The Little Latin Airline That Could

LanChile is diversifying aggressively into cargo, linking up with global partners, and gaining altitude fast

When Enrique Cueto was a wide-eyed 22-year-old straight out of university, he went to work for his father's struggling airfreight company in Santiago. The freshly minted economist helped resuscitate the small family business and turn it into a thriving enterprise.

Today, almost 20 years later, Cueto is still in the freight business. But he's not running some mom-and-pop operation. He's chief of Latin America's most successful airline, LanChile, which has both passenger and cargo operations. And he's making his mark in the U.S., too. Cueto's executives are busy putting up what will be the largest airfreight facility at Miami airport, a 320,000-square-foot, five-floor $70 million complex with room for massive storehouses and eight planes. When the facility opens in October, Cueto hopes it will move his airline into the big leagues of global air cargo carriers. In expectation, investors on the New York Stock Exchange have bid up LanChile shares close to all-time highs. "No other Latin American airline comes close to LanChile," says Kevin C. Murphy, an airline analyst at Morgan Stanley Dean Witter & Co.

AGAINST THE FLOW. Indeed, while most carriers in the region appear to be losing altitude, LanChile continues to climb. Its net income nearly doubled last year, to $48.4 million, on sales of $1.4 billion. In contrast, Brazil's Varig posted a $98 million loss in 2000. Argentine flagcarrier Aerolineas Argentinas is losing money at the rate of $1 million a day and recently canceled all its international routes because it cannot afford to purchase fuel for its planes.

Other Latin airlines could learn from LanChile's experience. While they stuck close to their national roots, Cueto aggressively regionalized and even globalized his company. For instance, last year, LanChile joined the Oneworld alliance, linking its flights with those of American Airlines, British Airways, and Cathay Pacific.

Just as important, Cueto has diversified. Cargo now represents 43% of LanChile's income, a percentage unmatched by any other passenger airline. And revenues from freight jumped 25% last year. Its aircraft ferry 100 tons of fresh Pacific salmon to Miami each day. They also load up on Colombian flowers, Ecuadorian fish, and Peruvian asparagus. The same planes return to the region bearing U.S.-made cellular phones, computer parts, and chemicals. "They use cargo better than anyone," says Robert Booth, chairman of Aviation Management Services Inc., a Miami-based consultancy.

When the Chilean economy headed south in 1998, Cueto looked north for new business opportunities. LanChile already has a subsidiary in Peru and will soon launch another in the Dominican Republic. Acquisitions have been another route to regional expansion: Last year LanChile bought 25% of U.S. cargo airline Florida West International Airways Inc., along with a similar stake in Mexico's MasAir, giving it access to markets it would otherwise not have been able to penetrate. "People would say, `Hey, things are pretty bad in Chile,' but things were not bad in the U.S. at that time," says Cueto.

Now, faced with the combination of an economic downturn in the U.S., a still weak Chilean economy, and high fuel prices, LanChile will have to struggle to keep revenues growing at the robust pace of recent years. At home, the carrier may be able to pick up some of the slack in traffic after local competitor Avant Airlines dropped out of the market in March. Performance this year will also depend on the success of two new nonstop flights to New York and Madrid, along with a drive to cut costs by boosting online ticket purchasing. Despite

the challenges, Morgan Stanley's Murphy predicts that LanChile's profits will rise to $51.5 million this year on revenues of $1.6 billion.

Meanwhile, expect Cueto to defend his own turf. When Continental Airlines Inc. introduced a nonstop Santiago-New York flight in May 1998, LanChile matched the U.S. carrier's rock-bottom prices and switched to smaller planes, which are less costly to operate. Continental eventually pulled out. "If someday one of the huge U.S. companies wants to enter the region, they have two alternatives," says Cueto. "Either they compete with us or they join us." Teaming up with this guy sounds a lot smarter than fighting.

By Louise Egan in Santiago

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