Uruguay's Pluna Airline CEO warns of 'collapse'

MONTEVIDEO, Uruguay (AP) ? Brazil's slowing growth and Argentina's bewildering trade and currency restrictions are dragging down the profits of some of the region's airlines, which tend to be a reliable indicator of economic misfortune.

In Uruguay, the national airline Pluna is resisting a $30 million government bailout offer, saying that unless politicians provide more protection from unfair competition, "everything we built will collapse." That warning came in an unusually frank letter that became public Monday after CEO Matias Campiani sent it to Pluna employees.

Campiani, who asked his workers to stay optimistic, work hard and "don't forget to smile for our passengers," blamed Uruguay's neighbors, competitors and politicians for his company's difficulties.

Airlines worldwide face higher fuel prices and tighter profit margins, but some are suffering more than others as competitors merge to cut costs and squeeze out smaller competitors.

Brazil's TAM and Chile's LAN each reported a 22 percent plunge in first-quarter profits, citing rises in fuel costs and other expenses among other factors. Another Brazilian airline, GOL, laid off 1,200 people to cut costs. Aerolineas Argentinas continues to bleed money, receiving more than $200 million in subsidies during the first quarter of this year alone.

"The price that airlines are paying for fuel is still very high so airlines have been pressured by costs. There has also been a worldwide and regional tendency towards mergers. This allows for lower costs for clients but it pressures margins for less efficient airlines that have a hard time competing with major carriers," said Jorge Sepulveda, who watches LAN for the EuroAmerica brokerage in Santiago, Chile.

Pluna, the plucky airline of little Uruguay, is particularly vulnerable since it competes with Argentina's heavily subsidized national airline and Chile's LAN, which this month completes its merger with Brazil's TAM to create the region's largest airline, LATAM. Twenty-five percent of Pluna's shares are state-owned and 75 percent are held by an investment group, LeadGate, which specializes in turning around struggling companies in emerging markets.

"We're going through strong turbulence," Campiani wrote. "All the aviation in our region is suffering from big problems, due to the major slowdown of economies that were growing at gigantic steps and now have stopped."

He blamed Brazil, where economic growth slowed to 2.7 percent last year after booming at 7.5 percent in 2010, and he cited "the restrictive policies applied by Argentina" for Pluna's change of fortune, which has come so suddenly that it still hasn't shown up in quarterly reports.

Pluna just had its best summer vacation season ever, flying nearly full planeloads of Argentines from Buenos Aires to the Uruguayan beach resort of Punta del Este. But that traffic has collapsed in the last few weeks due to draconian currency controls imposed by Argentina's government on its citizens, who have long used Uruguay as a place to shelter and hide their wealth from tax collectors.

"These Argentine currency controls have significantly reduced our traffic and made it impossible for us to bring money from Pluna Argentina to Pluna Uruguay," Campiani said.

Other frustrations abound: The Argentine government has refused to let Pluna fly to more destinations inside Argentina, even though Uruguayan politicians allowed Argentina's state-owned domestic carrier, Austral, to fly inside Uruguay. And because of shortcomings in Uruguay's air traffic control, the newspaper El Observador reported, Pluna can't fly close to the coast, increasing the cost of its Buenos Aires-Montevideo route by 30 percent.

All of these factors have contributed to Pluna's reported losses, which still haven't reflected the abrupt disappearance of Argentine passengers in the last few weeks.

An Uruguayan executive in a position to know about the airline's negotiations with the government said options under discussion include bringing in new investment, taking on more debt, reducing costs and finding ways to boost revenue.

The executive, who insisted on speaking anonymously because of the sensitive nature of the bailout, said improving Pluna's situation isn't something the airline can accomplish alone.

"For months now, the government has said it wants to invest more and the private partner is saying that it has no problem with investing more, as long as some of conditions change so that Pluna can be more competitive," he said.

The lack of access to Argentine destinations, which are now dominated by Aerolineas Argentinas and Austral, runs counter to a South American trade agreement that Argentina signed along with Uruguay establishing reciprocal access to each other's destinations. The executive said the member countries confronted Argentina on this point during their last summit, but the government of Argentine President Cristina Fernandez still refuses to comply.

Pedro Apezteguia, a top official at Uruguay's economy ministry, told The Associated Press that the government will do all it can short of giving preferential treatment to Pluna or any other company.

As for Argentina's restrictions, "it's a sovereign country," he said. "There's little the Uruguayan government can do about the resolutions of the Argentine government."

Campiani said Pluna has fallen victim to a price war as Aerolineas Argentinas and TAM sell tickets for Buenos Aires-Sao Paulo flights at just $180, compared to $300 a year ago, despite higher costs. But these larger carriers also face cutthroat competition: Brazilian budget airlines Trip and Azul now plan to merge, angling for position in the battle for their country's expanding middle class.

Ricardo Marenco, duty manager for Pluna at Montevideo's gleaming new international airport, said Monday that he was relieved to get such an honest accounting of the company's challenges from its CEO.

"It's a feeling of support," Marenco told The Associated Press. "Without a doubt, before the letter there was a general feeling of deep concern, and now people are less anxious, and sticking together. Not just with him, but with the group, with our fellow employees."

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Associated Press writers Luis Andres Henao in Santiago, Chile; Bradley Brooks in Sao Paulo, Brazil; and Michael Warren in Buenos Aires, Argentina, contributed to this report.

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