Latin CEO / January-February 2002
By Larry Luxner
Considering what had just happened half an hour before, it was surprising that Daniel Ratti could keep his 9:30 a.m. appointment for an interview on Sept. 11, 2001. Ratti, president of one of Peru’s largest airlines, Taca-Peru, was as shocked by the morning’s events as were his employees, many of whom were crying and praying as they watched TV footage of New York and Washington in flames.
But Ratti did manage to speak for half an hour, and even continued the interview as he drove himself to Lima’s Jorge Chávez International Airport, bound for El Salvador, where Grupo Taca is headquartered. “I’d like to make Taca-Peru the most important carrier in South America,” he said. “That’s my aim in life.”
Ratti, 51, may have a long wait. The airline executive originally hoped to end 2001 having transported one million passengers. Taca-Peru barely made the 600,000 mark – due not only to fallout from Sept. 11, but to poor market conditions within Latin America, as well as fierce competition from rivals LanPeru and American Airlines. “We saw the slowdown coming,” says Ratti. “Since January 2001, we had been taking action in terms of restructuring costs and reshaping the airline to make it more efficient. So the impact of Sept. 11 wasn’t as great as it would have otherwise been.”
Ratti says 5 percent of Taca-Peru’s 400 employees were laid off after the terrorist attacks; some 30 percent had already been dismissed before that. Still, by year’s end, the airline managed to generate US$100 million in revenues – less than the US$120 million Ratti had projected in early September, but still not bad considering the region’s economic cross winds.
Miami aviation consultant Bob Booth, who has known Ratti for years, says Taca-Peru has prudently improved its finances by shedding unprofitable routes and focusing on ones that generate money. “They’ve done all the right things, and they’ve cut back some of their money-losing routes, like Miami-Lima,” says Booth, chairman of Aviation Management Services. “I think there’s a tremendous future down there. Peru had more than a million tourists last year, and Lima is a natural hub for an airline.”
A limeño himself, Ratti studied at Gonzaga University in Spokane, Wash., and spent most of his pre-Taca-Peru adult life in the United States as an airline executive. After four years as chief financial officer at AeroPeru (which recently declared bankruptcy) he joined Air Florida in 1979, eventually becoming vice-president of finance. During that time, he formed a lasting friendship with Federico Bloch, then executive vice-president of El Salvador’s Taca.
After helping form Miami-based cargo carrier Challenge International Airlines, Ratti created Carnival Airlines in 1988 in order to cater to Florida’s cruise-ship passengers. He launched Carnival by purchasing Pacific Interstate Airlines, which was based in Las Vegas and had one Boeing 727-100. “We moved it to Fort Lauderdale,” he says. “I started it with virtually nothing and built it up to an airline worth a few hundred million dollars.” Within 10 years, Carnival had 30 aircraft in its fleet, flying mainly between Fort Lauderdale and the Bahamas.
After selling his stake in Carnival in 1997 for an undisclosed price, Ratti returned to Peru and formed Transamerican Airlines S.A. He then sold 49 percent of that company to Grupo Taca, and signed an agreement with his old friend Bloch – by then president of Grupo Taca – which allows Transamerican to use the name Taca-Peru.
The new airline began operations in October 1999, flying two Boeing 737s domestically between Lima and Peruvian cities Cuzco and Iquitos. The timing was perfect; the bankruptcy of AeroPeru that year created a vacuum in the Peruvian domestic airline market. “I was just looking for the right opportunity to enter the market,” says Ratti. “When we saw that this huge gap was created, we decided it was the right time.”
International operations started in July 2000, with flights to Buenos Aires, São Paulo, Santiago, Panama City, San José and Mexico City. In December, Taca-Peru added La Paz, Santa Cruz, Bogotá, Caracas, Quito, Guayaquil and Miami to its itinerary.
Since then, Miami, Bogotá, and Iquitos have been removed from the lineup, leaving the Lima-Miami route to rival LanPeru, which is owned by a Peruvian-Chilean consortium. So far, says Ratti, investors have poured US$280 million into Taca-Peru. Most of that money was spent on A319 jets, which cost US$33 million each, and A320s, which cost US$40 million each. The airline now has seven aircraft and working capital of US$25 million.
Our objective is to convert Lima into a South American hub,” Ratti says. “The beauty of it is that we have the capability of interchanging airplanes with Lacsa and Grupo Taca.” That gives Taca-Peru the flexibility to maximize its utilization of aircraft and to do perfect ‘hubbings’ without wasting aircraft time.
Another factor that bodes well for Peruvian air travel is the recent privatization of Lima’s Jorge Chávez International Airport. Last year, Lima Airport Partners (a consortium whose leading partners are Frankfurt Airport and Bechtel, with 42.5 percent each) won a 30-year concession to operate the airport, promising to invest US$1.2 billion during the life of the project.
Under terms of the concession, LAP has agreed not to increase user fees in the first two years, during which time the partners will build a new passenger terminal. A shopping center and a four-star hotel will follow, while a second runway is to be finished by 2010.
These projects are still years away, however, and in the meantime Ratti’s mission as a cost-cutter continues. “I look at having a very fit, low-cost, high-value product,” he says. “That’s the basis of the business, and that’s what we had at Carnival Airlines. We had to keep our costs as low as possible and not have unrealistic breakeven points. Right now, our breakeven point is around 60 percent [occupancy], though I wish it would be in the high 50s.”
After the attacks, Taca-Peru’s load factor dropped to 55 percent, but by December 2001 it was back up to around 70 percent. Asked about this year, he says: “Things look a lot better. After Sept. 11, I was very cautious about 2002, and expected it not to be profitable at all. I now see Taca-Peru on a breakeven trajectory for the first half of the year, then profitable in the second half.”
Yet even that may not be enough.
Eventually, the major carriers in Latin America should be looking at creating some synergy in order to survive,” he says. “We may be joining forces in order to create a more competitive product. That’s something being discussed among all Latin American carriers.” For that model, airlines need look no further than the Taca consortium that includes Taca-Peru.