FLUG REVUE March 2003: Lan Chile sees bright future

LAN CHILE IS TOP DOWN SOUTH

By Andreas Spaeth

These days airline success stories are hard to come by in South America, where bankruptcies, closures and forced mergers are more normal. Lan Chile, which was fully privatised in 1994, is not only still alive and kicking, but the company turns in substantial profits year after year and has achieved its objective of becoming one of the ten best airlines in the world in passenger service, if we are to believe the results of surveys of frequent flyers. Only in 2001 Lan Chile won the title of "Best airline in South America” according to a survey of 2.7 million passengers carried out by the English Skytrax organisation. Combined with healthy finances, even the analysts find this convincing. "No other Latin American airline comes anywhere near Lan Chile,” says airline specialist Kevin Murphy in New York.

Airbus A340 of LanChile

Airbus A340

"Our vision is to be the only major airline in the deep south of America,” said Abel Bouchon, Vice President International of Lan Chile, in an interview with FLUG REVUE in Santiago. This of course required first of all doing its homework in the domestic market, in which Lan today has a virtual monopoly, with 95% of the market share, as well as holding its own on the international routes to North America and Europe. Its only rival within Chile is Sky Airline, successor to the bankrupt Avant, which flies a few major routes with a fleet of four Boeing 737-200's. Before, Lan Chile had had a powerful competitor in Ladeco, which was popular with the customers. "In 1996 our domestic market share was 37%,” Bouchon recalls. But its rival was merged with Lan with the approval of the government in 1998, retaining its name Ladeco on domestic routes up to October 2001 out of consideration for its customer base.

At that time Lan set up a new subsidiary, which now operates all the domestic flights with single class cabins under the brand name of Lan Express. "In doing this, we wanted to link the strength of our Lan brand with the service culture developed by Ladeco”, says Abel Bouchon. Although legally a separate company with a lower cost structure, Lan Express is not at all a low-cost carrier: on domestic flights, which can sometimes be quite lengthy, all passengers receive a cold or hot meal, depending on the time of day, and alcoholic drinks free of charge.

"When one has a market share of 95%, it is better to have satisfied customers, who won't notice our monopoly,” Bouchon laughs. Product quality is a top priority, and here Lan Chile comfortably outdoes many major carriers, starting with its fleet which has had a new lease of life following the acquisition of new Airbus jets in 2000.

Nine out of a total of 20 Airbus A320's on order are already in service, primarily on domestic routes and connections with adjoining countries. Four out of seven A340's ordered are flying on the only European route, the daily non-stop service from Santiago to Madrid and on to Frankfurt, plus a three times weekly service to Sydney via Auckland and a few North American routes, which are mainly flown by eleven Boeing 767-300's. The fleet of Boeing twinjets is to be trimmed back in favour of the A340 fleet. The airline also owns over a dozen Boeing 737-200's which, like the 767's, are sometimes operated by Lan subsidiaries such as Lan Peru and Lan Ecuador.

"The shape our fleet takes depends above all on developments at our subsidiaries, but we see as the optimal fleet a combination of A320's and Boeing 737's, supplemented by A340's and Boeing 767's,” says Abel Bouchon. Surprisingly, however, the elderly 737-200's, some of them as old as 31, are to be kept flying until 2007. Noise is not a problem in South America.

Meanwhile Lan Chile is in discussions with Airbus on the possibility of replacing the outstanding A320 orders for ten to twelve A318's. This would be good news for the A318 programme, which has been recently hit by cancellations and conversions. Lan sees the A318 as fitting Lan Express's needs.

Whatever outward form the fleet takes, Lan is intent on maintaining its standards. "We want to offer a simple product to the domestic market, outstanding service quality and frequent services,” says Bouchon. e-ticketing is routinely used at Lan, as is e-check-in, which has already been taken up by 15% of the airline's customers.

The star features of long-haul flights include seating comfort (in Business Class, seat pitch is an extremely generous 1.42m in both aircraft types) and the entertainment programme on the A340. Lan is the first airline in the world to offer on demand music and video programmes on its Airbuses, in all three classes.

The 664m² lounge in Santiago is seductive in its design, comfort and furnishings, including twelve high-speed internet terminals. It was recently described by the American Forbes magazine as one of the ten best in the world. Lan is thus setting standards which are not automatic even for the other partners of the Oneworld alliance, of which the airline has been a member since 1999.

"Oneworld has helped us to overcome the negative reputation that Latin American carriers have for poor service and inadequate safety,” says Lan Chile's charismatic CEO, Enrique Cueto, whose family is the biggest shareholder in the company, owning nearly 40% of it. "The alliance gives a small airline like Lan credibility in other parts of the world,” says Cueto.

Above all, its relationship with Iberia, which has traditionally dominated the routes from Europe to Latin America, was not always plain sailing. It was only at the beginning of 2002 that after prolonged negotiations the two airlines signed a codesharing agreement for the daily Santiago-Madrid service operated by both airlines. The relationship with American Airlines, which codeshares two daily services of its own from Santiago to Dallas and Chicago, is symbiotic, while the Chileans themselves fly to Miami, Los Angeles and New York with American flight numbers as well. Together the two partners already carry 54% of the entire Chile-US traffic, which should in future be more heavily concentrated on Lan and America once United Airlines ceases to fly to Santiago at the beginning of 2003.

Otherwise, since Lan's success back in 1998 in driving out Continental Airlines with cut-throat prices the only other American airline to still fly to the Chilean capital is Delta Air Lines, which operates a service to Atlanta. However, Lan itself no longer flies non-stop to the USA, but always via either Lima or Guayaquil. "We used to fly non-stop to JFK,” says Abel Bouchon, "but then we had a lot of traffic coming from Argentina. Now that the Argentinians have cut back on flying we are having to fill the gap with more Peruvians.” 40% of Lan's turnover comes from international traffic and 20% from domestic services.

The proportion of freight business is unusually high for an airline, at 40%, and here Lan Cargo operates three Boeing 767-300's of its own. Recently Lan Cargo teamed up with Lufthansa Cargo, and since October 2002 the carrier has replaced its Paris CDG services with three times weekly flights from Miami to Frankfurt with pure freighters. At the heart of Lan Chile's subsidiary Lan Cargo's operations is Lan Cargo's five-storey, 17 hectare freight centre at Miami airport, which was opened in November 2001. Along with cultured salmon from Chile, asparagus from Peru, flowers from Colombia and fish from Ecuador are flown in here daily.

Whereas in the lucrative cargo business the Chileans are showing the way, in passenger services they still have a lot of work to do: with a small domestic market far removed from the major trunk routes, they have been forced to look around for business areas beyond the national borders, and despite the ever more regulated environment. Enrique Cueto is indefatigable in his efforts to achieve greater co-operation among the airlines in the region and to promote further liberalisation. At the same time he wants to increase the influence of his company through its subsidiaries in Peru, Ecuador and possibly Argentina in the future.

One of the greatest obstacles here is nationalism, which is evident in the civil aviation of many Andes states through the influence of former Luftwaffe officers who moved into this area after retiring from the air force. Most of the airlines in South America can be traced back to military aviation. This includes Lan Chile, which was originally founded in 1929,.

15 Latin American and Caribbean states already have open sky agreements with the USA. "Why shouldn't they also practise open sky with each other?” Cueto asks. He has in mind a common Latin American air transport market, to which the Chilean government is also committed.

Possible future candidate countries for Lan subsidiaries are Bolivia and Uruguay. In addition, the question of Argentina, Chile's large and densely populated neighbour, whose population numbers 36 million, is always surfacing. That country has in the past been an important source of customers to Lan Chile. Right now the Chileans are benefiting from the downfall of Aerolineas Argentinas, which, with debts of half a billion dollars, for a long time had trouble maintaining its operations and sometimes was unable to pay its avgas bills.

"We dominated Chile and Argentina,” says Abel Bouchon self-consciously, "and today we still transport 10% of Argentinian air traffic.” But as a result of the Argentinian economic crisis, the volumes of passengers and revenue Lan Chile has obtained from its neighbour have fallen sharply. "In 2001 we earned $120 million, but now it is down to $40 million.” Travelling has become four times as expensive for the Argentinians, while the country's gross national product has fallen by 15%.

"We still fly to Buenos Aires, Mendoza and Cordoba in Argentina, but less often and with more stops to pick up more passengers,” says Bouchon. The possibility of setting up a Lan Argentina subsidiary has been under discussion for some time, but the underlying conditions, including state regulation of fares and high charges, are not favourable at the moment. "We need to wait and see how the economy develops there,” says Abel Bouchon. However, its own success could soon bring Lan Chile problems: the carefully established brand could be damaged by too many subsidiaries which might not all offer the same standard of quality. "Our brand architecture is slowly become somewhat bizarre,” says Abel Bouchon.

From page 24 of FLUG REVUE 3/2003

Last updated 15 February 2003

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