Lan Chile – Bucking the Latin American Trend

IN THE tough market that the air cargo industry currently finds itself, it is becoming increasingly difficult to pick winners and losers.
But it is a fair bet that when the current crisis is over, LanChile Cargo will still be on the winners’ list.
An extraordinary success story, it has grown in the last 12 years from its relatively small home market — "a narrow land with desert in the north and ice in the south” as Paul Petrelli, LanChile’s vice-president cargo Europe (and an Argentinian) puts it — to a dominant position in the Latin American freight market.
Run by the Cueto family, which used its Fast Air cargo airline to mount a takeover of LanChile in the early 1990s, the carrier’s goal is simple, to be number one in every Latin American freight market, and one of the top 10 cargo carriers in the world.
Petrelli started with the Cuetos in the Fast Air days and has been a key member of what he admits is the “tight group of executives” who have run LanChile ever since. Prior to his current role, Petrelli was vice-president of international sales, based at head-office in Santiago.
In its aim to become a top 10 player, LanChile has made good progress in recent years. It was ranked 31st in freight-tonne-kilometres (FTKs) in 1998, but then a 34.1 per cent rise in FI’Ks catapulted it to 22nd in the LATA rankings in 1999. That put it ahead of such carriers as Malaysia Airlines, Continental, Alitalia and Emirates. Last year, it rose a further place to 2 1st, with a 17.9 per cent rise in FrKs.
In terms of individual Latin American markets, Petrelli has pie-chart after pie-chart demonstrating LanChile Cargo’s dominance. It ranks first in USA-to-Brazil traffic with a 33 per cent share ahead of Varig on 29; first from Argentina to the USA with a 34 per cent share; and first from Ecuador and Peru with 42 and 34 per cent shares respectively.
In South America’s second largest market — Colombia LanChile was second in 2000, with a 26 per cent share; however, the leader, Aerofloral with a 42 per cent share, has since folded. Lastly and not surprisingly, LanChile is overwhelmingly dominant in Chile, where it moves two thirds of air cargo both northbound and southbound.
This success has led to rapid increases in cargo revenues, which rose from US$228m in 1996 to $650m in 2000, the latter figure an increase of 26 per cent on 1999. Cargo now accounts for 43 per cent of the camer’s total revenues and could surpass 50 per cent in the coming year. Volumes too have leapt, almost tripling from 187,000 tounes in 1996 to 450,000 in 2000, the latter total up 37 per cent on 1999. As recently as 1999, LanChile was also leasing five B747-200Fs from Atlas, and in the last year, it has taken delivery of three brand new production-line B767-300Fs to add to the one already on board, with two more expected in coming months.
Things started to change in April, however, with volumes down 10.9 per cent in May, and 3.2 per cent for the year to May. Petrelli himself admitted in September that the market was “terrible — down like I have never seen it before”, with exports from Europe to Argentina, for example, running at only 57 per cent of 2000 levels.
He. insists that LanChile Cargo will still grow by 10 per cent for 2001 as a whole,
however. But that was before (just minutes before, as it happened) news broke of the terrorist attacks on the USA, throwing the cargo business into global confusion.
J-Iow LanChile will survive the crisis remains to be seen, but the prospects must nevertheless be good. After all, LanChile’s managers have been schooled in Latin America, one of the most volatile air cargo markets in the world, and have managed so far to emerge triumphant.
Petrelli, for one, displays a firm determination not to be blown off course by events. “We will stay in the black,” he says. “It’s a matter of creativity, of knocking on doors, creating new possibilities. The most important thing in situations like this is to keep strong, and remain motivated.”
Creativity, the ability to employ innovative solutions to obstacles, might well be seen as LanChile’s secret weapon. In recent years, for example, it has used the traffic rights of US carrier Florida West, in which LanChile has a 25 per cent stake, to build up traffic out of Miami. As a result, MIA is now LanChile’s largest hub, bigger even than Santiago, and it has just opened the largest and most modem cargo facility at the US gateway airport. Traffic out of Miami used to rely heavily on the leased Atlas B747Fs, but even before recent events, LanChile was scaling back on this strategy, with all but one of the B747Fs retumed to Atlas (the last was due to go back in November). Instead, LanChile will now focus on its own B767 freighters, leasing one to Florida West, and another to MAS Air Cargo, a Mexican cargo carrier in which it also has a 25 per cent stake. Other long-haul capacity will be provided by fuel-efficient MD-i is, leased from Gemini Air Cargo. The B767s will also replace LanChile’s four remaining DC-8s, which are well past their retirement date. So though the market is down, the new aircraft will have plenty to do. “They’re excellent ‘planes,” says Petrelli of
the B767s. “They’ve proved to be very flexible for our network. It is much better to serve markets daily with a B767 than to serve three times a week with a B747.” LanChile’s web of affiliate airlines is another of the key planks in its success. Long before carriers such as Lufthansa thought of using the capacity of alliance partners to open routes to places it has no traffic rights to, LanChile was already vigorously pursuing this policy. The strategy started in 1994, when LanChile leased its first B747 from Atlas and used Atlas’s US traffic rights to fly into Argentina and Paraguay. Since then, LanChile has built up a network of sister carriers that take it into almost every key Latin American route segment. Florida West, for example, flies from Miami to Viracopos for LanChile, while MAS Air Cargo operates on both Mexico-toUS (Miami, Los Angeles arid New York) and Mexico-toSouth America routes. LanChile has a Miami subsidiary called South Florida which manages this capacity.
The Viracopos, Brazil-based ABSA (Aerolinhas Brasileiras) is another partner, using LanChile freighters (one of the new B767s is destined to go here) to fly routes in the lucrative domestic Brazilian market. Before the US terrorist attacks, there were also tentative plans for a freighter flight from Viracopos to Luxembourg.
LanChile also has a growing relationship on the belly capacity front with American Airlines, and owns 49 per cent of LanPeru, the airline that is picking up where Peru’s failed national carrier AeroPeru left off.
Indeed LanChile’s only failure to date has been an attempt to take over the cargo capacity of Aerolineas Argentinas, which was abandoned earlier this year. “That was a disaster,” Petrelli admits. “It would have been a good deal for us, and we would love to have been involved, but it proved too difficult to talk to them. We decided to let them solve their problems and then perhaps talk again.”
One last relationship is with TAM, Brazil’s rising star and the second largest cargo operator at SAo Paulo’s Guarulhos airport, whose entire long-haul belly space LanChile now manages. The relationship started in 1999
when TAM started its first flights outside Latin America
— a three-times-a-week A330 passenger service to Miami — and chose LanChile to market the cargo. The relationship has since extended to TAM’s daily A330 flights to Paris, launched in 2000, and thriceweekly flights to Frankfurt, started in 2001. The new capacity has been particularly useful to Petrelli and his team, giving them the opportunity to expand capacity without having to conunit its own aircraft to routes. In all, LanChile now moves some 1,400 tounes a month for TAM out of Europe. LanChile’s heartland, ofcourse, is the North Americato-South America market. Some 42 per cent of its sales originate in the USA against 18 per cent from Chile and
11 per cent from Europe. In its own right, LanChile flies its B767 freighters to Miami, New York and Los Angeles, often taking in fifth-freedom calls in Latin American countries on the way.
Services to Europe are more limited; the only passenger route is a daily A340 to Madrid and Frankfurt, upgraded from a B767 in the past year, and the sole freighter route, a twice-weekly operation via Miami to Paris which started in 2000, has now been cut to one a week.
Petrelli insists LanChile’s commitment to Europe is strong. “When I was vicepresident international sales, my target was to build up our European business,” he says. “In 1995 we sold $5m; this year we will sell $40m.”
How well that success story continues remains to be seen, of course, but what Petrelli calls the “mystique” of the Fast Air boys may well carry LanChile through. “Our work is our passion,” he says. “We are motivated on a daily basis when we see the way the company is growing. “When I see how solid the team is then I feel confident. That makes me relax more than anything else.”