Copyright CBS
Ten days after taking office, Argentine President Javier Milei addressed the nation and announced a decree to generate a profound governmental reform to eliminate the chronic fiscal deficit, deregulating vast economic sectors.
Among those sectors, commercial aviation is set to go through major changes, including moving towards an “Open Skies” policy, declaring air travel an essential service, allowing competition among third-party operation support providers, and changing Aerolíneas Argentinas’ shareholding regulations to allow the transfer of part or all company stock to its employees.
“As our economic model, unlike everything that has been done in the last hundred years, attacks the deficit, which is the cause of our problems, and not the consequences of it, we can start today to unblock all these regulations that pretend to provide solutions but only generate problems,” said Milei when introducing part of the regulations the decree addresses.
The repeal of older decrees and laws, like Decree-Law No. 12.507/56 and Law No. 19.030, suggests a significant shift from previous regulatory frameworks. This could mean modernizing the legal framework to align with international standards and practices. This move was attempted many times before but fell short, mainly because of aeronautical unions’ fierce opposition.
Unions: Facing the perfect storm
That opposition may be immersed in a complex scenario, as part of the changes aims to reduce their firepower. The decree wants commercial aviation to be declared an essential service, which will reduce the impact of strikes, as a 75% minimum service threshold would have to be maintained.
Also, support services, now monopolized, would have to compete with other operators, allowing companies to continue operating by switching between suppliers based on price or internal conflict levels.
Open Skies, with some caveats
The reform of the Aeronautical Code will change how foreign aircraft operate in Argentina, as modifications In Articles 29 bis, 104, and 222 emphasize regulated yet competitive market access. Even though the “Open Skies” slogan was omnipresent throughout the campaign, the truth is in the fine print: deregulation won’t be total and automatic, and the state will retain many instruments to intervene in the market.
The wording of the legislation seems to reflect lessons learned in other regions. Nevertheless, the decree gives the government enough room to decide on a case-by-case basis. As always, the devil is in the details or the execution.
Another area the decree is changing is related to Safety and Security regulations: as various modified articles focus on safety, security, and compliance while maintaining the Argentine aircraft registration (LV) and Argentine-qualified workforce, the decree emphasizes alignment with international standards.
This could be interpreted as a gateway for the return of Interchange agreements, which by foreign aircraft of a multinational carrier can operate routes granted to a local subsidiary or even move forward towards aligning with the LAR (Latin American Regulations) at the expense of the stricter Argentinian RAACs (Regulaciones Argentinas de Aviación Civil).
Interchange and shifting to LARs are old claims of Latin American holdings that want to move aircraft between subsidiaries to find a cheaper workforce, reducing maintenance costs. Again, it’s all in the implementation.
Aerolíneas Argentinas: Beware of Greeks bearing gifts
One of the most repeated lines of Milei’s presidential campaign was that, if elected, he’d get rid of all state-owned companies. In the case of Aerolíneas Argentinas, the carrier (technically not state-owned, but that’s a technicality after receiving billions of dollars to finance its operational deficit since 2008), Milei said that he would “give the company to its employees” for them to run it as a cooperative. With a tiny detail: state funding will cease once the ownership is transferred to the workforce collective.
The decree proposes modifications to Aerolíneas Argentinas Nationalization Law, moving forward with the total or partial cession of Aerolíneas Argentinas and all controlled companies’ shares to their employees through a Participated Ownership Program.
This move puts the company in a pickle. If state funding is eliminated, Aerolíneas Argentinas must compete with competitors with its significantly higher cost structure in the Argentinian market.
Although Aerolíneas claimed that in 2023 has received no state funds and that it ended the year with a $32 million benefit, this positive result may be followed by a 2024 that will face several challenges as inflation is rising, even reaching 30 percent/month threshold according to some analysts. The steep peso devaluation will certainly reduce air travel demand.
Therefore, for many, Milei’s decision to “give the company to its employees” is a polite way to shut down the carrier, as Aerolíneas will face an extremely complicated scenario with almost no maneuvering margin.
In a consolidation era, there is a slight chance for a private investor to take the risk. Still, there’s only one ITA Airways, and the Italian operator’s main value is the opportunity to become the southern Europe hub for the Lufthansa Group. Regretfully, for geographical and economic reasons, Aerolíneas can’t provide that added value.
What’s next?
President Milei is embarking on a crusade that can either go well or wrong. Aviation was not set to be immune to an overhaul that knows no middle ground. Just hours after the announcement, all these changes have yet to be approved and applied. What is certain is that, regardless of the outcome, Argentine aviation changed drastically last night. Again.
