Chartering New Courses: AeroFloral

Chartering New Courses — AeroFloral

AeroFloral would be one of the largest freight carriers in the Americas, if only it were an air carrier

by Brendan Sobie
Miami

colorful
background and a little mystery has never hurt when doing business in Miami’s dynamic air cargo industry. Hernan Galindo and his flourishing perishables consolidator, AeroFloral, are certainly no exception. Threading its way through seemingly specialized markets, AeroFloral has become one of the largest air cargo companies in Miami, the leader in the huge Colombian perishables business, an innovator breaking down walls between cargo operators and, along the way, a lightning rod for controversy in the Americas.

Calling them a consolidator, in fact, hardly does justice to the enormous profile AeroFloral has gained in air shipping even as the company has blurred the traditional boundaries within the cargo industry.

With a foundation business linking growers in South America to perishables distributors in North America, the company handled just short of 400 million pounds of cargo in 1998. It leases three 747 freighters year-round, still more during peak seasons, and has branched out far beyond the flower field to keep those jumbos filled.

"We started off very modestly back in 1986," Galindo said in a recent interview, displaying the kind of modesty his company’s unassuming headquarters projects just off the western fence of Miami International Airport. "We started small and worked hard and I guess we provided a service for the industry that the industry was lacking at the time."

But its tough to keep a low profile when you’re flying flower-filled 747 freighters through Miami, and AeroFloral has attracted even more attention by dramatically stepping up its automation and forging new and controversial arrangements with U.S. Customs.

And, by the way, the company may have more than just capacity up for sale: AeroFloral’s four main owners apparently have the company on the market, making the task of defining just what AeroFloral does and how the company does it even more pressing.

Many independent Colombian flower farms were frustrated in their attempts to tap into the growing United States flower market in the 1980s. The little lift available was generally controlled by a handful of older growers.

A former president of the U.S. division at Colombia’s Avianca airline and director of international cargo sales at Miami-based Arrow Air, Galindo started AeroFloral by selling growers space on a DC-8 shared with Arrow. He persuaded Frontier de Colombia to drop its agency agreement with the Fritz Cos. to serve as AeroFloral’s general sales and handling agent.

AeroFloral moved to 747-200s in 1994 and was wet-leasing three jumbo freighters year-round less than two years later. The capacity gain was made possible after the company diversified by adding Ecuador as a second flower source and expanding into southbound trade. But the Colombia business remains AeroFloral’s bedrock, accounting for two-thirds of its business last year.

And no wonder: only three decades ago, Colombia exported some $20,000 of flowers a year; in 1997, that reached $544 million. And according to the Association of Floral Importers of Florida, traffic in cut flowers into Miami has grown from $153 million to $853 million in 15 years. Colombia accounts for 70 percent of these imports.

Along the way, AeroFloral claims it has led technological change in Miami and beaten its competitors by better preparing for the future.

For example, Galindo notes AeroFloral started leasing freighters as regulations against noisier aircraft started cutting into the fleets of Miami’s long-time freighter operators. AeroFloral kept growing even as some airlines folded and others scrambled to keep flying.

"There was chaos in the industry. They weren’t prepared," Galindo says. "They thought they would get other extensions by presenting phony agreements and so forth to the (Federal Aviation Administration), and then they came down and slammed the door and said, `No more, this is it.’"

Galindo also attributes some of his success to its innovative relationship with U.S. Customs. For instance, the company won special permission last year to have freight cleared at its huge, new warehouse off the airport. Competitors cried foul, claiming Customs had long refused to allow them to clear goods from cheaper, off-airport sites and arguing AeroFloral had gained political favor.

"Why is it controversial?" Galindo scoffed. "Because they didn’t think about it? They didn’t beat us to the punch, so they got together, which is illegal as hell, and tried to block this. And they’re opposing this using arguments that’s it’s cheaper over there. Security is much more expensive over there (at AeroFloral’s facility) than it is in the airport."

That dispute is largely moot because AeroFloral plans this month to open an airport screening facility that features a powerful new X-ray machine custom-built by RapidScan. AeroFloral says the $3 million facility will speed up inspections of imports and exports by almost 500 percent without compromising security. It has invited U.S. Customs to use the facility for cargo other carriers move through Miami and believes the agency will embrace the technology across the country.

AeroFloral already enjoys "super carrier" status with Customs, which means the company defines and adheres to a higher security standard that takes into account the extra risks associated with operating in a high-risk country. "We want to make sure nobody uses our company for illegal activity," says Galindo. "That’s why we’re making this investment. We want to protect our company, our customers, our good name."

AeroFloral’s competitors voiced more criticism of the company this spring after Colombia’s government targeted Frontier de Colombia in a wide-ranging investigation of smuggling that led to the arrest of several customs inspectors and a Frontier official.

The president of a major flower importer and one of AeroFloral’s biggest customers says other carriers have tried to use news of the Frontier charges to convince him to shift his business away from AeroFloral. "They’ve been here everyday," said this executive, requesting anonymity. "They are trying to take advantage of what is happening."

"They are just allegations," says Peter Kertesz, vice president of corporate logistics for USA Floral, another key AeroFloral customer. "The investigation is ongoing and the company tells us all their services are completely above board, and we have no reason to doubt that."

AeroFloral says it’s only tie with Frontier is the agreement on sales and handling. Galindo says the companies are completely separate entities, although Galindo is listed as a director of Frontier and he has guaranteed Frontier’s debt to air charter operators, according to news reports in Miami.

AeroFloral is "a U.S. company, it’s a Florida corporation," he says. "People just confuse us; they say because they are from Colombia, then they are Colombian. It isn’t. It’s a U.S. company."

Two of AeroFloral’s four owners are U.S. citizens — Eduardo Rueda, who is also vice president of finance, and Louis Soto, a Miami resident not involved with day-to-day operations. Galindo expects to be sworn in as a U.S. citizen by the end of this year. Only Hernan Lara, a minority partner, still resides in Colombia. He is a second cousin of Frontier’s president, Jaime Lara.

The events have some wondering just what anyone would get by buying AeroFloral. And is AeroFloral for sale, anyway?

"Not really. You have to take it with a grain of salt," Galindo says. But he concedes the company has also received seven inquiries to a recent listing by a sale broker that Galindo says approached AeroFloral.

"I have an obligation, not as president but to our shareholders, to present (the inquires) to them. I’d be a fool not to listen, so we’ll listen. Everything is for sale at the right price, but we’re not actively selling," he said. "I don’t necessarily want to sell it. I have mixed feelings."

Oddly enough, for a company that is not an air carrier, the initial inquiries have come from airlines, he says. "We don’t control our traffic rights, so we have our weaknesses. But if you combine it with a carrier, it’s a winner," Galindo said. "Just with our volume, you’re up there as an international player."

Whatever the relationship between the companies, AeroFloral surely has its dominant position out of Colombia because of Frontier. Flower consolidators say Frontier has the best facilities in Bogota, giving them an important edge over competitors. "They are on the cutting edge of technology," says Kertesz.

AeroFloral holds roughly half the market for flowers out of Colombia, translating into more than 50 million kilos of flowers a year worth some $180 million.

Colombia-based Tampa Airlines and others play up their Miami facilities and the fact they fly their own aircraft. "AeroFloral isn’t an airline," says Guillermo Mejia, commercial director of Colombia-based Tampa.

But with aircraft and strong service backup available to lease, argues Galindo, what good is an air carrier certificate? "What is the difference? Look at an established carrier that owns a certificate like Tampa or Challenge: They don’t own the airplanes," he said. "They lease the airplanes for five years like we lease for five years. If they could lease their crews, they would lease their crews. They subcontract the maintenance because it doesn’t make any sense for them. They subcontract the loading and offloading of the airplane because it doesn’t make sense. We do it ourselves through another (AeroFloral subsidiary) company called Advanced.

"I can have my name on the airplane. I can tell Atlas I want you to put AeroFloral on the door and so what? I think the industry in that respect has become very blurry, and then you got a whole bunch of regulatory problems you got to address by owning a certificate," he said.

AeroFloral itself is a very blurry entity. As an indirect carrier, it is sandwiched within a multi-layered industry, selling only to forwarders and importers, including consortia representing groups of growers. It only transports shipments from one airport to another with leased lift and leaves local deliveries to others.

That allows AeroFloral to focus efficiently on its niche. It fills up two 747-200s from Bogota each day and a 747-200 from Quito, Ecuador. The flying is done by Atlas Air and Kitty Hawk. Last year, AeroFloral wet leased its second year-round 747 from Atlas following the bankruptcy of Southern Air Transport. Thanks largely to the AeroFloral contract, Atlas handled 208,096 tonnes at Miami in 1998, 12.2 percent better than 1997 and enough to make Atlas the top cargo carrier at MIA.

That’s fine as far as Galindo is concerned.

"We’re not going to get into the airplane business," he says. "You need economies of scale to get into these large airplanes. I think all the industries in the world are changing and in our industry you have to operate in the most efficient way possible. Somebody who has 35 747s can run them cheaper than somebody who has five. Whether it’s a 747, whether it’s a DC-10, whether it’s a DC-8, whether it’s a DC-3, it’s economies of scale and that’s where the industry is moving, to efficiency."

Wet-leases also give AeroFloral the flexibility to add 747s in the weeks leading up to Valentine’s Day and Mother’s Day. This year, AeroFloral doubled its "fleet" to six 747s in late January and early February to accommodate daily volume that can be as much as 300 percent higher than normal. A fourth 747 is also added prior to Mother’s Day and spare hours on the three full-time aircraft are often used in the weeks leading up to the end-of-the-year holidays.

AeroFloral was the first to move to 747s, helping lead a largely narrowbody market toward widebodies. Florida West now flies 747s to Bogota, for instance, and Challenge Air Cargo has moved to DC-10s.

AeroFloral, however, isn’t leading a move to new gateways, instead sticking exlusively with Miami even though many of those flowers travel to other regions, including 3 to 5 percent to third countries.

"You can provide an excellent service for those customers that want an air service through Miami much better than you could by going direct," he says, arguing that other destinations don’t have the steady traffic to justify widebody economics. AeroFloral is trying to sell its customers on a feeder fleet from Miami to selected markets like Los Angeles.

"You can move the cargo through Miami much quicker and at a much lower cost than taking an airplane from Bogota all the way to L.A., a seven-and-a-half hour trip. Then what do you do with the airplane? You have to bring it back to Miami, essentially. ... And these markets, when you’re talking about the perishables it’s like the passenger business, they want frequencies. Dumping one 747 into L.A. on a Sunday is not the same as sending five 727s during the week with a fresh pot every day.

"It’s a concept that we haven’t really developed [but] we’re preaching."

Imbalanced trade lanes are bad enough out of Miami, forcing carriers to draw up triangular routes to keep the planes full. AeroFloral sends its 747s to eight South American countries and deep into the Southern Cone.

But a complicated southbound rotation has paid dividends: in the last three years AeroFloral has handled more cargo southbound than northbound. AeroFloral hopes to increase that business with new intra-regional trade between such countries as Brazil and Colombia.

Such flights fly empty because American carriers lack fifth freedom rights. Galindo hopes efforts to secure such rights are successful but he also envisions circumscribing regulations by turning the Brazil-Colombia leg into a Varig Brazilian Airlines flight while keeping the Colombia-Miami leg under Atlas’ auspices.

However, Galindo insits AeroFloral will remain focused on its core business — managing flower shipping — to maintain its huge profile in a growing floral industry. "To say the industry can grow at 5 percent a year, 6 percent a year, that’s not far fetched," says Galindo.

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