12-Jul-2013 3:20 AM

Panama starts to attract airlines from outside the Americas. Air France will not be alone

Analysis

Rapid economic growth and the emergence of the largest hub for intra-Latin America travel have firmly put Panama on the global aviation map. But the market is only now starting to capture attention from airlines outside the Americas.

Air France has unveiled plans to launch service to Panama City in Nov-2013, becoming only the third widebody passenger operator in the market. More European carriers and potentially one of the three main Gulf carriers will almost certainly follow.

Panama City is an attractive and fast-growing hub for accessing other markets in Central America and portions of South America and the Caribbean. It is also a strong destination in its own right, with expansion of the Panama Canal and Panama City's emergence as a regional financial centre driving increasing demand for business travel.

Summary

Panama's rapid economic growth and emergence as a regional financial center have put it on the global aviation map.
Panama City is an attractive and fast-growing hub for accessing other markets in Central America, South America, and the Caribbean.
Passenger traffic at Panama's international airport, Tocumen, has been growing at a double-digit rate and is expected to continue growing in the coming years.
Panama City is currently the second largest international airport in Latin America, but it is barely served by intercontinental carriers.
Air France has announced plans to launch service to Panama City, becoming only the third widebody passenger operator in the market.
The success and rapid expansion of Air France-KLM in Panama could prompt other European carriers, such as Lufthansa, to enter the market.

Panama sees rapid growth - in the economy and at the airport

Panama is one of Latin America's smallest countries, with a population of less than 4 million. But it has one of the hottest economies in the region with GPD growth of almost 9% in 2012 and almost 11% in 2011. Growth of between 7% and 8% is expected for 2013. Latin America's two largest economies, Brazil and Mexico, are expected to grow by only about 3%.

Panama annual GPD growth: 2008 to 2014*

While the country is small there is growing inbound demand for both business and leisure travel. The outbound market is also expanding as Panama's middle class grows and discretionary incomes are on the rise.

Passenger traffic at Panama's only international airport, Tocumen, grew by 16% in 2011 and 15% in 2012. Continued annual double-digit growth is likely for the next several years. Tocumen will likely surpass the 8 million passenger mark in 2013 and should reach the 10 million passenger milestone by 2015.

Panama City Airport annual passenger traffic: 2008 to 2012

Unlike nearly every other major Latin American airport, Panama City has kept ahead of the growth curve by constantly investing in expansion. It stands to benefit as infrastructure constraints continue to increase at other hub airports in the region, such as Bogota and San Salvador.

Panama City is Latin America's second largest international airport

Panama City is currently only the 11th largest airport in Latin America based on current seat capacity. But in terms of international capacity it is currently the second largest, only slightly behind Sao Paulo Guarulhos, according to CAPA and Innovata data.

However, Panama City is barely served by intercontinental carriers. Less than 3% of international seat capacity at Panama City is to markets beyond the Americas, compared to over 30% for Guarulhos.

Latin America (including the Caribbean) accounts for 75% of international seat capacity at Panama City but only about 43% at Guarulhos. North America accounts for a similar portion at both airports.

Panama City capacity share (% of seats) by region: 8-Jul-2013 to 14-Jul-2013

Air France to join sister airline KLM in serving Panama

The Panamanian market is finally starting to capture the attention of more long-haul carriers. On 24-Jun-2013 Air France unveiled plans to start serving Panama from 25-Nov-2013. Air France will initially operate three weekly flights on the Paris-Panama City route using 777-200s configured with 35 business, 24 premium economy and 250 economy class seats.

Air France is confident the route will work as it has seen the success sister carrier KLM has had since launching services to Panama in Mar-2008. KLM also initially served the market with three weekly frequencies but has since steadily expanded its Panama City operation. It added a fourth and fifth weekly frequency in Dec-2008, just a few months after the launch, added a sixth weekly frequency in Oct-2010 and finally upgraded the service to daily in Oct-2012.

Air France will likely look to similarly increase capacity to Panama City over time. KLM meanwhile may also look to add more frequencies. The Panamanian government recently approved the expansion of its bilateral agreement with the Netherlands to allow a second daily flight from Dutch carriers.

Panama has a liberal air services policy as it recognises the value of the Tocumen hub to the country's economy and its importance in attracting multinational companies to establish regional headquarters in Panama City. Panama has emerged as a regional centre and has already attracted over 80 major multinational firms.

The fact the Panama-Netherlands bilateral had been capped at one daily flight was simply a reflection that it would have been unimaginable a few years ago that Panama could attract more than seven weekly frequencies from Holland or any other European market. Even the Panama-Spain market is currently only served with five weekly flights. Spain has traditionally been by far the largest market for all Spanish-speaking countries in the Latin American region given the cultural, historical and business ties.

KLM may not end up using the additional rights to further expand capacity in the Panama market. But as a result of the expanded bilateral the carrier should have the flexibility to respond with more capacity if market conditions remain favourable.

Air France-KLM expansion could prompt other European groups to launch Panama, including Lufthansa

Ultimately the ability of the Air France-KLM Group to continue expanding in the Panamanian market may depend on whether other European groups also start to respond to the growing demand. IAG subsidiary Iberia is currently the only other widebody passenger operator at Tocumen and currently serves the market with five weekly flights from Madrid.

Iberia reportedly has been considering increasing its Panama City service to daily. IAG could also look to supplement Iberia with a new flight from its British Airways subsidiary but this is unlikely as BA is more focused on expanding in Asia, leaving Madrid as the group's hub for Latin America. Air France-KLM, which will have 10 weekly flights to Panama by the end of 2013, will almost certainly remain the European leader in the Panamanian market.

Panama to Europe capacity by carrier (one-way seats per week): 19-Sep-2011 to 29-Dec-2013

Air France-KLM's success and rapid expansion in Panama should be a wake-up call for Lufthansa. A Frankfurt-Panama City service would be a logical new route for the German carrier given Panama's dominant carrier, Copa, is a Star Alliance member.

A Panama City service and partnership with Copa would give Lufthansa access to dozens of markets that it currently does not serve with its own aircraft. Lufthansa currently only serves six destinations in the Latin America/Caribbean region compared to 17 for Air France, 14 for KLM and 14 for Iberia, according to Innovata data. Lufthansa's smaller Latin America network means it is even more important to establish links to key Star hubs in the fast-growing region.

Lufthansa did launch services in 2010 to Bogota, which is the largest hub for Star member Avianca. But the Bogota hub is not as well connected to international destinations within Latin America as Panama City. Bogota is also congested, forcing Avianca to focus on building up other regional hubs, including San Salvador in El Salvador and Lima in Peru. Lima, which is also the main intra-Latin America hub for LAN, is served by Air France, KLM and Iberia but not Lufthansa.

Panama City is by far the largest airport when it comes to international capacity within Latin America. Panama City currently has about 220,000 international seats to other Latin American markets compared to about 140,000 for Lima and less than 120,000 for Bogota.

Top 10 Latin American hubs based on international capacity within Latin America: 8-Jul-2013 to 14-Jul-2013

Panama City is currently connected to 53 international destinations in Latin America (including the Caribbean), according to Innovata data. Bogota in comparison is connected to 21 international destinations in the region and Lima is connected to 26, according to Innovata data.

Copa works with Air France-KLM rather than European members of Star

In accepting Copa's application to join, Star allowed Copa to retain its codeshare with KLM. Star had no grounds for objecting to the continuation of its relationship with the Air France-KLM Group because there was no overlap with any of its existing members. At the time no Star member from Europe served Panama and that continues to be the case despite it now being over one year since Copa formally entered the alliance.

Copa's relationship with Air France-KLM is now being extended to Air France's new flights to Panama. This relationship dates back to when Copa was in SkyTeam. (Copa left SkyTeam in 2009 along with its closest partner and then shareholder Continental Airlines.)

Copa provides important connections to markets in Latin America that Air France-KLM does not serve with its own aircraft. In exchange, KLM and now Air France give Copa access to Europe as the carrier is a purely narrowbody operator.

Star has failed to fully leverage its Panama City hub

Given the strength of its hub it is surprising Copa has not had any success in attracting more Star carriers to Panama since it decided to join the alliance in 2010. Star has a dominating 92% share of capacity at Panama City but not a single flight outside the Americas. oneworld and SkyTeam have shares that are less than 4% and 3% respectively, but both have a presence in the Panama-Europe market.

Panama City capacity share (% of seats) by alliance: 8-Jul-2013 to 14-Jul-2013

Copa has an 86% share of capacity in the Panamanian market while two other Star carriers, Avianca and United, combined have another 6%. Avianca serves Panama City from its Bogota, San Salvador and San Jose (Costa Rica) hubs while United serves Panama City from Houston and Newark.

Panama City capacity share (% of seats) by carrier: 8-Jul-2013 to 14-Jul-2013

From oneworld, only American and Iberia serve Panama City. Somewhat surprisingly not a single passenger airline or affiliate of LATAM, which is by far the largest airline group in Latin America, currently serves Panama.

From SkyTeam, only KLM and Delta currently serve Panama City. Aeromexico dropped Panama in 2012 as it struggled to compete against Copa on the Mexico City-Panama City route.

SkyTeam is trying to bolster its position in Latin America with more flights into the region, including the new Air France service to Panama City. But it will have trouble matching Star and oneworld because neither of its two Latin American members, Aeromexico and Aerolineas Argentinas, have strong regional networks or geographically well positioned hubs. Leveraging Panama City and working with Copa works for now but if Lufthansa or another Star carrier moves in SkyTeam could be at a disadvantage.

Copa keen on having more Star partners, including ANA

It is just a matter of time before Star carriers from outside the Americas start to leverage Star's dominating position in Panama City. Panama's strong economy and Copa's strong hub should make it a no-brainer.

Copa would like to see more Star carriers serve Panama as it has no intensions of expanding into widebody aircraft. It has had huge success, including some of the consistently highest profit margins in the global airline industry, by sticking to an all-narrowbody model. Copa has exploited the central location of Panama, which is virtually the only country that is within narrowbody range of the entire Americas region (barring isolated destinations such as Alaska and Hawaii).

Copa has particularly tried to persuade Japan's All Nippon Airways (ANA) to use its new 787 fleet to launch flights from Tokyo Narita to Panama City. But ANA has informed Copa that it is not interested in serving Panama, partly because it does not believe Tokyo-Panama can be operated with its new 787s. (ANA's 777-300ERs may have the range but would likely prove to be too large for the Tokyo-Panama City market.)

Panama has growing economic ties with Asia. But at least for now it appears the market will continue to be served via Europe and the US.

Panama-Asia market offers good opportunities for European and potentially Gulf airlines

Travelling via the US instead of via Europe can be more circuitous for many Panama-Asia city pairs and is also less convenient due to US visa requirements. KLM has been able to leverage its Asian network, which includes 19 destinations, as it has expanded in Panama. KLM is now the only European carrier offering one-stop connections from Panama to Asia as Iberia does not serve Asia. Air France should be able to attract an even larger number of Panama-Asia passengers, including passengers now going via the US, as it has an even bigger operation in Asia.

The growth in the Panama-Asia market and the broader Latin America-Asia market could eventually help attract a fourth European carrier to the market. Lufthansa should be able to make a Panama City flight viable just with the Europe-Latin America market, leveraging the huge number of connections available at both Panama City and Frankfurt. But the additional possibility of attracting high yielding Latin America-Asia passengers should make the market even more attractive.

Growth in the Panama-Asia market could also eventually attract a Gulf carrier to Panama City. As it does not compete in the intercontinental market, Copa would likely be willing to work with Emirates, Etihad or Qatar Airways. A non-stop service to Dubai, Abu Dhabi or Doha would significantly reduce travel time from Panama City to destinations throughout the Middle East, Asia and Africa. By partnering with Copa, the Gulf carriers could also use Panama to serve several offline markets in Central America, the Caribbean and the northern part of South America.

Turkish Airlines would also be a possibility as Istanbul offers similar connections to the Gulf hubs. Turkish has the added advantage of being in Star. The carrier also has ambitions to expand in Latin America, starting with Istanbul-Havana-Mexico City and Istanbul-Caracas-Bogota services in 2014.

Panama poised to attract more long-haul services

Panama should be able to attract more connections outside the Americas. While Panama City does not offer Europe, the Middle East or Asia the same kind perfect central location as it does for the Americas, it can offer long-haul carriers more regional connections than any competing hub. Panama has also become a strong market in its own right with growth that is likely to eclipse just about any other market in the Americas.

Air France will not be the only carrier from outside the Americas to notice the huge potential of the Panamanian market. Others will follow, including carriers from Star.

Part 2

This is the first in a two-part series of reports on Panama. The second report, to be published later this month will look at Copa's continued growth and outlook.