European discount airline

South America is full of well-known airlines. Chile's LAN, Brazil's Varig and Argentina's Aerolineas Argentinas have been carrying passengers across the continent for years. U.S. and European airlines also fight for market share in the region, making the market a tough one in which to earn money. Yet over the skies of Uruguay, a small airline has become a takeover target for the region's big boys. Pluna, currently controlled by Brazil's Varig. has caught the eye of Aerolineas Argentinas, owned by Spanish tourism conglomerate Marsans. If Aerolineas gets its way and buys Pluna, it could monopolize Uruguay's busy skies.

In Uruguay, privatization is always a topic of debate--especially when it comes to the airline industry. In 1995, the government partially privatized Pluna, as the carrier's poor financial health left no other option for the company's survival. Varig acquired 49% of Pluna, the government kept 48%, company employees held on to 1% and other investors kept the remaining 2%. Varig's management ran the airline.

Even though Pluna was under new management, the company continued to lose money at first. Yet a surprise came at the end of 2003, when revenue hit US$80 million. The company posted an operating profit of $546,000. which was thin but the first profit in a long time. In January 2004. the company reported revenue of $8 million, or 25% more than projected. Union leaders say the company's employees are behind Pluna's success, and not just management. "We've had ups and downs in the process of the partial privatization of Pluna," says Elina Rodriguez, director of the Pluna workers' labor union.

According to Rodriguez, Pluna's profits are the product of its employees' stake in their livelihood and that of the company. "At no time did we waver in our positions, but we were not into deadlock and we did support compromise so objectives could be achieved," says Rodriguez. Company employees assisted management with decision making during the handover, and they played a role in the purchase of new Boeing 767 aircraft that led to a Montevideo-Madrid route, Rodriguez says.

Nobody in Uruguay ever thought an international airline would set its sights on the Uruguayan carrier in the wake of Varig's acquisition, yet interest came from just a few miles to the south. Aerolineas Argentinas Airlines officially stated its interest in buying a controlling stake in Pluna with the aim of consolidating its presence in the region. In fact, Aerolineas Argentinas, once financially strapped itself, has said that if it does not buy into Pluna, it would enter the Uruguayan market via a local office, and, apparently, it has the funds to do just that. Aerolineas Argentinas has recovered from the effects of the country's financial crises, and it earned $43.8 million in 2003, which represents a 156.7% increase from 2002's earnings. Marsans bought the company in 2001 for $615 million. Prior to that, Spanish state-owned holding company SEPI ran Aerolineas Argentinas.

In March, Varig gave Aerolineas access to Pluna's financials for auditing purposes, hoping the Argentine carrier would buy out Pluna. Varig's shares shot up on the Sao Paulo stock exchange on the news.

A less favorable reaction came from Varig's partner in Pluna, the Uruguayan government. Management at Pluna Ente Autonomo (PEA), the body that represents Uruguay, sent a letter to Varig opposing the sale of Uruguay's flagship airline. Jorge Neves, Pluna's general manager, argued that Varig should not have handed over sensitive information to Aerolineas on the grounds that the Argentine carrier competes with Pluna. "Varig was a Pluna competitor when it then became its operator and later its shareholder" Neves says.

Monoplozing. Aerolineas Argentinas's interest in Pluna has led to even further unease. After the sale, Aerolineas could monopolize the profitable Buenos Aires-Montevideo route, which represents the bulk of the passenger traffic coming through Montevideo's Carrasco International Airport. Pluna already controls 52% of the traffic between the two cities, and Aerolineas controls the rest. Industry leaders have plenty of reservations. "We do not believe in monopolies," says Fernando Pelaez, general director of Puerta del Sur, the company that man ages the Carrasco Airport.

He may get his wish. Aerolineas Argentinas is not the only company interested in Pluna. Uair, a start-up that began operations in 2003 in Uruguay, has expressed interest in Pluna. While Uruguayans wait to see who will fly them back and forth to Buenos Aires, Pluna's onion has made it clear that neither Aerolineas Argentinas nor the young Uair are acceptable. "It's worth seeing the trials that await Aerolineas Argentinas to determine if it's suitable to go forward. Uair doesn't even seem solvent," Rodriguez says. Presently, Pluna owns seven planes and flies to Santiago, Buenos Aires, Madrid, Sao Paulo, Rio de Janeiro, Porto Alegre and Asuncion.

Founded in 1936, Pluna is renovating its fleet and offering discount fares around Uruguay. The carrier honors Varig's frequent-flier program. Varig was planning on merging with rival Brazilian carrier TAM, a deal that would have given the airlines control of 67% of the Brazilian market. However, an improving economy fueled business for both carriers, which subsequently called off plans to merge. Varig, at the time, was on the verge of bankruptcy.

DIEGO STEWART * MONTEVIDEO