Aerolíneas Argentinas S.A. - The Path to Privatization in the 1980s

The Path to Privatization in the 1980s

The disastrous Falklands War in April 1982 did not help Argentina's economy, which fell apart in the mid-1970s during Isobel Perón's rule. Inflation reached triple or quadruple digits, depending upon the estimate, and in 1986 the government of Argentina planned for the privatization of several large companies in order to satisfy its creditors. AR was to be one of the first.

In February 1988, the Directory of Public Enterprises (DEP) announced the sale of 40 percent of AR to SAS for $204 million. Cielos del Sur, which owned Austral, itself privatized in 1987, put forth an informal but well publicized counteroffer with the support of Swissair and Alitalia. SAS withdrew its bid in December 1988 after a highly politicized debate pitting President Raul Alfonsín against incumbent Carlos Menem. The Cielos del Sur group was not able to finalize its bid, however, due to a lack of financial disclosures from the government. Then, Swissair withdrew from the group, scuttling the offer. Menem renewed efforts to find a buyer after winning office in May 1989.

Menem's efforts were frustrated by the company's poor financial health; it was losing $10 million a month in 1990, which was a terrible year for the airline industry as a whole, with most of the world's major carriers posting losses. Nevertheless, a consortium led by Spain's carrier Iberia made a bid in June 1990, kicking off AR's tortuous, extended privatization process. In its initial offer, Iberia would control 30 percent, three Spanish banks another 19 percent, Argentinian investors 36 percent, employees 10 percent, and the government 5 percent, resulting in 51 percent Argentine ownership. Iberia and its partners agreed to pay more than $2 billion for their 85 percent share, including a $130 million initial cash payment. Not included in the new deal were AR's lucrative ramp service and duty-free businesses.

Company Perspectives:

Could we ever have imagined, fifty years ago, such evolution, such route development? Was it a drive from within to fly across our vast country that gave us the impulse to reach out to the world? Was it the knowledge of our pilots or the spirit of the Argentines that gave this impulse to Aerolíneas? One thing we do know for sure is that the word 'impossible' does not exist. What we do know is that Aerolíneas, either with its present equipment or with the super-'Jumbos' yet to come, will expand into the future, on internal or overseas routes, and will be the main link for the business traveller and tourist alike with the rest of the world.

Several factors soured the deal for Iberia once it was committed to the buyout. When Enrique Pescarmon sold Cielos del Sur (and thus Austral) to Iberia in March 1991, leaving the partnership, his share was split between other Argentinian interests. Mounting losses through 1992 (when AR lost $189 million on revenues of $911 million) necessitated a capital infusion from the Spaniards and the Argentine government, diluting other shareholdings of the private local investors. The Spanish holdings, however, remained the same. The government owned 43 percent, which it intended to reduce to 10 percent once the market allowed. In addition, $2.1 billion of foreign debt, part of Iberia's purchase requirement, ended up costing more than originally estimated. Finally, postponed layoffs of 775 workers incited labor protests. Moreover, Iberia suffered serious losses at home, $264 million on 1992 revenues of $3.6 billion.