Friday, July 6, 2012

PLUNA Shut Down "Indefinitely" by Uruguayan Government, Likely to Liquidate

Financial Problems & Decision to Shutdown

On Thursday 05Jul12, Uruguayan President Jose Mujica announced that the government would shut down the national carrier PLUNA "indefinitely" while other reports indicated that the carrier was being liquidated.  Either way, the cessation of operations was caused by a lack of liquidity to pay its bills and overall meager financial resources due to continued losses on operations.  The government was seeking private investors to replace the dissolved Leadgate/Jazz partnership but with no solid prospects on the horizon, losses mounting, and with the employees on strike for 48 hours earlier this week, the decision was made that the current financial situation made it "impossible to assure an adequate operation".  

Hints that President Mujica might shut down PLUNA came earlier this week when he said in an interview that "the president is not in favor of continuing to lose money".  A sale of the airline to private investors or shutdown of the carrier and sale of its assets, such as equity in its aircraft, were both being contemplated.

Employees Losing Jobs

PLUNA's 900 employees will lose their jobs but will collect unemployment insurance with many workers likely to be placed in other government jobs. Nonetheless, many workers broke down in tears and desperation at the prospect of being unemployed in a small country where good work opportunities are often hard to come by.

Passengers Stranded

July is the winter vacation period in Uruguay and it is estimated that 75,000 travelers would have traveled with PLUNA during that month alone but will now need to make alternative travel plans.

A New Airline ?

According to Transport Minister Enrique Pintado the priority now is to "reestablish the country's air transportation connectivity".  He and Economy Minister Fernando Lorenzo will introduce "a package of measures" on Monday 09Jul12 with that end in mind.  That same day, President Mujica will send proposed legislation to the Uruguayan congress establishing ground rules for negotiations with the airline's creditors.   Also on Monday, the Council of Ministers will consider a legislative bill that would generate an RFP (Request for Proposals) for private investors to enter in a partnership with the Uruguayan state to start another carrier to replace PLUNA.

Limited Measures Possible

Pintado indicated that the situation has changed since the 15Jun12 press conference where it was announced that the Leadgate/Jazz group was exiting PLUNA and that new investors were looking at putting money into the airline.  "No financing source, nor any party interested in capitalizing the carrier has appeared", he said.  He added that the state is limited in the actions that it can take in a company that it has a minority stake in and that is majority privately-owned.      

Fraud ?

While there are many commercial reasons for the airline's troubles, there have also been accusations, especially among opposition politicians, that Leadgate management stripped assets from the company through such actions as excessive consulting fees, the selling of PLUNA's office in Buenos Aires for US$ 1.2 million, a CRJ-900 engine for US$ 4.6 million, and aircraft spare parts for US$ 500,000.  

Editor's Opinion:   Limited Hub Connectivity

While the commercial reasons given for PLUNA's demise have been many:  High fuel prices, stagnating economies in South America, Argentine currency restrictions, and Uruguayan air traffic control inefficiencies, the most important reason in my opinion is the limited connectivity of PLUNA's Montevideo (MVD) hub due to route denials by the Argentine government. 

Route authorities were requested, but denied, to several destinations, including Bariloche (BRC), Mendoza (MDZ) and Trelew (REL).  Montevideo is strategically located between Argentina and Brazil.  PLUNA was flying to six different Brazilian cities at the time it shut down but needed a similar number of cities in Argentina to make its hub system of flights feeding each other work.  While the Argentine government's wish to protect its carriers Aerolineas Argentinas / Austral might be understandable, the damage done to the economies of Argentine cities that are denied air service probably far exceeds the benefits realized by the national carriers from being protected from competition.

Sources: El Pais Uruguay 05Jul12, 06Jul12

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