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Hard to keep up with Latin American changes, next consolidation wave on the way

25-Nov-2010

While 2009 was a hot year for the Latin American market, 2010 has followed suit with more acquisitions, partnerships and mergers as airline holding companies and alliances jockey for position to become the 900-pound gorillas on the continent. It is unlikely the pace will stop any time soon. Watch for more consolidation along the Brazil-Colombia-Mexico axis.

Latin America has emerged as a shining star in the industry after a decade of crisis and change,” International Air Transport Association Director General Giovanni Bisignani told delegates at the Latin American and Caribbean Air Transport Association (ALTA) Leadership Forum in Panama City. “Ten years ago the region was a mess. Today it is the only region that has delivered a profit in 2009 (USD500 million) and in 2010 (USD1 billion). We expect profitability to extend to a third consecutive year with a USD600 million return in 2011. The turnaround is the result of hard work and a willingness to change. But aviation remains a tough and dynamic business. Even more change is needed. But the position of the Latin American industry going forward is much different. The successes over the last decade give the region a platform to be a force for global change.”

CAPA’s hottest airlines to watch in 2011: Latin America

Despite all the activity it is likely that this is only the latest, and second, in a three-round consolidation trend, according to Interflight Global Chair Oscar Garcia, who regularly briefs analysts on the changing Latin American air transport and aerospace marketplaces.

“Latin America is 10-15 years behind the US and Europe in terms of consolidation,” he told Centre for Aviation. “That’s what you are seeing today with Avianca-TACA and Lan-Tam which will lead up to the third round end game in five to 10 year’s time when we will be down to two to three big players. It is happening very slowly because the Latin American countries are still very fragmented in terms of economic integration. In fact, it is one of the most fragmented regions in the world. That is why it is so far behind and because of the political barriers, mainly slow bureaucracy and emerging countries’ usual corruption and antiquated trade agreements. It is getting better. It is going in the right direction but not as fast as the US and Europe did.”

He said one of the most interesting combinations, of course, is the evolving LAN-TAM merger. “They have a Northeast/Southwest axis and now have another line from Brazil creating a Northwest axis with Lan’s acquisition of Aires in Colombia,” said Garcia, adding Colombia was the only market not served by TAM. “The next possible consolidation axis will be Brazil-Colombia-Panama-Mexico with GOL, Copa and AeroMexico as potential merger candidates. If they merge that would be a powerful axis. Aeromexico and GOL need to look for such links because the Brazil-Chile axis is already taken as is the Avianca-TACA Brazil to Colombia to Central America. That leaves you with GOL, Copa and Aeromexico so this next round will be very interesting. A Copa and Aeromexico combination would be a very large player in the Central American region.”

That would create some interesting conundrums for the alliances with Gol aligned now with American/Iberia, Copa with Star and AeroMexico with SkyTeam.

Garcia, however, indicated that the LAN-TAM merger has seismic implications for commerce in the region. “The LAN-TAM merger is more important than just a merger,” he continued, explaining the difficulty airlines from Chile and Brazil have had in penetrating each other’s market. “They’ve been trying to do this for years and have been blocked. Their ability to gain that axis is really the writing on the wall for air commerce and trade consolidations to go full speed for the next five to 10 years. This merger is very strategically and politically important. This is a commercial, air transport and political breakthrough which lays the groundwork for other sectors including finance, telecommunications and infrastructure. You are going to see a lot of follow up deals between Brazil and Chile as a result.”

Mexican Lazarus

With the Mexican market the focus of so much attention, the moves to resurrect oneworld-member Mexicana with the recent government approval of PC Capital SAPI’s rescue plan could put it back in the air as early as mid-December now that unions and creditors have agreed to the USD155 million (MXN1.9 billion) bailout proposal. Mexicana’s failure left SkyTeam as the only alliance with a presence in the market via Aeromexico.

Garcia said it is more likely to be summer before Mexicana returns. It ceased operations in August. The plan, which gives PC Capital a 35% stake in the resurrected company, received a boost last week when the largest – Grupo Financiero Banorte SAB, holding USD65.4 million (MXN800 million) in debt – said it was encouraged by the plan and would consider converting the debt to capital, CEO Alejandro Valenzuela told Bloomberg.

The deal would resurrect Mexicana – but not its subsidiaries Click and Link – with 30 Airbus A320s compared with the 100 that once constituted its fleet. It will initially build up to serve 17 international markets in the US and Central America and seven domestic points. That is a significant downsizing from the 65 domestic and international destinations served before the bankruptcy when it carried 6.86 million passengers in 2009 with another 4.25 million carried by Click and Link.

Mexico’s other airlines have objected to direct government aid on the grounds is would give the ailing carrier an advantage. Instead, the government has pledged indirect support by providing credits for fuel, taxes and ATC charges. 

However, Mexicana only owned nine of the aircraft, leaving quite a gap since its former leased aircraft are already on duty elsewhere. Routes will concentrate on large domestic markets to the US which has forestalled back-filling by other Mexican carriers owing to Mexico’s IASA ranking of Category Two. However, the domestic markets have already been back-filled by AeroMexico and other LCCs.

The plan also calls for PC Capital to offer unions MXN975 million in cash. It would also arrange a seven-year MXN926 loan paying monthly interest rates to employees who would also receive an equity stake in exchange for the MXN2.85 billion owed them. Deputy Minister of Transportation Humberto Trevino, tasked with brokering a deal with creditors, told Bloomberg if unions accepted the deal, they would more than double their expected compensation than if the company were to be liquidated.

Pilots opted for a 40% reduction in salaries and benefits as well as productivity gains that increase flying hours. Some 280 of the 1167 mainline Mexicana pilots will be hired in a commitment made by PC capital. In addition, 375 flight attendants are scheduled to be hired.

Garcia said it will emerge as a low-cost carrier and could be a good target for consolidation of the low-cost-carrier segment in the country which also has Interjet and Volaris. “Once Aeromexico goes with someone, then they will have to do something together,” he said. “Aeromexico could link to the South with Copa and maybe GOL. They need to something before LAN-TAM-Avianca do it themselves. LAN is looking at its Central American footprint and is creeping up slowly to Colombia and peering up to Panama and Central America. That would be a powerful axis since it constitutes roughly 25-30% of the Latin market. This is the time to do it because the consolidation writing is on the wall and once LAN-TAM deal gets done, I think they will do just that.”

During its third quarter conference call TAM reported a continuing strong demand for Brazilians going abroad

Regional carrier lift

Regionals, Garcia said, will not play a huge part in the overall Latin American industry but they will be filling in niches such as Synergy Group’s Ocean Air , now Avianca Brasil. “I don’t see any significant outgrowth there,” said Garcia, pointing to the demise of Click and Link. “They will either be absorbed or merged like Southwest did with Morris Air in the US low-cost arena. As they grow they’ll be picked up in the next three-to-five years.”

North American regional carriers are showing an interest in their South American counterparts with SkyWest and Jazz investing in Brazil’s Trip and Uruguay’s Pluna, respectively. But, with the network gaps that remain in an under-developed, intra-regional system throughout the continent, there is the potential for regionals to play a larger role in the future if the continent mimics North America.

Pluna, which has 10 CRJ 900s, is aiming to import the capacity purchase agreement model and is now in talks with several South American airlines about such deals using 50-seat CRJs, according to President Matias Campiani, who said they could be used to open up new, thin destinations as well as increase frequencies in current markets. The move is interesting because it suggests that there is life after all in the 50 seats arena US mainline carriers are anxious to spin out of their fleets. Pluna, privatised in 2007, now connects Montevideo to destinations in Argentina, Brazil, Chile and Paraguay but Campiani suggested there is great potential in growing the hub with CPAs.

Interestingly, GOL signed an interline agreement with Brazilian regional NOAR Linhas Aéreas to expand its penetration of its route network. As part of the deal, GOL began serving Caruaru, affording direct connections among its destinations in Brazil’s north-east.

Azul may go international

Then Garcia said something really interesting. “No other players are really relevant except for Azul and that remains a big unknown. Its fleet composition with Embraer’s EJets doesn’t really fit with anyone. It is inevitable they will expand regionally so it may look at a North American expansion. If you look at the Brazilian market, 80% of the traffic is carried by US carriers and the government is intent on making that 50-50 in the long-term future. It wants another international carrier besides Tam and Azul would certainly be a good candidate. Given David Neelman’s US market know how, it is a logical move, not very different from Tony Fernandes’ strategy with Air Asia’s long-haul arm Air Asia X.”

Garcia said infrastructure remains a systemic problem in the region, although during third quarter conference calls, Lan and Gol noted how they were benefiting from improving infrastructure after analysts expressed concern. Tam is also continuing to develop Rio as an international hub.

Meanwhile, Copa is expecting huge benefits from the expansion of the Hub of the Americas with the 60% capacity expansion at the terminal set to open next May, said to CEO Pedro Heilbron during the third quarter conference call. He is also anticipating a good traffic bounce from the expansion of the Panama Canal as well as a new light rail system and major highway. He indicated the airport is already planning its next expansion phase and added that 7000 hotel rooms were being built.

“We are very lucky to be based in Panama,” he said. “We’ve had all these major infrastructure projects and are planning more. Panama is strengthening itself as a major regional tourist and business hub.”

But the International Air Transport Association called on Latin governments to address infrastructure issues, along with safety and rising taxation during the recent ALTA Leadership Forum in Panama  City.

“Brazil is Latin America’s fastest growing aviation market but its infrastructure capability is not keeping pace with the growth in demand,” said Bisignani, who said IATA is committing additional resources to Brazil.  “Of the top 20 airports in Brazil 13 don’t have terminals that can meet today’s demand. This includes Sao Paolo Guarulhos, the region’s largest hub, which will play a gateway role in 2014 for the FIFA World Cup and in 2016 for the Summer Olympics. I don’t see much progress and the clock is ticking. To avert a national embarrassment we must get all the stakeholders to the table and finalize a plan.”

Both Heilbron and GOL CEO Constantino de Oliveira Júnior indicated they were frequently asked about infrastructure. Gol offered up a slide during its 3Q call explaining the different projects in Brazil.

Garcia, however, sees a barrier. “The problem is corruption and direct foreign investment confidence in the region’s capital markets,” he said. “Developments are slow but not as critical as India. The infrastructure is getting better but is only a seven average, or, in some cases, like Panama, an eight on a scale of 10. The question is how they will align infrastructure with air transport growth. But this is not a huge factor in the region because the development is going well enough with the 3-5% CAGR’s. The bigger issues are political stability, free commerce, transparency on taxes and fees, bilateral agreements and open skies.”

Latin America seeking to boost infrastructure as traffic bounces back

The US has open skies agreements with most Latin American countries although several big economies have yet to be done including Argentina, Brazil, Ecuador, Bolivia and Venezuela. It also does not have agreements with Guyana, French Guyana and Surinam.

Corruption is also a limiting factor in the Caribbean, said Garcia. “Now that Air Jamaica has become Caribbean Airlines and LAN has stabilized Dominicana with two 767s, once the dust settles you’ll see the Caribbean become something significant within the next three years. You have 15-20 island countries that only need about 30 to 40 narrowbodies and five to 10 widebodies which are better served by a Pan Caribbean organization and cost base. We’ve been trying to do that for decades.”

Copa in good position

Garcia noted that Copa enjoys a nice niche with its Hub of the Americas in Panama, which the airline is pushing as a no-visa-required transit point between Latin America and the Asian and European markets.

Copa's hub touted as ideal link between economic powerhouses: Asia and LatAm

While observers view its visa requirement as putting the US at a competitive disadvantage, the point has been made that the travelers who drive the majority of revenues between the three regions have already solved this with 10-year visas and face few problems crossing borders. It is a burden for occasional travelers but they are not market drivers and would likely fly low-fare carriers with less than daily service between the regions. Even so, it is something the US should look at, given the changes in the industry.

Garcia indicated that Copa was at the cusp of a decision on how it will grow but said expanding to long-haul markets would get them in trouble.

Clearly, Copa agrees. Vice President Commercial and Planning Joe Mohan indicated it wants no part of doing its own wide-body, long-haul service. Instead, it plans to be the Star Alliance connecting carrier offering a maximum of four-hour flights to the rest of Latin America. Mohan said he’d like to see the Hub of the Americas become a transit point between Latin America, Asia and Europe using global carriers for the long-haul and Copa for the service into Central and South America.

Garcia indicated he did not think the double-digit expansion rates at Latin American carriers were too worrying. “The reason is they are still taking people off the buses and into the airplane,” he said. “Remember, Gol’s founders come from the bus industry so they are just taking traffic away from another channel. However, Copa strategy needs monitoring with 40 new routes. I have no concern that Brazilian carriers are growing too fast.”

However, the third quarter conference calls revealed GOL, TAM, LAN and Copa are all keeping their wary eyes on capacity. GOL, for instance sees a lot of room to increase block hours and load factors before pouring on a lot of new capacity, according to statements made during its third quarter conference call.

Alliances

While it may look as if Star has completely locked up the Latin market, Garcia says much remains to be worked out as the industry changes. Of course, the biggest question is whether LAN and TAM, once merged, will retain their current allegiances with oneworld and Star, respectively, or which one they will choose. Garcia thinks it will be oneworld and during its third quarter conference call, LAN management reiterated its intention to settle on one alliance.

“Everything LAN is today is, in large measure, thanks to oneworld,” said Garcia. “I really doubt they would go to Star. TAM is in Star, but only since May, but that is nothing compared to LAN’s founding membership in oneworld. Should it stay with oneworld, then oneworld will be the dominant alliance in Latin America at least from the north-south perspective. Europe-South America is currently dominated by Star and SkyTeam but that will be balanced by the American-BA-Iberia joint business which has a 30% share of that traffic.”

Alliance Origins and Destinations: From Europe

SkyTeam oneworld Star
Amsterdam London Frankfurt
Madrid Madrid Funchal
Moscow   Istanbul
Paris   Lisbon
Rome   London
    Madrid
    Milan
    Munich
    Paris
    Porto
    Zurich
South American Destinations
Bogota Bogota Belo Horizonte
Buenos Aires Buenos Aires Bogota
Caracas Caracas Brasilia
Cartago Cordoba Buenos Aires
Cayenne Guayaquil Caracas
Lima Lima Fortaleza
Paramaribo Montevideo Natal
Rio De Janeiro Quito Recife
Salvador Rio De Janeiro Rio De Janeiro
Santiago Santiago Salvador
Sao Paulo Sao Paulo Sao Paulo

Airline alliances in Latin America provoking major changes. How TAM helps Star

Copa and Avianca have now chosen Star although official induction won’t come for another 18 months which is expected to turn two fierce competitors in the Colombian market, into partners. Copa choosing Star was not a surprise given the fact Continental had a stakeholding in the carrier until it sold it off. As a result, Copa is already in Continental’s OnePass loyalty programme and shares the same IT system with Continental.

It also changes the dynamics at Miami, an overwhelming oneworld hub and one of American’s important corner-stone markets. The addition of Copa and Avianca/-TACA Star becomes the dominant Central American alliance, increasing the alliances O&D profile and Miami. Even so, its feed there to other Star members such as US Airways is minimal.

Latin American airline consolidation intensifies

Should the LATAM initiative be approved by all the necessary regulators, the folks in Santiago will effectively pull most of the major aviation strings across the region, creating a group with unprecedented dominance across an entire continent. It could also drive GOL into a closer association with the carriers in a competing alliance. The net result could be either a template or a warning for the rest of the world as carriers seek to consolidate.

TACA-Avianca and the Latin American airline market

Copa, through subsidiary Copa Colombia, the third largest carrier in the country, hopes to begin codesharing with Avianca-TACA, the number one carrier in the market. They may need the strength given Lan’s acquisition of the second largest carrier, Colombian low-cost new entrant Aires which stimulated a 22% increase in the domestic market in 2009 and another 36 year to date 2010. Copa hopes to convince Star to make Hub of the Americas its main connecting hub and expects to launch codeshare and frequent flier partnerships with Star members in the first quarter.

The three alliances already jockey for position at Panama with Star represented by United flights from Houston and Newark it received when it merged with Continental. In addition, Copa already serves Washington Dulles, Los Angeles, Miami, New York and Orlando.

Panama City already enjoys oneworld and SkyTeam connections via Iberia and KLM, respectively. Copa especially hopes to attract Lufthansa, despite its new service to Bogota. The Panamanian airline is also eyeing Star’s All Nippon Airways which does not now serve Latin America but could quickly do so with a link to Copa.

American also has a growing relationship with GOL, with which it has both a codeshare and frequent flyer programme exchanges. GOL also has a codeshare with oneworld’s Iberia and SkyTeam’s AeroMexico and has applied for codeshare and frequent flyer programme exchanges with Delta.

LAN, meanwhile, has LAN Peru Ecuador and Argentina and should TAM join them in oneworld, Star can turn to Copa and Avianca, with their subsidiaries, to fill in the South American gaps. There is no question, however, TAM will be a loss to Star which had a huge Latin American “white spot” on its map before attracting the Brazilian carrier. But, its increasing footprint in Central America, South America’s North and West as well as Caribbean will stand it in good stead if it helps to expand its Copa/Avianca partners.

SkyTeam not left out

Garcia rejected suggestions that SkyTeam is being left out in the cold in Latin America, saying it is far from weak with Aerolineas Argentinas and AeroMexico. “It is now a force to watch,” he concluded. “They have 3% of the Mexican market and over 5% of the North, Central and South American markets. Should Aeromexico look South for a combination with Copa or GOL, that would be a strong axis for SkyTeam. It would then have a powerful axis from Mexico to Brazil to Argentina and, if that happens, you have much more balanced shares with the three big alliances.”

For its part, GOL was coy during its conference call, saying it is watching the market carefully and has advisors to “help it reflect on opportunities”. The airline pointed to its moves in recent years as examples of how it is reacting to alliance changes. It reiterated its ability to stand alone and partnerships did not necessarily mean it would have to join what it termed the “cross-ownership movement”. However, it also said it needs to be open in order to be protective of its stakeholders. It added that the low-cost model must be preserved in any event.

Market shares reveal part of the picture; the rest being shown by the origins and destinations from which the alliance partners operate. The rather large chart displays the cities in North America and Europe from which the partners operate to South American destinations.

Alliance Origins and Destinations:  From North America

SkyTeam oneworld Star
Atlanta Dallas/Fort Worth Charlotte
Detroit Los Angeles Chicago
Los Angeles Miami Houston
New York New York Miami
  San Francisco New York
    Orlando
    Toronto
    Washington
South American Destinations
Bogota Belo Horizonte Bogota
Brasilia Bogota Buenos Aires
Buenos Aires Brasilia Caracas
Caracas Buenos Aires Lima
Georgetown Cali Manaus
Lima Caracas Quito
Manaus Guayaquil Rio De Janeiro
Quito La Paz Santiago
Rio De Janeiro Lima Sao Paulo
Santiago Maracaibo  
Sao Paulo Medellin  
  Montevideo  
  Quito  
  Rio De Janeiro  
  Salvador  
  Santiago  
  Sao Paulo  

From North America, oneworld’s strong share comes not from having a great many more origin and destination points, but rather from the multiple hub services provided by the LAN/AA cooperation. Santiago is served from New York, Dallas and Miami with lots of frequencies. Between Miami and Santiago alone, oneworld offers 22 frequencies each week while Delta offers only a single daily flight from Atlanta.

And while the SkyTeam list of destinations looks impressive, almost all flights, as well as those to the Caribbean and Central America, are from Atlanta. It is an extraordinarily centralized flight pattern.

Meanwhile, oneworld has bench strength across a number of hubs, and offers, in many cases, an assortment of flights from New York, Dallas and of course, its powerhouse, Miami.

Star, owing to its larger membership, offers a variety of gateways, but the real strength is provided by Continental from Newark and Houston. United and US Airways are only marginal players in South America , though US has a strong Caribbean presence. The addition of TAM brings a significant boost to the alliance’s position and provides extensive feed on both ends.

Overall, oneworld is the North American leader and likely to remain so for the near term.

Stay tuned

About the only thing one can really conclude about the Latin American marketplace is that it will keep changing. Watch this space.

Although Star dominates the Europe-South America market and oneworld has the edge to North America, there are still significant airline partners yet to be wooed by the alliance groupings. Avianca/TACA is certainly an important player. (See related report: Can Avianca set the Synergies flowing?).  But Copa, while still on the sidelines, will most likely eventually follow its mentor, Continental, into the Star fold, further entrenching that dominance.

New airlines will almost certainly proliferate over coming years; already the low cost contingent is growing and expanding its reach, with both JetBlue and Spirit  already offering services to Central and South America. Given a large population with limited resources, the low cost model likely has great appeal in the market. Consequently the battle for dominance has many more likely engagements. Low-cost airlines have not figured prominently in global alliances . That could be another feature that the always interesting Latin American market introduces, as oneworld and SkyTeam seek to redress the imbalance.


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