At the beginning of the year, the prestigious Wall Street Journal published an article by David Wessel whose title was: “The US will have to choose the airlines it can finance.”

Wessel gave details of economic and financial assistance for over U$S 15,000 million which, encouraged by the White House, the US congress granted the US airlines. The journalist then remarked on the difficulties met when deciding which companies were worthy of economic assistance.

According to the interpretation of Alfred E. Kahn, considered to be the architect of air liberalization in the US, the spirit of these grants implied that the North American government faced a choice between winners and losers.

At the time, attention was drawn to the fact that in the main country to foster private enterprise and free competition of business risk, the State should transfer money from the public treasury to private companies quite unceremoniously.

Of course, what was taken to be implicit in North America was not perceived in the same way in Europe.

In fact, on the other side of the Atlantic, there was almost immediate reaction. Loyola de Palacio, the European Transport Commissioner, even proposed the implementation of a legal instrument similar to the one in force on North American territory, which enables the State Transport Secretary to adopt any type of action against any type of anti-competitive practices.

Thus, that which some thought to be correct and natural, affected others as disloyal and anti-competitive, and surely there must have been reasons of various kinds.

The first aspect that might help to understand these different criteria is the thin line separating, or perhaps we should say linking commercial air industry in its two angles: private business on the one hand and the public service on the other.

Until some decades ago, when most of the States were also the owners of an airline that was in turn run like any other state company, this characteristic of the public service carried out by a state-owned company was quite obvious and nobody even thought of arguing the point.

But today, in the XXI century, when state-owned airlines at world level are an exception and the majority of these companies are publicly traded corporations, it is much harder to admit plainly that even though they are private, they continue to provide a public service.

However, what deserves to be analyzed under the new XXI century point of view is whether this non-private backing needed to support the public service of air transport should be provided by the individual states or not, since these will unfailingly back the companies of their own country, rather than those of a foreign flag.

If we wish to be rigorously objective, the reaction of the North American government should have been to give economic compensation to all those airlines that were unable to operate on the days following the attacks of 11 September. All the companies flying to the US, the main world market for commercial air travel, were affected by the paralysis of the airports after the terrorist attacks.

However, the North American government only supplied fresh funds for those of its national airlines that applied for them, thus running the risk of benefiting Us airlines that prior to the 11 September events were already teetering on the edge of bankruptcy.

The fragile Latin Americans

This event was undoubtedly a new harsh blow for the airlines of the Latin American region, which were already in a very delicate position.

According to IATA, the largest civil aviation association in the world, the figures displayed by the continental air sector are far from kind: of the 40 regional lines, 10% might close down this year, almost half of them are technically bankrupt and in 2000 they had losses for U$S 750 million dollars. In addition, 20,000 people in the sector were left unemployed during the last 12 months.

Even so, there are some companies that considerably improved their results and are now in a privileged position for the time when business picks up its impulse again.

Amongst these are Lan Chile, TAM, Aeromexico, Mexicana de Aviación, TACA and the Colombian merged companies in the Summa Alliance: Avianca, Aces and Sam.

According to Patricio Sepúlveda, top regional officer for IATA in South America, the companies themselves are to blame for half the problems affecting the airlines in the region, but for the other half the blame can be laid at the government’s feet.

Sepúlveda is not referring to the issue of Latin American administrations not backing their private airlines with economic assistance, which is not hard to understand if we consider the fragility of the treasuries in the region, but to the fact that almost one-third of the cost of each plane ticket goes directly to pay taxes of all sorts to the national treasure: on fuel, on flight assistance, airport taxes, for the right to over-fly another country and many others.

The IATA officer said he believed that the region was unable to provide the enormous financial help offered to the US airlines by George W. Bush’s administration, but even so, local costs could certainly be reduced until the commercial situation goes back to normal.

As for Daniel Da Silva, at the time sales vice-president for Latin America and at present vice-president of customer support in Europe for the aircraft giant Boeing, he said: “The Latin American regional commercial airlines are hindered by tax barriers and high operating costs. These airlines will become more competitive and profitable in today’s global market, if the over-flight and navigation tariffs, as well as the fiscal airport taxes, are reduced.”

In order to understand the fragility of the situation of the companies in the region, it is enough to compare the size of the markets. While the average traffic between two cities in this region is 30,000 people a year, in Europe it reaches 30 million passengers. It is a well-known fact that the determining factor of airline company dimension is the size of the domestic market.

In every region in the world, the larger companies show a tendency to concentrate in countries with big domestic markets, such as the US, England, France, Germany and Japan.

A few airlines, such as Singapore Airlines or KLM are an exception, as they have learnt to compete in international markets though they originated in relatively small domestic markets. This statement is proved by the fact that out of the 10 airlines with the largest plane fleets in the world, six are North American.

To illustrate the latter, it should be taken into account that if we measure the domestic American market in numbers of carried passengers, it is 10 times larger than the sum total of Latin American markets, and just six operators represent 83% of the total number of carried passengers.

Upon analyzing the Latin American market to according to year 2000 figures, just 4 countries represent 90% of the 51.3 million domestic passengers carried: Brazil (with 44%), Mexico, Argentina and Colombia.

To this must be added the 47.3 million people carried on international routes, which brings the total numbers of travelers flying to and from the region during 2000, to 98.6 million, according to figures published by CLAC (Latin American commission for Civil Aviation) and IATA.

It is a fact for some concern that out of this total, 62.5% used North American airlines (American Airlines being the most popular choice) and only 33.7% chose Latin American carriers with Mexicana de Aviación taking the podium.

A plan

Very definitely, Latin American competitors will have to overcome great difficulties to raise their joint market. The main challenge is to find the means to achieve this purpose, rather than persist on the wear and tear of individual struggles, considering that the set of North American airlines is the principal rival to be defeated.

Two-sided agreements on the issue of open skies between individual countries and the US do nothing but undermine even more strongly the weak position of Latin American carriers.

Javier Etcheberry, Chilean Minister of Public Works, Transport and Telecommunications pointed out: “To generate competitive conditions in the regional market, to end protectionist barriers and define a policy of traffic rights founded on bilateral open skies agreements could contribute to reactivate and improve the regional operations.

Evidently, the regulatory frame of the activity in the region needs to be reviewed by the member states and it would be honest to admit that some steps in that direction have already been taken, fundamentally by Chile, although Argentina particularly has advanced in its relations with Chile and Peru.

No less evident, in the light of the events accounted for at the beginning of this columns, is the fact that today any effort to review existing conditions and projects of commercial air policy for the region must translate in an unfailingly joint action between government and private enterprise, given the characteristics of the activity with regard to private business and public service. It is clear too, that the Northern hemisphere has a clear conception of this aspect and acts in accordance. In Latin America, governments and private enterprise should consequently take up this joint task again as soon as possible, in order to put the advantages on a par with those at the disposal of the sector in the US.

An unequivocally fundamental course would be to have regional open skies, but giving priority to the opening among the countries in the region rather than with those in the Northern hemisphere. Thus, the private carriers in these latitudes would ensure their access to a mega-domestic market of greater scope that would allow them the means to achieve, through efficiency, optimal standards plus volumes similar to those handled by their US or European competitors.

The analysts in the industry are already saying that in the near future three large groups will be formed around British airways, Lufthansa and Air France and that in the US possibly two will remain only. It is rather unlikely that the Latin American region remain as an exception to this tendency to consolidate. It is also more feasible that some of the European or North American groups become more interested in participating in the ownership of a Latin American carrier. But they will only do this insofar as the latter show potential, market penetration and efficiency, all of which are aspects that will be heavily influenced by the size of the market in which they are able to operate.