Argentina moves to expropriate airline under threat of US$1 Billion arbitration claim

By Fernando Cabrera Diaz
30 November 2008

The government of Argentina is driving ahead with its plan to expropriate the country’s largest airline from its Spanish owners in the face of a threatened US$1 billion arbitration claim. The Madrid-based Grupo Marsans had agreed to sell the troubled Aerolineas Argentinas to the government in July, but the two sides have failed to bridge their wildly divergent estimates of the airline’s value.

The airline has been subject to numerous employee strikes and flight delays in recent months, for which the government blames the company for mismanagement. Argentine President Cristina Kirchner says her government has been forced to intervene because the airline is on the verge of failure, something which would devastate the national economy. Meanwhile, Grupo Marsans blames government regulation, including rate hike preventions, for the airline’s problems.

A valuation of the airline performed by Argentina’s Planning Ministry determined that Aerolineas Argentinas, and its subsidiary Austral, were US$832 million in debt.  However, a Credit Suisse valuation requested by Grupo Marsans estimated the airlines’ combined worth at between US$350-445 Million.

With negotiations reaching a deadlock over Aerolineas Argentinas’ worth, on 24 November Argentine lawmakers introduced a bill in the senate to expropriate the airline. A parliamentary committee determined a few days later that the airline was a public necessity and therefore subject to expropriation. Based on its estimate of the airline’s worth, Argentina plans to pay a symbolic sum of US$ 1 in compensation.

ITN interviewed Angel del Rio, head of communications at Grupo Marsans, who said that under the July agreement both sides had arranged to commission separate valuations of the company in order to determine a fair price.  In the event that the valuations did not match, the agreement called for a third independent valuation, claims Mr. del Rio. However, Mr. del Rio said Argentina has refused the company’s attempts to coordinate the third valuation, and accussded the government of using its internal valuation to cover up its unjust expropriation of the airlines.

If the expropriation is executed, Grupo Marsans will filed a claim with the International Centre for the Settlement of Investment Disputes (ICSID), seeking some US$1.5 billion, said Mr. Del Rio. Grupo Marsans is protected by the Spanish-Venezuela bilateral investment treaty.

Aerolineas Argentinas was a state-owned airline until 1990, when it was privatized and sold to Iberia Airlines.  The airline switched hands several times before it was acquired by the Marsans Group in 2001. At the time, the airline, deeply affected by Argentina’s financial crises, was on the verge of bankruptcy.

Grupo Marsans initially brought the airline into profitability, but began to have troubles in 2005 when it butted heads with employee and pilots unions as it sought to control its costs.  The problems have aggravated by the fluctuations in oil prices in recent years.