TRIP Linhas Aereas

LATAM Airlines Group continues to battle pressure in long-haul and Brazilian domestic markets

Weakness in long-haul markets from Brazil continued to pressure LATAM Airlines Group during 1Q2013 as competitive capacity increases triggered depressed loads and unit revenues in its international network. But LATAM’s efforts to restore strength in the Brazilian domestic market and the relative strength in the group’s Spanish speaking companies should help to offset some of the continuing pressure in LATAM’s international network.

The company’s attempts to bolster international service during the last year to offset some of the continuing weakness in the Brazilian domestic market have faltered somewhat due to competitive capacity increases by American and United in the US-Brazil market, and LATAM’s own expansion of supply in the market. The company’s overall capacity increase in its international markets during 1Q2013 was 12.3%.

Gol shows some signs of financial improvement despite posting a 1Q2013 loss

Brazil’s second largest carrier Gol recorded mixed fortunes during 1Q2013 as its overall losses widened year-over-year but yields and unit revenues improved at what appears to be at the expense of load factor. After recording annual losses for the last two years Gol is hoping an aggressive capacity reduction in the Brazilian domestic market place and a significant reduction in its workforce will help the carrier slowly improve its fortunes.

But Gol faces challenges in achieving its turnaround as company management believes it is uncertain that Brazil will record 2.5% GDP growth in 2013 while inflation is rising. The carrier feels positive about its position heading into the slow season in South America, but the timing of a full recovery for the carrier seems far from uncertain.

Gol pledges a financial turnaround as it records a second consecutive annual loss, of USD745 million

Brazil’s second largest carrier Gol was unable to turn its fortunes positive in 2012 and actually widened its loss for the year. Despite its attempts to combat the cooling Brazilian domestic market through marked capacity cuts and turning some of its attention to international services, Gol recorded a BRL447 million (USD222 million) loss for 4Q2012 and a BRL1.5 billion (USD745 million) negative result for the full year.

Gol believes the changes it has made with respect to its domestic supply and various cost-containment schemes should produce a positive operating result for 1Q2013. But the carrier made similar pronouncements during 2012 as it recorded four quarters of unprofitability, so the pressure is mounting on management to put some grit behind a pledged turnaround.

Unlike its major rival TAM, which is now part of the powerful LATAM Airlines Group, Gol does not have the benefit of large network to help it diversify from areas of weakness to more robust regions. Both Gol and TAM during 2012 had to combat softening demand that resulted from Brazil’s slowing economy. During 2012 GDP growth in Brazil was revised down to 2% from 4%, and during 2013 Gol is projecting growth of 2.5% to a maximum of 3%. This compares to GDP growth of approximately 7.5% growth in Brazil during 2010.

Brazil domestic growth slows in 2012 as Azul-TRIP continues to take market share from Gol

Domestic RPK growth in Brazil slowed to 6.8% in 2012, after growth of 15.9% in 2011 and 23.5% in 2010, and will likely remain in the single digits in 2013 as the country’s two major carriers continue to reduce capacity in response to challenging market conditions. But Brazil’s two other main domestic players, the new Azul-TRIP group and Avianca Brazil, will continue to expand and take market share away from the leading TAM and Gol groups.

Azul-TRIP and Avianca Brazil have each seen market share gains of between 2 and 3ppt over the last year. Their gains have come at the expense of Gol, which has been cutting capacity and struggling financially after acquiring smaller low-cost carrier Webjet. Gol saw its share of the domestic market slip by about 4ppt in 2012 while TAM has been able to keep its share relatively stable despite reducing capacity by lifting its load factors.

TAM to slash domestic capacity in 2013 in an attempt to help rationalise the Brazilian market

Brazil’s largest carrier TAM is continuing attempts to address excess capacity in the Brazilian domestic market by declaring plans to cut seat capacity on routes within Brazil by 7% during 2013 after refining capacity guidance downwards throughout 2012. TAM executives conclude that Brazil’s sluggish economic growth coupled with over-supply continue to make the operating environment within Brazil challenging.

TAM’s largest rival Gol has also been reining in supply throughout 2012 by cutting 130 unprofitable flights from the combined Gol-Webjet network. Gol is in the midst of merging with its smaller domestic rival after acquiring Webjet in late 2011.

TAM has an advantage of leveraging the larger network of the now-combined LATAM to redeploy assets from the Brazilian domestic market onto more profitable routes within South America. This is not an option readily available to Gol, which is primarily a domestic carrier and does not have subsidaries or affiliates in other Latin American markets. But even as Brazil’s two largest carriers have cut domestic supply and ceded market share, the country’s smaller carriers have continued their explosive growth, which has counteracted some of TAM and Gol’s efforts to neutralise the marketplace.

Gol attempts to improve its fortunes in 2H2012 as market conditions continue to weaken

Efforts by Brazilian carrier Gol to convince the industry at large that its weak financial condition could turn a corner during 2H2012 so far have drawn little success. After the carrier recorded a 2Q2012 loss of BRL715 million (USD354 million) ratings firm Standard and Poors (S&P) opted to downgrade the carrier’s long-term corporate credit rating, concluding the company’s business risk profile as weak and highly leveraged. While the carrier’s Aug-2012 performance showed slight promise with a 1% rise in yields, pricing traction in the Brazilian domestic market remains weak, which will continue to pressure Gol’s results well into 2013.

Unlike its Brazilian rival TAM, which has a more diversified network with a larger number of international flights (and now has more network leverage through its merger with LAN), Gol’s focus until the last few months has been solely on the Brazilian domestic market. Yields in Brazil began weakening in 2011, and the country’s macroeconomic conditions have continued to diminish throughout 2012 as Brazilian GDP growth forecast are now 2% compared with previous estimates of 4%. It is a drastic drop from the 7.5% GDP growth posted by Brazil just two years ago.