Business Maverick

Argentina May Spend Over $880 Million to Prop Up State Airline

By Bloomberg 31 May 2020
Caption
Boeing Co. aircraft, operated by Aerolineas Argentina SA, stand at Aeroparque in Buenoes Aires, Argentina, on Monday, May 18, 2020. In Argentina, home to the strictest travel ban in the Americas with flights grounded until Sept. 1, state-run carriers Aerolineas Argentinas and Austral Lineas Aereas are merging to survive.

Argentina may have to dole out at least $880 million in subsidies this year to keep its state airline afloat, further weighing on government finances after the nation’s ninth sovereign default.

Aerolineas Argentinas President Pablo Ceriani said the carrier’s budget shortfalls, up from about $680 million last year, will persist until demand rebounds, which isn’t expected for a couple of years. The carrier probably won’t break even for as many as five years after that, he said in an interview from Buenos Aires.
Aerolineas Argentinas CEO Pablo Ceriani Interview
Pablo Ceriani, chief executive officer of Aerolineas Argentina SA, speaks during an interview at the company’s headquarters at Aeroparque in Buenoes Aires, Argentina, on Monday, May 18, 2020. In Argentina, home to the strictest travel ban in the Americas with flights grounded until Sept. 1, state-run carriers Aerolineas Argentinas and Austral Lineas Aereas are merging to survive.

“One of the conditions for profitability is demand, and that won’t be normal until 2022,” Ceriani said from the airline’s headquarters in local airport Aeroparque Internacional Jorge Newbery. “We’re planning to curb structural losses in a sustained way from then onwards. That’s the reasonable horizon in this situation.”

Like airlines worldwide, Aerolineas Argentinas’s operations have been paralyzed by coronavirus fallout. Argentina implemented some of the earliest and harshest measures in Latin America to halt the spread of the virus, such as halting commercial flights until Sept. 1. But unlike the airline’s global peers, Aerolineas Argentinas is committed to weathering the crisis without any layoffs or pay cuts for its 12,000 employees, according to Ceriani.

“It’s a policy aimed at keeping jobs,” he said. “Cutting incomes hurts workers already going through an economic crisis.”

Flag Carrier Advantage

Argentina’s flagship carrier has depended on subsidies since being nationalized in 2008, but the gap has been exacerbated by a 50% plunge in the peso, plus a devastating recession and double-digit inflation. Airlines’ two biggest costs are fuel and planes, both of which are typically paid for in dollars. It has managed minimal savings during the pandemic, including on travel expenses.

Read More: Airline Default Risk Stalks Latin America at Twice World Average

Ceriani expects activity to start recovering in the second half of 2021 and to resume investing in growth after 2022, when it aims to boost its fleet, including by adding wide-body cargo planes that he aims will primarily fly to and from China and the U.S as part of a new focus on cargo shipping.

In the meantime, it will merge with sister airline Austral Lineas Aereas, a plan that added to the cargo shipping and a new maintenance unit, is estimated to allow $100 million in savings over three years. The carrier weighs blocking middle seats in all cabins as it strategizes for a safe return to operations, he said. Restoring flights to each of Argentina’s provincial capitals would mean operating at 25% of usual activity in the domestic market. Foreign travel probably won’t start until after November, Ceriani said.

“This year will likely be the hardest in the history of Aerolineas Argentinas, just like it will probably be the worst year in the history of aviation,” he said.

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