The Challenges of the Latin American Airline Industry How Grupo TACA succeeded in a challenging economic environment Gabriela Kaynor Brian Mottola March 8, 2003

Today’s Agenda Purpose Privatization Movement Early years of aviation in Latin America TACA’s inception TACA’s alliances TACA’s competition History of other Latin American airlines Conclusions

Privatization Movement Latin American economies are stagnant State-owned companies in many industries 12% of GDP in Latin America Privatization encouraged to create efficiency Govt’s severed burdens of state-ownership Privatized industries create needed tax revenue

The Birth of TACA TACA – Transportes Aereos Centroamericanos Est by Lowell Yerex in Honduras Entrepreneurial opportunity existed Quickly grew into a strong regional airline Linked all Central American capital cities Linked Mexico and Caribbean

Birth of TACA (Cont’d.) TACA formed airlines in different countries Named “TACA de (country’s name)” Nicaragua, Belize, Costa Rica Parent company was TACA de Honduras Enabled local air routes to be established Used small, aging aircraft to reduce its costs Faced increased competition from int’l airlines Pan American Airways, Trans World Airlines

The Original TACA dissolves TACA country members want own nat’l airline By 1948, all TACA shares resold to govt’s Beginning of the end of original TACA corporation TACA El Salvador was only airline left under original TACA banner Changed name to TACA International Airlines Beginning of modern-day TACA

TACA International Airlines TACA Airbus A-319

TACA’s Route Map

TACA International Airlines Current CEO Federico Bloch started with the Company in 1979 His vision  setting up subsidiary airlines through partnerships in Latin America Bloch has received multiple awards and accolades for his outstanding achievements within this very competitive industry.

TACA Alliances Bloch pursued the acquisition of several Central American National Airlines. Complete by Guatemala (Aviateca), Honduras (SAHSA), Nicaragua (NICA) & Costa Rica (LACSA) They also have feeders in Cuba and Peru Alliance with American Airlines Conglomerate with National & International airlines under one umbrella

Competitive Advantages.. Cross border alliances Quasi- Monopoly for domestic markets Control of pricing for Central American fares Multiple “hubs” Increased number of destinations Growth opportunity in South America

Side Effects…. Pursuit of customer oriented business practices becomes secondary Multiple connecting flights to reach destinations Subject to economy swings in Latin American Countries Proven profitability attracts competition

Competitors Other Latin American Airlines have tried to follow suit with this business model Successful competitors include Aerocontinente Peru Lan Chile VASP from Brazil Unsuccessful stories VIASA Venezuela

LAN CHILE Linea Aerea Nacional – founded in 1932 as a government owned carrier In 1989 they sold 51% of their shares to SAS (Scandinavian Airline Services) 1994 – 100% Privatized 1995 – Acquired Lan Express 1996 – 44% sales growth (3 rd largest in the Industry

Executive VP Enrique Cueto (Executive of the Year 2001) Vision  Become one of Top 10 airlines Strategies to survive after 2000 decline Reduction in frequency of domestic flights Increasing capacity utilization Built strong alliances with international partners Separate business structure Cargo Operation – Lan Cargo Passenger Operation – Lan Pax

VIASA (Venezuela) Shift from a government airline (AEROPOSTAL) to a private venture AEROPOSTAL 51% capital AVIANSA(owned by PAN AM Airlines) 49% Formed alliance with KLM Cargo Operation Subsidiary TRANSCARGA 1975 – First reported loss Airline Nationalized again

Effects of Nationalization.. Government was covering up losses and inefficiencies No operational or strategic improvements being made 1989 – Venezuela’s economy starts to weaken – seeking a bidder KLM vs. IBERIA 1991 –IBERIA wins the bid 1997 – Airline closed for good under acrimony.

CONCLUSIONS Privatization works – better service & efficiency TACA’s business model transcends time and regions Airline industry is susceptible to sociopolitical events – especially in volatile Latin America