Latin America Aviation Outlook 2020

Summary:

• Fluctuating governments and economies are causing great uncertainty for Latin American aviation.
• The MAX grounding has put a hold on expansion and clouds future plans.
• Mexico City's airports plan has been grounded while Argentina's liberalisation could be curtailed.
• Delta's purchase of 20% of LATAM could shake up the market.
  
  

Economic and policy uncertainty are the biggest concerns (and the MAX)

The biggest unknowns that airlines operating in Latin America face heading into 2020 are: uncertainty over the fate of more liberalised aviation policies in Argentina now that a leftist administration is returning to power; whether Mexico's government can commit to a long term plan for Mexico City's connectivity; and how the region's 737 MAX operators will navigate the aircraft's return to service.

Each of those elements will mean significant implications for Latin American aviation in 2020 and beyond.

Through the first seven months of 2019 members of ALTA (Latin American and Caribbean Air Transport Association) grew their passenger numbers by double digits year-on-year, with an average of approximately 17%. Those operators recorded a solid load factor of nearly 82% for that period, which was essentially a flat result, notching down just 0.2ppt year-on-year (see chart over).

Those passenger growth levels were encouraging in light of Brazil's third largest airline, Avianca Brazil, ceasing operations in May-2019.

Brazil's largest airline GOL has expressed some concerns about the impact of an uptick in domestic capacity growth, and data from CAPA and OAG do show solid growth year-on-year for the first few months of 2020.

Azul, which revised its planned domestic capacity growth upward in 2019, concluded that its growth was justified, given that it is unchallenged in broadly 70% of its markets, the majority of which are domestic (see chart right).

Brazil's GDP growth was projected to be 0.8% for 2019 before a rebound to approximately 2% in 2020. But trade tensions continue to tug at global economic growth, and Brazil's economic growth in 2020 could fall below current forecasts. There is some speculation that Brazil could be headed for a recession, and if that occurs, demand and pricing in the country's domestic market will suffer.

Mexico's largest domestic airline Volaris plans 10% capacity growth in 2020, which is a pull-back from 17% in 2019. The lower forecast is driven by the re-entry of the Boeing 737 MAX into the market and some softness in private investment, which is affecting Mexico's GDP.

Economic headwinds are growing for Mexico. Near the end of 2019 the ratings agency Moody's cut its 2019 real GDP forecast for the country from 0.5% to 0.2%, and to 1.3% in 2020, reduced from a previous projection of 1.5%.

The MAX grounding has considerably affected many Latin American markets

Capacity at Mexico's only full service operator, Grupo Aeromexico, has been falling steadily throughout 2019, largely driven by the removal of six 737 MAX 8 aircraft from its fleet after the aircraft was grounded worldwide. But for the past six to eight quarters the airline has recorded that there has been double digit capacity growth in Mexico's domestic market, which Aeromexico believes is unsustainable.

Given uncertainty over when the 737 MAX is returning to service, Aeromexico is not offering capacity guidance for 2020. The company's executives recently explained that the airline was originally supposed to be operating 12 MAX 8s by YE2019, and over the course of 2020 it could be catching up on 2019 and 2020 deliveries.

The resumption of 737 MAX deliveries will create a spike in Aeromexico's capacity, but the company has given assurances that it will manage the jet's re-entry into service in a reasonable way. Its yields grew a healthy 5.6% year-on-year in 3Q2019, so Aeromexico no doubt aims to preserve that momentum as the MAX rejoins its fleet.

CAPA's Fleet Database shows that at the close of 2019 there were 33 inactive 737 MAX jets in Latin America. Each operator was working diligently, after the grounding of the aircraft in Mar-2019, to mitigate the effects of suddenly removing the MAX from their respective fleets.

GOL expects to have 32 MAX jets in its fleet by the end of 2020, which is just two shy of the 34 it had originally aimed to be operating at that time.

Previously, the company's management has stated that once the ungrounding of the MAX jets occurs, the seven aircraft in storage could return to operations fairly quickly. For the aircraft remaining to be delivered: "We expect that there would be a one to two month process once the ungrounding happens for our aircraft to be accessed and operating in the fleet", GOL CEO Richard Lark explained near mid-year 2019.

Copa is also working to ensure that it will achieve a smooth re-entry of the 737 MAX. Executives at the airline have previously stated that, broadly speaking, Copa could get the six grounded aircraft operational within a month. Copa's other MAX jets awaiting delivery have to complete a post-delivery modification process to add certain features such as entertainment systems.

If deliveries occur in Copa's high season in Dec-2019, Jan-2020 or Feb-2020, "We can fly all of them," said company CEO Mr Heilbron. If deliveries occur during the low season, "We will make a gradual introduction," he added.

As operators in Latin America work to face prolonged headwinds triggered by continued uncertainty over the MAX's return to service, other long term challenges could be on the horizon.

The great Mexico City Airport mistake

After winning Mexico's presidential election late 2018, Andrés Manuel López Obrador (AMLO) held a referendum that encouraged halting construction of a new airport that would have bolstered Mexico City's capacity and the city's stature as a world class connecting hub. Voters endorsed ending the construction, which had already cost USD5 billion.

AMLO subsequently presented an alternative scheme for the new airport that included bolstering operations at Toluca Airport, which is 64km southwest of Mexico City. His administration also aimed to add a new terminal and two runways to the St Lucia military base.

Logistics of a three pronged approach to managing Mexico's City airspace were scant, and connectivity between the airports has emerged as a major challenge that needs to be solved.

In Oct-2019 Volaris CEO Enrique Beltranena remarked that "the government recently presented the strategic plan to us and we now have more information". He stated that construction at St Lucia had not yet begun, and "…we're looking forward to see what happens with that project, although we don't see that project happening in the next three years".

As the government seems to be adopting a sluggish approach to creating an alternative to the now defunct airport, Mexico City's opportunities to become a competitive global connectivity point have diminished. Mexico City Juarez International Airport continues to operate well above its capacity of 32 million annual passengers and could lose ground to other connecting north-south hubs, including Panama City, Houston or Dallas.

"Mexico City is still somewhat dubious in terms of what the mid and long term plans are for the airport connectivity of that city", IATA Regional VP of the Americas Peter Cerda told CAPA TV in late 2019.

Argentina appears about to descend into 20th century policies again

As 2019 came to a close, Argentina's electorate chose not to award Mauricio Marci a second presidential term as the country battles a recession and inflation that has remained above 50%.

The victors were Alberto Fernández and his vice presidential running mate Cristina Kirchner, who was president of Argentina from 2007 to 2015.

Even though Argentina faced significant headwinds under Mr Macri, his administration introduced air liberalisation reforms that allowed for an influx of low cost airlines to start operations in the country, including FlyBondi, JetSMART Argentina and Norwegian Air Argentina. Between Jan-2019 and Jul-2019 those airlines controlled 19% of Argentina's domestic flights, and Argentina's domestic passenger levels from Jan-2019 through Sep-2019 grew 15% year-on-year.

Despite Argentina's persistent economic weakness, domestic passenger levels continue to grow, and it remains fertile ground for the low cost model. The country has a population of close to 45 million, and there were 0.3 trips per capita in 2017.

But the staying power of reforms that allowed low cost airlines to take root in Argentina is now uncertain as a new administration settles in.

Before Mr Macri took office, prior governments - including the administration of former president Cristina Fernández de Kirchner - had adopted protectionist policies to shield state-owned Aerolineas Argentinas from competition.

Before the outcome of Argentina's election, IATA's Mr Cerda remarked that, depending on the outcome, the results "could have significant implications on further growth of air transport in Argentina during a very difficult time because of their economic recession".

Delta's LATAM share purchase and partnership has reshaped the oneworld alliance's dominance of Latin America

In Sep-2019, Delta Airlines rattled the oneworld global alliance's dominance of Latin America by announcing plans to acquire a 20% share in LATAM airlines, making it the largest shareholder (followed by Qatar Airways' 10%). Delta already owns 49% of Aeromexico, along with large shareholdings in airlines in Canada, Europe and China. At the same time Delta announced plans to divest itself of its 8% shareholding in Brazil's GOL.

This follows a major battle a few years ago to ensure LATAM would be part of the global alliance, but it will now leave and become part of Delta's spreading portfolio. In this case, Delta is reportedly intent on using the partnership to expand its frequent flyer programme and to support its premium cabin strategy.

In a broader scope, while Delta remains as a leader of the SkyTeam alliance, Delta CEO Ed Bastian told analysts at the time that "We are not going to sit around and wait for the alliances to develop their technologies".

As one of the largest and most profitable airlines in the world, a statement like that has more than passing significance for the future of international partnerships.

Upheaval on many fronts is not new to Latin America' airlines.

During the past couple of years Latin America's operators have faced a sideways economic recovery and the persistent push and pull that the region's governments exert on the aviation industry.

Not all of the airlines in the region have the same level of resilience, but many are well positioned to face persistent uncertainty head-on, and 2020 will no doubt test their resolve.