03-Feb-2014 3:12 PM

Air New Zealand reviews options for Latin America. Can new partner Singapore Airlines help?

Analysis

Air New Zealand is reviewing options for covering Latin America, which according to CEO Christopher Luxon remains the last white spot in the carrier's network after plugging all its other holes with its new Singapore Airlines (SIA) partnership.

The forthcoming withdrawal from the South Pacific market by Aerolineas Argentinas could leave an opening for Air NZ as oneworld partners Qantas and LAN will be left as the only carriers crossing the South Pacific between Australasia and South America. Air NZ's new partnership with SIA could be extended to Latin America, providing feed for a potential new route which would otherwise not be viable.

But the economics of Australasia-South America routes are challenging and Air NZ has not yet been able to find a suitable partner on the Latin American end. Air NZ has been eager for some time to exploit New Zealand's position between Asia and South America and connect an underserved and fast-growing market. Likewise, Auckland Airport has envisaged itself as a potential hub for the connections. There is still no easy solution for Air NZ.

Summary

Air New Zealand is considering options for expanding its network to cover Latin America, which is currently the only "white spot" in its network.
The carrier's partnership with Singapore Airlines (SIA) could potentially be extended to include Latin America, providing feed for a new route that would otherwise not be viable.
The economics of Australasia-South America routes are challenging, and Air New Zealand has not yet found a suitable partner on the Latin American end.
The lack of Star Alliance options in western South America poses a major challenge for Air New Zealand.
Brazil is an attractive market, but the low visitor numbers and lack of connections beyond Sao Paulo make it challenging for Air New Zealand.
Chile is an ideal market for Air New Zealand due to its geographical proximity, but the dominance of LAN and oneworld alliance in Santiago makes it challenging from a competition perspective.

This is the second in a two-part series of analysis reports on Air NZ's long-haul strategy. The first report analysed Air NZ's plans for expanding long-haul capacity over the next few years as it takes delivery of 787-9s and additional 777-300ERs.This part looks at the carrier's potential long-term options for serving the Asia-Latin America market.

Latin America is the last remaining "white spot" in Air NZ's network

Air NZ CEO Christopher Luxon calls Latin America "the next big white spot" in the carrier's network. The SIA partnership, which was announced on 16-Jan-2014, solved the carrier's other white spots - namely Southeast Asia, South Asia and South Africa - and improves Air NZ's coverage of Europe.

The SIA codeshare will expand Air NZ's offline network by almost 60 destinations. Air NZ views SIA as its second cornerstone partner along with Virgin Australia. Its other partners are for specific markets - including Cathay Pacific Airways and Air China for greater China; All Nippon Airways for Japan; United Airlines for the US; and Air Canada for Canada.

While Mr Luxon's predecessor Rob Fyfe for several years talked up the prospect of building Auckland into a niche hub for the Asia-Latin America market, Air NZ has never come close to pulling the trigger on a South America route. Mr Luxon says since he took over from Mr Fyfe at the beginning of 2013 improving the carrier's network in Southeast Asia and Europe has been "the biggest priority". With those parts of the puzzle now complete, Latin America will get more attention but Air NZ is still not likely to launch a service across the South Pacific to South America in the near to medium-term.

"We don't have a solve for it right now. It's something we will continue to explore with Singapore Airlines, others and ourselves. It does make sense if you are sitting in southern China and need to go to Latin America to go via Auckland," Mr Luxon said while at the 16-Jan-2014 signing ceremony with SIA. "It's a difficult one. We can light up the aircraft and fly to South America, but can we build a business where we don't lose 30 million dollars a year?"

Can SIA use Auckland as transit point for South America?

A potential joint solution with SIA provides an intriguing option and SIA may look in future at extending its new partnership with Air NZ to include South America. But SIA says at this point the focus is on Southeast Asia, South Asia, Europe and Africa.

SIA currently serves Sao Paulo via Barcelona. SIA could instead operate Singapore-Sao Paulo via Auckland with a similar total transit time. Air NZ could potentially operate the Auckland-Sao Paulo leg, reducing operating costs as SIA would no longer need to triple stop its crews to cover Brazil.

But serving Brazil via Spain is generally more appealing as Spain-South America is a much bigger local market than New Zealand-South America. Sao Paulo is also not the ideal South American destination for Air NZ as it sits on the eastern side of the continent. Significant backtracking would be required for passengers connecting to Latin American destinations outside Brazil.

Air NZ could instead potentially work with SIA in opening a totally new route to other parts of South America while SIA retains its current Sao Paulo service via Barcelona. Argentina, Chile and Peru would be the most logical options. But the challenge with these markets is they are too small to rely only on New Zealand and connections beyond Auckland. Feed at the South America end would be critical for any Auckland-South America route to be viable.

Lack of Star options in western South America poses major challenge

The Star Alliance has a relatively weak presence in all three of the South American airports Air NZ has been considering - Buenos Aires Ezeiza in Argentina, Lima Jorge Chavez International in Peru and Santiago International in Chile. Among this trio, the only Star hub is in Lima where Avianca has a subsidiary, TACA Peru (which is currently in the process of being rebranded Avianca).

But TACA Peru is a smaller carrier than oneworld affiliate LAN Peru. Star currently has about a 34% share of international capacity in Lima compared to 51% for oneworld, according to CAPA and OAG data.

Peru is also the smallest of the potential South American markets for New Zealand. Air NZ executives say the biggest South American market from New Zealand is Argentina, followed by Chile and Brazil. With Peru not even among the top three, Air NZ would have to almost entirely rely on connecting traffic beyond Lima. Peru at least now is the least attractive of the potential Latin American destinations for Air NZ.

Lima Jorge Chavez International Airport is currently the third largest international airport in South America, behind Sao Paulo Guarulhos and Buenos Aires Ezeiza. Santiago International is the fourth largest.

Top five international airports in South America based on international seat capacity: 27-Jan-2014 to 2-Feb-2014

Rank	Airport		Total Seats
1	GRU	Sao Paulo Guarulhos International Airport	337,848
2	EZE	Buenos Aires Ezeiza International Airport	227,255
3	LIM	Lima Jorge Chavez International Airport	207,155
4	SCL	Santiago International Airport	197,743
5	BOG	Bogota El Dorado International Airport	194,167

Brazil is an attractive market but difficult from New Zealand

For inbound visitors to New Zealand, Brazil is the largest South American market. Brazil is the only Latin American country in the top 30 source markets for New Zealand tourism, based on data for the 12 months ending Nov-2013. But Brazil is only the 25th largest source market with Statistics New Zealand reporting 10,300 Brazilian visitors in the 12 months ending Nov-2013.

With such low visitor numbers, Brazil could be challenging without a significant portion of sixth freedom passengers. Neighbouring Australia received over three times that number of Brazilian tourists in 2012 and is one of the faster growing sources, with a young age profile and high average spend, so there is life in the market. Air NZ could potentially offer connections on the Asia end and target the fast-growing China-Brazil market using its daily flights from Auckland to Hong Kong and Shanghai. But connections beyond Sao Paulo would be difficult given the geographic position of Brazil. The economics of an Auckland-Sao Paulo route would also be challenging as it would be a longer flight than from Lima, Santiago or Buenos Aires.

Sao Paulo also has alliance issues as Sao Paulo will become a oneworld hub at the end of Mar-2014 as Brazil's main international carrier, TAM, moves from Star to oneworld. TAM merged with oneworld founding member LAN in 2012.

Once TAM moves to oneworld and much smaller Brazilian carrier Avianca Brazil joins Star, oneworld will have a 43% share of total capacity at Sao Paulo Guarulhos compared to 12% for Star. Avianca Brazil will provide the several Star members serving Guarulhos with domestic connections to most main Brazilian cities but does not operate any international services and also does not have nearly the domestic network as TAM.

See related reports:

Chile is an ideal market for NZ but challenging because of oneworld's dominance

Chile is ideally positioned geographically as it is the closest South American country to New Zealand. But the Chilean market is dominated by LAN. Oneworld currently accounts for 73% of total capacity at Santiago compared to only 8% for Star and 4% for SkyTeam, according to CAPA and OAG data.

Santiago would also be challenging for Air NZ from a competition perspective as it will also soon be the only Latin American destination served from Australasia. LAN currently operates one daily flight from Santiago to Sydney via Auckland while Qantas operates three weekly non-stop flights between Sydney and Santiago, according to OAG data. Qantas dropped Buenos Aires and launched Santiago in Apr-2012.

Argentina-Australia is a larger market than Chile-Australia but Qantas' inability to offer connections beyond Buenos Aires and the opportunity to work closely with LAN drove its shift to Santiago. Qantas continues to cover Buenos Aires via a codeshare with LAN, which operates from Santiago to both Buenos Aires airports - Ezeiza and Aeroparque, a downtown airport used for domestic and some regional international services.

Aerolineas subsequently dropped in Jul-2012 its Auckland stop on its Buenos Aires-Sydney route, giving it an exclusive non-stop. The carrier subsequently claimed the economic performance of the route had improved, leading it to add a fourth weekly frequency at the end of 2012. An overwhelming majority of passengers were heading to or from Sydney.

SkyTeam member Aerolineas was keen to build up Sydney as its gateway into Asia. It planned to start codesharing with China Southern on Sydney-Guangzhou, giving it a play in the fast-growing South America-China market. As CAPA reported in Aug-2012, Aerolineas also had been aiming for some time to upgrade its interline with Virgin Australia to a codeshare.

But Aerolineas decided in late 2013 to discontinue Sydney, saying the route remains highly unprofitable. High operating costs and payload limitations made the route almost impossible to achieve break-even. The use of ageing A340-200s with an outdated premium product also made it difficult for Aerolineas to achieve sustainable yields. Aerolineas plans to operate its last flight to Sydney at the beginning of Apr-2014.

Southwest Pacific to Latin America capacity by carrier: 27-Jan-2014 to 2-Feb-2014

Rank	Airline		Total Seats
1	LA	LAN Airlines	4,124
2	QF	Qantas Airways	2,154
3	AR	Aerolineas Argentinas	1,911

Buenos Aires could be viable for Air NZ but would need support from Aerolineas

It would be logical for Aerolineas to consider a tie-up with Air NZ. Although such a partnership would cross alliances lines it should be permitted by Star and SkyTeam as neither alliance will soon have any options across the South Pacific.

If Air NZ launched Buenos Aires with a codeshare with Aerolineas it would again give Aerolineas access to New Zealand and Australia as well as China. Air NZ could also potentially work with SIA in providing connections between Argentina and Southeast Asia.

Air NZ would be able to provide some of the fastest connection times to Argentina from Asia. The market is currently served primarily by Emirates and Qatar, but both Gulf carriers only serve Buenos Aires on a one-stop basis, requiring passengers originating in Asia to make two stops to reach Argentina. (Emirates routes its Dubai-Buenos Aires flights via Rio de Janeiro and Qatar routes its Doha-Buenos Aires flights via Sao Paulo.)

Aerolineas has a smaller international network than LAN and TAM parent LATAM but would be able to provide sufficient international connections to make an Auckland-Buenos Aires route viable as it covers all the main markets as well as a few secondary cities. According to OAG data, Aerolineas currently links Buenos Aires Ezeiza with 13 international destinations in South America: Asuncion, Bogota, Brasilia, Caracas, Florianopolis, Lima, Montevideo, Punta del Este, Rio de Janeiro, Sao Paulo, Salvador, Santiago and Santa Cruz.

Air NZ-Aerolineas may seem like an odd partnership but it could be the only plausible combination as the only other South American carriers able to provide Air NZ what it really needs are part of LATAM. As LATAM and its partner Qantas now dominate the Latin America-Australasia market, a partnership with Air NZ is out of the question.

Filling in the Latin America white spot will thus not be an easy feat. Air NZ is in no hurry and will not invest in launching service to South America without careful deliberation. Nor does it help that Argentina's economy is again staggering under accumulated debt, making outbound travel less likely. But Air NZ remains interested in eventually providing a connection to South America as it would boost trade and tourism while positioning Auckland as a new transit hub in the fast-growing South America-Asia market.

Air NZ will need to be proactive and forge potentially multiple partnerships to make its Latin American dream a reality.