State-owned enterprises (SOEs) in Argentina are at the centre of public debate. Milei’s government repeats, over and over again like a mantra, that they are inefficient and represent a heavy burden on the national state’s strained public accounts. The reasoning behind this is simple: why keep inefficient companies in state hands whose services or goods could be provided by the private sector?
Answering this question requires at least three steps. First, take a look around the world to see whether SOEs are a rara avis of “leftist” developing countries or policy instruments present in modern developed countries. Second, to separate the wheat from the chaff to understand in which cases state ownership of enterprises is justified and what are the potential costs of renouncing the exercise of these ownership rights. Third, takes a closer look at the management of public companies, in particular to understand the reasons for their inefficiencies and policy alternatives. To this end, we focus on Aerolíneas Argentinas.
Public enterprises, a neighbourhood phenomenon
- On the one hand, governments own pension funds, financial institutions and sovereign wealth funds, which have reached an amount equivalent to one third of global financial asset holdings. Some of these funds are invested in equity stakes in companies. For example, in 2010, sovereign wealth funds held more than 50% of the shares in around 1,000 companies. By 2020, the total had risen to ten thousand firms.2
- On the other hand, the second factor is the growth and internationalisation process of SOEs, particularly in China. Since 2008, SOEs account for between 5%-15% per year of cross-border acquisitions (acquisition of private companies in countries outside the state that owns the SOE)3.
Public companies, means to an end
There are several reasons that justify the existence of public enterprises, reasons that demonstrate the presence of a public interest at stake:
Market failures
The existence of SOEs is usually justified as a way to correct market failures. For example, in cases where the private sector does not have sufficient incentives to invest in projects where large investments are required, profits are long term and there is high uncertainty. Another example of market failure is natural monopolies, where it is most efficient for a single supplier to provide a good or service; drinking water distribution or energy distribution networks are examples of this type of market situation.
Industrial or development policy in strategic sectors
SOEs can play a key role in economic development by fostering the growth of new sectors or activities. Examples of this role are the Chilean company CODELCO, created in 1976 in the copper mining sector, or the Korean company POSCO, created in 1968 for steel production. In our country, after its majority expropriation, the role of YPF was central to the development of hydrocarbon exploitation in Vaca Muerta.
Macroeconomic balance
SOEs can fulfil macroeconomic objectives. For example, a public bank can have a counter-cyclical credit policy or a public enterprise can increase investment in a crisis context. These enterprises do not replace macroeconomic tools, but complement them.
The government’s argument is that many of the functions performed by SOEs could be performed more efficiently by private companies. But the truth is that this requires complex regulatory regimes or taxation schemes to ensure that policy objectives are met, and involves high administration costs. So, why not try to make SOEs, which fulfil some relevant policy objective, both efficient and transparent?
There is renewed interest in the world on how to improve the management of SOEs. In general terms, it is argued that they need to follow standards and practices similar to those of the private sector, without losing sight of the particular characteristics of this type of instrument.
This includes a number of reforms aimed at:
- Improve its governance.
- Introduce good management practices to increase their efficiency and effectiveness in meeting commercial and non-commercial objectives.
- Have more transparent policies to assess their contribution to economic development.
- Open the ownership of companies to private capital and promote their exit to the capital markets, so that minority shareholders have some degree of influence over decisions.
Governments in Argentina have made little progress in this type of reform. There have been some attempts to improve SOE governance, but they have not been sustained over time. And, as is often the case, when the necessary reforms are not addressed in due time, it leaves room for extreme positions, such as the one we are seeing today: the national government’s political agenda is privatisation.
Aerolíneas Argentinas, flag carrier or reservoir of inefficiencies and privileges?
In our country, there are reasons that justify the need for public policies that encourage and promote air transport development. Among the main ones, the following stand out:
- It is the eighth largest country in terms of territorial extension with large territories of low population density and with a third of its population concentrated in the AMBA.
- It is surrounded by oceans in a southern region of the planet far from the regions with the highest intensity of world passenger and trade flows.
- It has a federal political organisation.
A priori, at a theoretical level, incentive policies and regulatory policies could be designed to contribute to achieving the objectives of aerocommercial development and connectivity that the country needs with private operators. These policies would have costs. However, the starting point for thinking about how to improve connectivity and the development of the airline industry must be based on an analysis of reality.
The national state owns the flag carrier, which has a 64% share of the domestic market and flies to 39 domestic destinations, most of them with two daily frequencies, and is the only company operating in half of them. It currently has a workforce of 11,920 employees, most of them highly qualified, and has a fleet of 81 aircraft and an important maintenance and training infrastructure. Disposing of these assets would have high costs for the state, both in terms of the obligations already incurred and the investments made.
Table 1, summarises some of the company’s indicators for the period 2015-2023. After the pandemic, there was a recovery in the total number of passengers carried on domestic flights in a context of market growth. Internationally, the company did not recover the total number of passengers carried before the pandemic, although it maintained the market share with a substantial improvement in the occupancy factor. During the period, the total number of employees and the fleet remained constant.
During 2023, it carried 11 million domestic passengers (a record number for the company and a return to 2019 market share ), 2.8 million passengers on international routes and operated 114 thousand flights with an average total seat occupancy factor of 84% (industry estimates that average occupancy must exceed 70% to break even).
In terms of air cargo transport, Argentina’sperformance is poor compared to other countries in the region. Not only are our neighbours at much higher levels, but they also had a growing trajectory, unlike the stagnation shown by our country….
Looking at operating results as a percentage of company revenues, there is evidence of poor performance from 2013 to 2023.In the last ten years, if we do not consider 2023 (because it is an incomplete accounting statement)4 and the years 2020 and 21 of the covid 19 pandemic, the company operated with a negative average operating result of -22% of revenues. These are extremely negative values and with a sustained trend.
The company’s poor operating results were in contrast to the international performance. While the airline industry was significantly impacted during 2020 and 2021, the rest of the years saw positive operating results. Figure 4 presents data prepared by the International Air Transport Association (IATA) showing the industry’s operating results globally and in particular in Latin America over the last ten years. Over the last decade, globally, excluding the years 2020-21, the industry operated with an average annual positive operating result of 5.7% of revenues.
In the public debate, it is claimed that the company did not need contributions from the national state during 2023 since it achieved “operational balance”. However, an analysis of the financial statements as of June 2023 shows that the company’s operating result was -31% of revenues in the first half of the year.What remained in balance was the net cash flow and this was due to the regulatory change of the Central Bank of Argentina (BCRA), which allowed the company to settle dollars from ticket sales abroad at an exchange rate equivalent to the spot rate, while its costs were at the official exchangerate5.
In other words, in the first half of 2023, the company did not achieve operational equilibrium, but it did achieve a balanced net cash flow thanks to the financial results generated by a growing exchange rate gap and the BCRA’s sectoral regulations.
The agenda for discussion on Aerolíneas: between ideologised visions and political slogans
The government's proposal
In the first days of October 2024, the Executive Branch declared the company Aerolíneas Argentinas subject to privatisation under the terms of Article 9 of Law 23696 6 . What this law establishes is that the decision requires the approval of the National Congress. The government’s statement seems to be more discursive than to move steadily towards a new privatisation. In the recent debate on the Ley Bases, the Executive failed to achieve the necessary majorities to include Aerolíneas Argentinas among the companies “subject to privatisation” and there is no indication that the parliamentary majorities have been modified.
In relation to the announcement, a relevant question is the viability of the privatisation of Aerolíneas: what private investment group would be interested in acquiring the shares of a company with an average negative operating result of 22% and a negative net worth of USD 170 million, in an industry such as the aeronautics industry, which operates with very low margins?
In the short term, the announcement aggravates the problem as it impacts on ticket sales by increasing uncertainty about the continuity of the company. This worsens the operating result and the value of the company. Beyond this “no solution” from the government, two other options for the future of the company appear in the public debate:
- Continue as before.
- Decree the bankruptcy of the company in order to reorganise the national aviation market on the basis of private players.
Business as usual
The main criticism of the continuity of the status quo is the negative operating results and the need for capital contributions from the national state to sustain the company. Does Aerolíneas Argentinas lose money because it carries out activities at a loss in order to achieve non-commercial objectives? In other words, does it fly to unprofitable destinations, but with positive externalities for regional development and the country’s connectivity?
From the company’s public information, there is no element that allows an affirmative answer to these questions. The occupancy factor of both domestic and international flights shows a value above 70%, a value indicated by specialists in the sector as the break-even point in the industry for a flight (see Table 21). Even in those domestic destinations where the company is the only operator (twenty domestic destinations), the occupancy factor on these routes was above 75% in 2023 7 . The other possible explanation for the company’s negative operating results is based on the existence of non-productivity.
A comparison of some of the company’s indicators against five other Latin American airlines (Latam, Copa, Gol, Aeroméxico, Avianca) for the year 2023 provides evidence of the existence of unproductivities. While Aerolíneas Argentinas has a negative operating result over revenues (-31%), the rest of the airlines have positive operating results (on average 12%). At the same time, the Argentinean company has higher values than the rest of the airlines in employee/aircraft ratios -147 for Aerolíneas and 90 on average for the rest- and passengers transported/employees -1158 for Aerolíneas and 2157 on average for the rest.
In the rest of the indicators, the company presents values similar to the rest of the companies (Occupancy Factor, Passengers transported/Aircraft, Number of destinations/Aircraft, Fuel Expenditure/Total Revenues). Unlike the rest of the industry, Aerolíneas Argentinas does not publish other operational indicators, which would allow comparing other dimensions of productivity 8.
Aerolíneas Argentinas’ operating losses due to unproductiveness are unacceptable. In the context of an industry such as the airline industry that manages very small profit margins, it is essential to make progress in improving the company’s productivity levels. There is no reason why the public budget should allocate resources to this end. Business as usual cannot be an option.
A clean slate
Some believe that Aerolíneas Argentinas’ operating performance is entirely explained by operational inefficiencies and “cannot be made viable“. 9For this reason, they believe that the only solution is to file for bankruptcy of the company. They also assume that, in this scenario, Aerolíneas Argentinas would be replaced by private operators with no impact on air connectivity and the economic and social development linked to air navigation. This is a pragmatic argument, repeated by those who believe that “things are not going to change”.
Sending Aerolineas into bankruptcy will have costs in connectivity and airline activity until such time as private operators replace it, first on the most profitable routes and then on all routes. There is no guarantee that current connectivity will be restored.
However, for any private operator, the scheduling of new routes and aircraft availability does not happen overnight. In this scenario, it is difficult to determine how long it would take private operators to replace Aerolíneas Argentinas’ operations. This depends on a variety of factors including: the global context of the aviation market, the global availability of aircraft, and the level of union unrest at the airports that would result from the company’s cessation of operations, among other aspects. In turn, the aircraft in leasing of Aerolíneas Argentinas would remain as part of the bankruptcy and, in this scenario, it would take years before the companies that own them could recover and sell them.
A reasonable estimate in relation to the economic and social impact would be to assume a value equivalent to the company’s annual contribution to the gross aeronautical product, tourism and connectivity. According to calculations made by the company, the cost would amount to some USD 6017 million10.Other costs of this decision would be: the loss of passengers who would have purchased tickets from Aerolíneas Argentinas at the time of bankruptcy, which as of June 2023 was a figure equivalent to USD 497 million (deferred revenues from air traffic); the loss to Banco de la Nación Argentina of some USD 200 million for loans and guarantees granted for the purchase of the Embraer fleet; the loss to Banco de la Nación Argentina of some USD 900 million for loans and guarantees granted for the purchase of the Embraer fleet; the labour liabilities for severance payments amounting to some USD 900 million (in a bankruptcy they might not be paid, but they are a contingent cost); and the commercial liabilities that include companies such as YPF, with important claims against the airline for the sale of fuels. In total an economic cost of USD 7614 million could be estimated.
Table 3 summarises an estimated calculation of the social economic cost of the decision to bankrupt the company without continuity considering the numbers presented above.
The decision to send the company into bankruptcy is not immediate, has costs and does not guarantee that in the short term private operators will be able to replace the activity currently carried out by Aerolíneas. Nor does it guarantee that the current connectivity will be recovered in the medium term.
What to do with Aerolineas Argentinas?
More than fifteen years have passed since the nationalisation of Aerolíneas Argentinas. The company must drastically change its operational management and align its practices with the rest of the industry. It is unacceptable to continue to subsidise operational inefficiencies with resources that could be used for other purposes or even for more extensive development of the airline business, where the externalities justify these subsidies.
In recent years, some changes have been made to improve the productivity of the company, such as the opening of collective agreements and the elimination of inefficiencies in some processes. However, the existing situation shows the need for deeper reforms.
Thus, capital contributions to finance the operating deficit should be ended and new forms of public financing of the company’s non-commercial objectives should be implemented. But first, it is necessary to clearly define which are the company’s commercial and which are its non-commercial objectives. The objectives must be made explicit and translated into quantifiable goals that are accessible to the public for their control.
A new Aerolíneas Argentinas may require a redesign of its current governance scheme that increases the professionalism of the board and establishes clear mechanisms in the relationship with the shareholder. Ideological views on the company should be put to an end and a pragmatic vision should be adopted.
Finally, and in relation to the entry of private capital into the company, this is a debate that should be raised once operational equilibrium has been achieved. The decision on whether or not to open the company’s share capital must be approached with a company in equilibrium and in response to the following question: what is best for the country and the development of connectivity and air navigation activity?
Among the arguments in favour of private capital entering the company (in a minority form, in a first stage), the following stand out:
- As YPF’s experience shows, private shareholding obliges the company not to lose sight of profitability and operational efficiency. In addition, the public listing of shares generates obligations related to the publication of financial information and relevant facts that increase the transparency of the company’s management.
- In the airline industry, there is a growing trend towards the concentration of activities in increasingly larger companies that take advantage of service and marketing networks in several countries, thus maximising profits and improving and increasing the services offered to passengers. One of the most common ways in which alliances are developed is through the entry of minority equity capital. Moving forward in an alliance with a company from the region could be beneficial for Aerolíneas Argentinas and increase the country’s connectivity.
In this, as in other aspects, it is necessary to abandon purely ideological views and the immobility of the argument that preaches “No se puede” (it can’t be done). Aerolíneas Argentinas is the company that in 1966 made the first non-stop flight between Buenos Aires and Madrid in 11 hours and 31 minutes, a world speed record at the time; that in 1980 made the first transpolar flight from Buenos Aires, crossing the South Pole and reaching Auckland, New Zealand; and it is also the company that was able to recover from the emptying left by the privatisation of the 1990s. Our flag carrier, capable of reaching these milestones, must be able to operate with levels of efficiency and productivity similar to those of the rest of the industry. Pragmatism is needed and comfortable political positions must be abandoned. A new Aerolíneas Argentinas without operating losses would gain social legitimacy and, for many years to come, would continue to be a source of pride for its workers and Argentine society as a whole.
Notes
1 FMI (2020). Fiscal Monitor: Policies to support people during the COVID-19 pandemic. Chapter 3. “State Owned Enterprises: The other government”.
2 Banco Mundial (2024). The business of the state. World Bank Group.
3 FMI (2020). Fiscal Monitor: Policies to support people during the COVID-19 pandemic. Chapter 3. “State Owned Enterprises: The other government”.
4 Los resultados de 2023 presentados en este documento corresponden al estado contable publicado a junio de 2023.
5 La Comunicación A7630 del 3 de noviembre de 2022 del BCRA exceptuó a la empresa de la obligación de liquidación en el Mercado Único y Libre de Cambio (MULC) a los cobros de servicios de transportes de no residentes por vía terrestre, aérea o acuática.
6 Decreto 873/24.
7 ANAC. Informes mensuales 2023.
8 En la página de Aerolíneas no se publican reportes operativos que permitan comparar otras dimensiones de la productividad de la empresa. El resto de las empresas relevadas en la tabla publican reportes operativos con indicadores de performance que incluyen: horas de vuelo promedio aeronaves, ASK, RSK, CASK, PLF y otros.
9 A modo de ejemplo, el ex ministro de Transporte, Guillermo Dietrich, manifestó públicamente su escepticismo respecto a la posibilidad de privatizar o reestructurar la compañía.
10 Este cálculo fue elaborado por Aerolíneas Argentinas con base en la metodología de IATA y publicado en su estado contable 2022.
About the Authors
Gonzalo Guilardes has a degree in Economics UBA. He also holds a Master’s Degree in Economics from the University of Buenos Aires (thesis pending). Chief Economist and Director of Audemus Consulting. Former Chief of Staff of the Ministry of Economy 2019-2020. Former General Manager of IMPSA 2022-2023.
Jimena Rubio holds a degree in Political Science from the University of San Andrés and a Master’s degree in Political and Social Sciences from the Pompeu Fabra University (Barcelona). She is a researcher in the area of Productive Policy at Fundar. She specialises in issues of state capacities, political economy and productive policies. She worked in the Secretariat of Public Management of the National Cabinet Office and has worked as a consultant for international organisations and provincial governments on policy evaluation and strengthening of management systems.
