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BUENOS AIRES—As chief executive at General Motors in Argentina, Isela Costantini cut costs and raised revenue at one of the most admired companies in the country. Last year, she quit and took a very different job at the urging of Argentine President Mauricio Macri: running the country's bloated state-run airline, Aerolí neas Argentinas.

Nine months later, Ms. Costantini is finding it tough to overhaul the flagship carrier. With 12,000 workers, six powerful unions and a deeply ingrained bureaucratic culture, the 65-year-old airline is more like a government ministry than a cost-conscious company, she said in an interview.

"I knew I was going to find a black box, but I didn't know how big it was going to be," Ms. Costantini said.

For managers who have worked in private enterprise, moving to the public sector can be a jarring shift. Leaders must balance the interest of more stakeholders, including government officials and deeply vested political interests, said Philip Armstrong, vice chairman of the International Corporate Governance Network. What's more, workers aren't necessarily sold on the benefits of increasing productivity.

"You have to have a very high level of political astuteness and judgment," Mr. Armstrong said.

Since taking office in December, the market-friendly Macri administration has laid off almost 11,000 employees across ministries, slashing payrolls that had soared under Mr. Macri's populist predecessor, Cristina Kirchner.

But the 45-year-old Ms. Costantini is finding it more difficult to streamline Aerolí neas, which was on track to lose $1 billion this year, after dropping $1 million to $2 million a day for much of the past decade. The CEO said the airline lacked the organizational trappings of a normal business, such as budgets, performance and sales targets.

"We had more employees than we needed. The challenge was that we didn't know exactly where we had the extra employees," she said.

Ms. Costantini, one of numerous CEOs who accompanied Mr. Macri into power last year, is finding that the company's omnipresent, politically active unions oppose change. To save money, she asked pilots to agree to fly a smaller, less expensive plane to Rome. They balked.

Aerolí neas has too many administrators, yet Ms. Costantini is pushing to increase earnings, rather than reduce head count, in part because unions could react by shutting down flights. Instead of firing thousands of workers, she is trying to woo them, inviting them to participate in corporate decisions. She has written letters to labor leaders, carefully explaining plans and seeking feedback.

Her approach appeared to be working until last Thursday, when pilots unexpectedly went on strike for nearly a day to demand better pay and benefits. The move left thousands of passengers stranded and led Mr. Macri to hire a private plane to fly to a United Nations meeting in New York.

Though the strike ended, the pilots union has called the company's management "intransigent" and is doubling down on calls for higher wages.

In many ways, Ms. Costantini is building from the ground up. Early on, when she asked employees to find ways to cut spending, a staffer replied, "I don't have a budget," she recalled. "There was no culture of cost. There was no culture of revenue," Ms. Costantini said.

Mrs. Kirchner's government nationalized Aerolí neas in 2008, claiming that its previous owner, Spain's Marsans Group, had run up $890 million in debt and mismanaged flights that often were canceled, and punctual only 50% of the time.

The nationalization was part of a broader increase in government control over Argentina's economy, which included the expropriation in 2012 of energy company YPF. Mr. Macri, then mayor of Buenos Aires, criticized those moves, but as a presidential candidate, he promised to keep the companies in government hands.

Though it could save the government money, "privatizing Aerolí neas would be like privatizing the national soccer team," Ms. Costantini said. "People feel like they own it."

Under Mrs. Kirchner, Aerolí neas doubled the number of flights and passengers flown. It improved punctuality, added 3,000 employees and burned through $5 billion in taxpayer subsidies, according to Guillermo Dietrich, Argentina's transportation minister. By one estimate, the government was spending more on Aerolí neas than Argentina's poorest province was allocating to public education.

Mr. Dietrich has described the previous management as "disastrous," claiming its former chief executive, Mariano Recalde, had no business plan.

"That's a lie as big as an Airbus A330," Mr. Recalde said in an interview, referring to the company's new aircraft. He almost tripled the fleet to 75 planes, he noted.

Ms. Costantini has slashed non-operating costs, boosted revenue, and says Aerolí neas could cut its losses to as low as $260 million in 2016. She expects the airline to be profitable within four years. Sales are up 10% this year and in July Aerolí neas flew a record one million passengers, up 13% on the year.

But with the Macri administration facing budget problems, it is unclear how much it will fund Aerolí neas.

Franco Rinaldi, author of a book about Aerolí neas, said Ms. Costantini has vastly improved the company, but added that she must take painful actions to truly overhaul it. The airline has 160 employees per plane, but can operate efficiently with closer to 100, he said.

"She's focused on reducing costs without making the hard and inevitable decision that you have to make," Mr. Rinaldi said. "If you don't reduce the workforce, it's going to be impossible to turn the company around."

(END) Dow Jones Newswires

September 20, 2016 10:25 ET (14:25 GMT)

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