SANTIAGO – LATAM, South American’s biggest airline is facing severe financial difficulties after the COVID-19 outbreak forced them to cut 90 percent of their flights. The airline is now seeking a way out of the crisis, with a nationalization by Chile as one of the options. How realistic is such a bailout?
Ever since South American countries started closing their borders, the continent’s airlines have warned about the risk of going bankrupt. Its biggest carrier, LATAM, has a greater financial buffer but is at the same time struggling to makes ends meet. The airline has requested help from, among others, the Chilean government. So far, the government has been reluctant to give any financially support to LATAM, which has a presence in Brazil, Argentina, Chile, Colombia, Ecuador and Peru and operated about 1,300 daily flights with 330 aircrafts before the crisis.
The president of the Confederation of Production and Commerce, Juan Sutil, said the government should stand up and help. Sutil even mentioned nationalization as an option. “It is a strategic, public company that also must be protected. As a last option, I would even consider nationalizing the company,” he said.
This week, the company warned that it had enough money to last another three to four months, but also stated that it would need to implement more drastic measures to avoid a possible bankruptcy. Early April, LATAM eliminated 90 percent of its international flights and 40 percent of its domestic flights and cut the salaries of 43,000 employees by 50 percent.
Another measure was announced yesterday, as LATAM plans to suspend a USD$57 million dividend payment over the profits made in 2019. The company is obliged to annually pay its shareholders 30 percent of the profits made the year before, but in order to preserve cash the carrier is now putting payments on hold, according to The New York Times. Shareholders will receive their share at another time.
In March, the International Air Transport Association asked Latin American governments to eliminate fuel taxes to help airlines through these difficult times of reduced revenue for the industry. Losses were initially estimated at between USD$63 and $113 billion dollars. Financial aid did come today from the British bank HSBC, through the announcement that LATAM would get access to a credit loan of USD$750 million.
LATAM And Its Need for Help
Whether these measures will be enough remains a question. The situation in South America is unlikely to change in the next months, meaning borders will remain closed and the majority of LATAM’s fleet will stay grounded. Even when countries and economies start to reopen after the current crisis, airlines will need to recover confidence from travelers, and many travelers, even if they might be inclined to fly, will likely be unable to do so as much as before because they too will be suffering the financial hangover of the economic shutdowns.
According to LATAM’s CEO Roberto Alvo, governments should help. “All the airlines in the world are going to need support from their governments to get ahead. We are asking all the governments where we operate for help to be able to solve this crisis.” As LATAM’s main hub, the carrier looks mainly to the Chilean government for financial help. “There are countries that are talking about nationalization or incorporation of state property in companies; there are other countries that have given credits, and others, guarantees.”
Finance Minister Lucas Palacios was quick to rebuff to LATAM’s plea for help. “I want to be super clear about this,” he said. “We are prioritizing people, and I think it’s rushed. I think it’s wishful thinking, for one company to be asking something of that nature. I don’t think it’s convenient for big companies to go on TV and ask for this help from the State”.
Dilemmas for a Nationalization by Chile
Economists recommend LATAM avoid help from governments. According to Libertad y Desarrollo economist Tomás Flores, in an interview with online portal El Dinamo, the situation doesn’t require the nationalization of Latin America. “The company is facing a transitory shock. This is not a case of structural market change; people are going to fly again. The first thing is to go to the capital market, get financing and for the shareholders to make a capital contribution. I believe the role of the government is not to take control of the company.”
The bigger problem for Chile, if it were to consider nationalization, is the conflict of interest it might generate. One of LATAM’s main shareholders is none other than Sebastián Piñera, the current president of Chile, who bought a large number of shares in 2007 when the carrier operated under the name LAN. Nationalization by Chile would not only mean that the State protects an international company, but also that the interest of the president gets protected by taxpayer’s money while profits go directly into his personal bank account.
Whether LATAM’s circumstances are so urgent to the Chilean government that the carrier should (partially) be nationalized – or even given financial aid in poor economic times – is one thing, but, in Chile, where the free market even flourishes in times of a global pandemic, the debate has now taken a political turn.
Editor-In-Chief Boris van der Spek is the founder of Chile Today.