possible. “The formula will probably have to be a public-private partnership because even though [the state] has a significant amount of money, it’s still finite – and the country’s needs are enormous,” he says.

What the state doesn’t have, at the moment, is a true hub for the project. For cost reasons, Lima’s main airport, Jorge Chávez, isn’t an option. Lima Airport Partners, the company that administers Jorge Chávez, charges too much to make the low-cost model work there. The nearby Las Palmas Air Force Base isn’t an option either, since for contract reasons, the state isn’t allowed to operate another commercial airport within 200 kilometers of Jorge Chávez.

Grumblings from the private sector

Palacín hasn’t figured out a way around the problem just yet, but insists that once a solution is found, Aerolíneas del Perú will be in a position to take off quickly – financially speaking. The aeronautical law expert says the airline could pull in about $50 million in its first year. Within a decade, Aerolíneas del Perú could generate annual revenue of $500 million and enjoy a 40% market share, he predicts.

The numbers don’t sit well with private sector representatives like Carlos Gutiérrez, who heads an international airline association called AETAI. Gutiérrez would prefer to see the Humala government scrap the project and use its money instead to help private carriers offset costs involved in certain unprofitable routes. Carlos Canales, the president of Peru’s National Tourism Chamber, is also critical of the Aerolíneas del Perú project, saying it could end up bankrupting weaker private operators.

Leading airline LAN Perú, however, says it isn’t worried. LAN Perú controls about 60% off the market and generated nearly $760 million in revenue in 2010. Executive Vice President Enrique Cueto has said publicly that LAN Perú plans to stick with its five-year, $700 million-investment plan regardless of how the government’s Aerolíneas del Perú project pans out.

Aerolíneas del Perú doesn’t yet have an official launch date. But insiders say the government is indeed moving forward with the plan. Pro Inversión, the government’s investment promotion agency, plans to have the project mapped out by the end of the year. Only then will the state really know if there are private parties willing to buy into its dream of putting Peru’s red-and-white flag back in the sky.

Read more from AméricaEconomía in Spanish

Photo - Santi LLobet

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About this article source Website: http://www.americaeconomia.com/

America Economi­a is Latin America's leading business magazine, founded in 1986 by Elias Selman and Nils Strandberg. Headquartered in Santiago, Chile, it features a region-wide monthly edition and regularly updated articles online, as well as country-specific editions in Chile, Brazil, Ecuador and Mexico.

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