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Peru's Airlines Skirt Ownership Rules

Published on Dec 21 2020 1:36 PM in General Industry tagged: LATAM Airlines Peru / Viva Air Peru / Sky Airline Peru

Peru's Airlines Skirt Ownership Rules

Peru's top three airlines are operating with little or no Peruvian ownership despite a rule that local carriers must be at least 30% owned by its nationals, company filings, court documents and interv...

Peru's top three airlines are operating with little or no Peruvian ownership despite a rule that local carriers must be at least 30% owned by its nationals, company filings, court documents and interviews with industry officials have shown.

Increased competition has lowered ticket prices for Peruvians in recent years, but it has also that meant multinational carriers have driven locally-owned players out of business.

Motivated by what lawmakers say is a lack of reinvestment in the country from its dominant foreign-controlled airlines, Peru's Congress is analysing a bill to create a state carrier.

As of last year, 82% of Peru's 13.8 million domestic passengers flew either on LATAM Airlines Peru, Viva Air Peru or Sky Airline Peru, which are all foreign-owned and operate popular routes such as the Lima-Cuzco shuttle.

But while LATAM Peru, which is the largest carrier, was for many years 30% Peruvian, just 0.39% remains in local hands after this year's Chapter 11 bankruptcy filing of Chilean parent LATAM Airlines Group, court records show.

And low-cost competitors Sky Airline Peru and Viva Air Peru, which are more recent entrants into the Peruvian market, only have non-Peruvian shareholders, company filings and interviews show.

Aviation regulator DGAC confirmed in a statement that Peruvian citizens are required to own at least 30% of any domestic airline. It did not answer questions on compliance.

LATAM Peru said in a statement that it "fully complied" with Peruvian law, adding that the coronavirus crisis has required it to change its capital structure.

"More than 30% of LATAM Peru's equity is incorporated in Peru, which means we are in full compliance with all of the country's rules," it added.

Viva said that it "follows and will follow the rules of each country in which [it is] present".

Sky declined to comment.

Peru's law says that the 30% stake should not just be incorporated in Peru but should also be "subject to the real and effective control of shareholders or partners of Peruvian citizenship".

Reuters could not determine why the requirements are not being enforced, although some analysts noted that enforcement might not be in the national interest.

"This is the perfect example of a law that doesn't generate any benefits to the country," said Carlos Ozores, an aviation consultant at ICF focused on Latin America.

Established by Declan Ryan, a co-founder of Ryanair, Colombia-based Viva was the first low-cost airline to land in Peru in 2017, disrupting LATAM's previous market dominance.

Abel Lopez Campo, who was Viva's general counsel until last year, told Reuters that he was tasked with setting the company up.

Lopez Campo said that he told Peruvian regulator DGAC officials in 2017 that the funds to establish Viva Air Peru would come entirely from Irelandia, Ryan's investment fund, and no concerns were raised.

Soon after, records show that the regulator approved Viva's proposed corporate structure, which did not include Peruvian shareholders.

Irelandia did not respond to a request for comment.

"I did a very thorough analysis and found that the DGAC indeed had very solid regulations...but in practice there was no evidence of enforcement," Lopez Campo said.

What Viva did was to incorporate a company in Peru to hold more than the minimum 30%, said Jose Castellanos, Viva Air Peru's founding CEO who left in 2018, adding that the owners behind that Peruvian corporation are foreign.

Irelandia controls Viva and the Chilean Paulmann family controls Sky, filings and documents show.

Gonzalo Perez-Witcht, who headed DGAC until 2016, said that during the four years that he was in charge, the two main foreign airlines operating in Peru, LATAM Peru and Colombia's Avianca Peru, both complied with the rule.

Avianca shut down its Peruvian operation in May when the coronavirus pandemic pushed it into bankruptcy, saying that it saw no path to profitability.

"In no case can the ownership stake held by Peruvian citizens be less than 30%. If it falls any lower than that, it is my understanding that the airline will lose its legal ability to operate," Perez-Witcht told Reuters.

In 2019, Sky Airline also entered Peru with an identical structure to that of Viva Peru, documents filed with the US Department of Transportation this year show.

Sky Peru's ownership includes a company incorporated in Peru that holds 30% of the operation, according to the documents.

The airline also told the US authorities that its "ultimate ownership" resides in five individuals, "all of whom are citizens of Chile."

Holger Paulmann, Sky's chairman and a member of the owning family, did not respond to a request for comment.

LATAM Peru, the annual reports of which show that it has complied with the 30% rule since it was founded in 1998, emulated this structure as of May of this year.

Now, 48% belongs to a company incorporated in Peru that is ultimately a subsidiary of LATAM's Chilean parent company. Another 51% is directly owned by the parent.

How Shareholders' Identities Were Revealed

The identities of company shareholders are not usually public in Peru, but LATAM Peru's owners are named in its US bankruptcy case and in quarterly earnings reports.

Sky Peru disclosed its shareholders when it petitioned the US to operate flights between Lima and Miami.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.

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