20-Jun-2012 4:50 PM

American Airlines and TAM continue to expand US-Brazil as other markets show signs of weakness

Analysis

American Airlines and Brazilian carrier TAM are taking full advantage of a phased-in open skies agreement between the US and Brazil to significantly expand into new and existing markets between the two countries. US expansion into Latin America is generally a safer investment at the moment as Europe's economy remains tenuous, which is driving a slowdown in international traffic to/from Europe. While Brazil's economy is showing some signs of slowing, the market is still performing far better than Europe and launching new service and strengthening existing routes between the US and Brazil is key for American and TAM as they work to be the airlines of choice for the upcoming surge in passenger traffic ushered in by the 2014 FIFA World Cup followed and by the 2016 Summer Olympics.

Europe's economic uncertainty and an attempt to better manage seasonal capacity to maximise profitability are forces behind the recent cuts by US carriers to their European networks.

For May-2012, traffic in American's trans-Atlantic markets fell 10% on a 12% capacity decrease while traffic and capacity in the carrier's Latin American markets each increased 3% for the month. During 1Q2012 unit revenues in American's Latin American markets also grew 11% year-over-year.

American makes push into Brazil to preserve its dominance in the country

American on 14-Jun-2012 launched direct flights from its Miami hub to Manaus, which is the capital of the Brazilian state of Amazonas and is the primary departure point for trips to the Amazon. At the same time the carrier increased frequencies from Miami to Belo Horizonte and Brasilia from three to five times per week to daily and increased its weekly frequencies from Dallas to Sao Paulo from seven to 12. (TAM is now planning to also increase capacity from Miami to Belo Horizonte and Brasilia to daily from a current three and four weekly frequencies.)

American now accounts for about 36% of seats between the US and Brazil, with TAM accounting for about a 29% share. It is no surprise that American wants to pull further ahead of its US legacy rivals in Latin America and its largest market Brazil as both United and Delta have stated on numerous occasions the importance of Latin America in their networks going forward. American's capacity share to Brazil is currently 21 ppts higher than the 15% share held by Delta and 20 ppts more United's 16% share.

US to Brazil capacity by carrier (seats per week, one way): 19-Sep-2011 to 09-Dec-2012

American is now planning a second push into Brazil beginning in Oct-2012 through additional frequencies that allow the launch of a second daily JFK-Sao Paulo flight and a second daily flight between Miami and Rio de Janeiro. It also plans to convert its daily Miami-Recife-Salvador route to five weekly non-stop flights to each destination. The carrier plans to introduce the bolstered US-Brazil schedule between Oct-2012 and Dec-2012.

American also plans to increase capacity on its Dallas-Sao Paulo route by starting to use Boeing 777-300ER on some frequencies starting on 13-Dec-2012. Dallas-Sao Paulo will be the first route to be operated with American's new fleet of 777-300ERs, which will be the largest aircraft in the carrier's fleet, further illustrating the importance of the Brazil market in American's post-bankruptcy strategy.

American CEO Thomas Horton dedicated his monthly column in the June edition of the American Way in-flight magazine to the carrier's Brazil expansion, citing the US-Brazil Open Skies agreement that allowed American to capitalise on its expansion into Brazil. The countries brokered the pact in 2010, and the agreement allows for increases in flights from Oct-2011 to Oct-2014, with full implementation scheduled for Oct-2015.

Mr Horton stressed American is "working very hard to extend our lead in this very important market [Brazil]", noting with the Jun-2011 changes American will offer nearly 90 weekly flights between the US and Brazil. "By far the most in the industry," he remarked.

Competition intensifies between American and TAM

American's two-phase expansion in Brazil during 2012 is also creating more competition for the country's largest carrier TAM on some of its entrenched US markets. Prior to American's launch TAM had a monopoly on the the Miami-Manaus route. American has added about 1100 weekly one-way seats into the market through the operation of 737-800s, giving it a 44% capacity share on the route versus a 56% capacity share held by TAM.

American now dominates in both the Miami-Belo Horizonte and Miami-Brasilia markets, holding a 72% and 62% seat share, respectively. But this will change after TAM upgrades services on both routes to daily, giving both carriers roughly equal capacity in the two markets.

Miami to Manaus/Belo Horizonte/Brasilia capacity by carrier (seats per week, one way): Jun-2012

Destination	Weekly seats	Seat share
Manaus
American	1120	44%
TAM	1435	56%
Belo Horizonte
American	1575	72%
TAM	615	28%
Brasilia
American	1323	62%
TAM	820	38%

American will also become the first carrier operating non-stop flights from Miami to Recife, which is one of Brazil's largest metropolitan areas and is one of the host cities in the 2014 FIFA World Cup. American is getting a foothold on US-Brazil traffic for the event with its direct flights and is taking advantage of an upgrade to Recife's terminal to handle the influx of passengers.

Salvador da Bahia is Brazil's third largest city, and is becoming an increasingly popular tourist destination as well as serving as an important commercial and industrial centre for the country. For both Recife and Salvador, there is enough current and future demand from Miami to warrant direct flights in the markets by American, who will continue to use 182-seat 757s that it currently uses on the Miami-Salvador-Recife routing. Like Miami-Recife, TAM now only offers one-stop service from Miami to Salvador, which will make American's direct flights to both Recife and Salvador more attractive to the carrier's large passenger base in Miami that accounts for a significant portion of its traffic to Latin America.

Currently TAM offers a considerably higher amount of capacity in the JFK-Sao Paulo market compared with American and Delta Air Lines. American's second daily flight on the pairing is scheduled to debut in Oct-2012 and is likely a tactic to expand its scope in the market compared to rival Delta than to intensify competition with TAM.

TAM could become American's new partner in Brazil

While American and TAM are now competitors and members of different global alliances, TAM will likely join American in oneworld over the next 12 to 24 months. That would result in the two largest carriers in the Brazil-US market being partners in time for the FIFA World Cup.

TAM is prohibited from staying in Star Alliance because a condition of Chile's approval of the merger of TAM and LAN is that LATAM cannot be in the same alliance as Avianca-TACA within 24 months of the merger being completed (the merger is expected to be completed later this month). With Avianca-TACA about to join Star, TAM will need to join LAN in oneworld or pursue the less likely option of being non-aligned. American would likely welcome TAM into oneworld as it needs to find a new partner to feed its fast-growing Brazilian routes.

While American now operates to several Brazilian cities with its own aircraft, Brazil is a huge country with dozens of fast-growing smaller cities which American now accesses via a codeshare with Brazilian LCC Gol. But American and Gol are expected to end their codeshare following Delta's acquisition of a minority stake in Gol. Delta and American both now codeshare with Gol but the Delta-Gol partnership is set to become exclusive as part of Delta's closer ties with Gol, leaving American without a local partner in the key Brazilian market. Delta and SkyTeam are also trying to persuade Gol to join SkyTeam but even if these efforts are not successful, Gol will not be able to continue working with American.

The recent alliance movements in Latin America firmly puts Delta and Gol, which is also now preparing to launch services to Miami, in one camp in the Brazil-US market and American and TAM in another. American's increased schedule between New York and Sao Paulo is a way to help sustain its dominance between the US and Brazil as Delta works to improve its substantially weaker presence in Brazil and Latin America.

New York John F Kennedy to Sao Paulo Guarulhos capacity by carrier (seats per week, one way): 19-Sep-2011 to 09-Dec-2012

American's second daily flight from Miami to Rio will also ensure its leading position in the Miami-Rio market and offer improved schedules for the route. The carrier plans to introduce the second daily flight in Dec-2012 just as Brazil's high travel season begins.

Miami to Rio De Janeiro Galeão capacity by carrier (seats per week, one way): 19-Sep-2011 to 09-Dec-2012

While American and TAM are currently the only carriers in the Miami-Rio market, Gol may look to enter with a one-stop product as part of the second phase of its US expansion. Gol is expected to launch Miami services later this year and has applied to initially operate Miami to Sao Paulo via Caracas. Delta is expected to work closely with Gol in supporting the new route.

TAM plans US expansion

While TAM is now planning to reduce domestic capacity by 2% in 2012, it expects international capacity to be up by 1% to 3% year-over-year. The international expansion is being driven by growth in its US markets. As this expansion is being implemented late in the year, the impact on full year international capacity for 2012 is relatively small. A bigger year-over-year uptick in TAM international capacity is likely in 2013.

See article: TAM plans US expansion in 2012 with B777-300ERS while Brazil domestic growth slows

TAM now plans to implement a significant capacity increase on Sao Paulo-Miami from 12-Nov-2012, when both of its daily flights on the route are upgraded from 223-seat A330-200s to 362-seat 777-300ERs. TAM's 777s have roughly 63% more seats than its A330s, and the 777s particularly boost TAM's premium positioning in this important business market because its 777s have 32 more business class seats than its A330s. Upgauging in the Miami-Sao Paulo market is logical to both cater to the premium passengers in the market and maximise slots at Guarulhos.

Introducing the 777-300ERs in the US market is a significant step for TAM as it currently only deploys smaller A330s and 767-300ERs on its US routes while 777s are deployed to Europe. TAM told CAPA late last year that traffic to Europe was weakening while US load factors remained robust, prompting the carrier to decide to allocate at least some of its additional 777-300ERs to the US market as they are delivered. TAM is adding four 777-300ERs to its fleet during 2012.

TAM fleet plan for 2012 to 2015 as of 1Q2012

North America now accounts for about 30% of TAM's international seat capacity, according to data from Innovata. Data from Brazil's ANAC show for Apr-2012 TAM's load factor on international flights increased from 83% to 84% year-over-year. TAM's New York, Miami and Orlando markets from Sao Paulo are three of its largest international markets in terms of weekly seat deployment.

TAM Airlines international capacity by region (% of seats): 18-Jun-2012 to 24-Jun-2012

TAM to launch Rio-Orlando service in October

TAM is also planning to launch on 29-Oct-2012 a new daily flight from Rio de Janeiro to Orlando, according to GDS filings. This new flight, pending government approvals and slot allocations at Rio, will supplement TAM's existing flights from Sao Paulo to Orlando.

TAM has been very successful in Orlando since launch service on the Sao Paulo-Orlando route three years ago. In 2011 TAM added a second daily A330-operated flight on the pairing and now plans to introduce the new flight from Rio, building on its status as the only carrier operating non-stop flights from the high-demand Orlando market to Brazil.

While Orlando is largely a leisure destination, TAM likely garners a fare share of business travellers as Orlando is also a large convention market and the biotech industry is a growing component of the region's economy. The Rio-Orlando market is likely to draw a significant number of leisure travellers as Brazil's middle class continues to build its base of disposal income. Orlando-Rio is also likely to be a popular route during the Brazilian carnival season in Feb-2013.

The Rio-Orlando service is part of TAM seeking 15 additional US-Brazil frequencies that include increasing weekly frequencies from JFK to Rio from six to seven, an increase of four to seven weekly frequencies between Miami and Brasilia and a rise in its frequencies from three to seven between Miami and Belo Horizonte. These capacity increases are made possible as A330s are freed up by the introduction of 777-300ERs on both Miami-Sao Paulo flights.

TAM also plans to increase capacity from Manaus to Miami by replacing 205-seat 767-300ERs with its 223-seat A330s, which will increase the overall supply in the Miami-Manaus market now that American has launched direct flights on the route. Miami-Belo Horizonte will also see a big uptick in total capacity once TAM increases its frequencies to offer daily flights alongside American.

Once TAM adds the planned additional flights it will greatly enhance its offering between Florida and Brazil with daily flights from Miami to Rio, Manaus, Brasilia and Belo Horizonte and two daily services from Miami to Sao Paulo using the largest aircraft in its fleet, the 777-300ER. Meanwhile its new daily Rio-Orlando flight will join the existing double-daily service from Sao Paulo to Orlando. As a result, TAM will have nine daily flights between Florida and Brazil, up from seven currently, with total capacity increasing at an even faster clip as a result of the introduction of 777-300ERs on the core Miami-Sao Paulo route.

The expansion of both American and TAM in the US-Brazil market is against the backdrop TAM's required exit from the Star Alliance and likely forthcoming decision to join its new sister carrier LAN in oneworld. The result would be an impressive position for oneworld in the Florida-Brazil and broader US-Brazil market.

American plans Asuncion flights as it pledges to more Brazilian growth

At the same time American is planning expansion of service to Brazil the carrier is launching four weekly flights from its Miami gateway to Asuncion, Paraguay with 757s on 15-Nov-2012, a route the airline dropped in 2006. It will be the only direct service from the US to Paraguay, whose GDP growth is expected to decline 1.5% in 2012 before growing 8.5% in 2013. In 2010 and 2011 Paraguay's GDP grew 15% and 3.8%, respectively. Paraguay is a small country with a economy that is largely driven by the agricultural industry, so the bulk of the demand on the route is likely to originate in the US.

The flights could create some incremental connecting traffic for American although the route is largely O&D. American could potentially partner in Paraguay with TAM's Paraguayan subsidiary, especially if TAM and TAM Paraguay end up in oneworld. TAM Paraguay currently operates A320s on domestic routes which could help feed American's new Miami-Asuncion service. TAM Paraguay also operates some international flights from its Asuncion hub to Argentina, Brazil and Chile, including to Buenos Aires downtown airport Aeroparque - which is popular with business travellers and only open to domestic and short-haul international flights.

Paraguay top 10 system arrivals by city based on capacity (seats): 18-Jun-2012 to 24-Jun-2012

Local Paraguayan press reports indicate officials have been courting American for roughly a year to return to Paraguay, and the Government reportedly offered the carrier breaks in air navigation and ground handling charges.

American's push into Brazil, meanwhile, appears to be far from complete. The carrier is reportedly planning service from Miami to two more Brazilian destinations, Porto Alegre and Curitiba, to join its already-revealed Brazil expansion in 2012. Mr Horton proclaims as much as American has grown its Brazilian presence in recent years, "we have really just scratched the surface of what we can and intend to do".