CAPA Americas Summit: Latin America remains promising as open skies drives US international growth


The evaluation process that airlines use to determine the viability of international routes goes far beyond merely calculating potential profitability. Myriad considerations need to be undertaken, including ease of doing business with governments, infrastructure constraints and the customer experience of passengers travelling to the end destination.

Although American and Delta continue to trumpet the need for government-to-government consultations between the US and the UAE and Qatar regarding open skies agreements with those countries, fully liberalised air service pacts remain the cornerstone for international expansion from the US. Particularly so for airports outside the hub systems of the three large global US network airlines.

A pending open skies agreement with Brazil, a new bilateral with Mexico and the recently concluded agreement to resume scheduled flights between the US and Cuba have created new opportunities for US airlines to broaden their reach in Latin America and the Caribbean. But there are obviously inherent risks in undertaking expansion to those regions, and the rewards from growing on routes to those countries may only manifest themselves in the medium to long term.

  • The evaluation process for international routes involves considerations beyond profitability, including ease of doing business with governments, infrastructure constraints, and customer experience.
  • Open skies agreements remain crucial for international expansion from the US, particularly for airports outside the hub systems of major US network airlines.
  • Venezuela's government inaction has wasted opportunities for air traffic development, resulting in challenges for citizens to travel outside the country and obtain goods and services.
  • Latin America presents growth opportunities despite economic challenges, with countries like Argentina and those on the Pacific Rim showing promise.
  • Cuba's new aviation agreement with the US has created opportunities for airlines, but challenges remain in terms of infrastructure and services.
  • Open skies agreements are key to long-haul service for US non-hub airports, and a more liberalised bilateral between the US and Mexico could benefit low-cost airlines.

Venezuela serves as a prime example of opportunity wasted due to government inaction

During a panel discussion at the recent CAPA Americas Aviation Summit, representatives from Latin America and airports offered insight into the opportunities and risks in evaluating growth to Latin America. Obviously there are short-term challenges in markets such as Brazil, but overall - despite Latin America's current economic challenges - much promise remains in the region for those airlines willing to add a patience factor when evaluating those network opportunities.

Brazil's rapid economic deterioration during the last couple of years has resulted in airlines that operate within and to and from the country adjusting their short term expectations and capacity. Companies based in the country are essentially blocked from access to capital and ALTA executive director, Eduardo Iglesias, has stated, "there is no light at the end of the tunnel".

Essentially, the Venezuelan government is ignoring the huge opportunities for air traffic development not only to and from the country, but also within its borders, Mr Iglesias concluded.

The government of Venezuela, which still owes roughly USD3.8 billion to airlines worldwide, has essentially stymied what could be a vibrant aviation industry. IATA regional VP Americas, Peter Cerda, told the CAPA audience that Venezuela is one of those countries that are "disconnecting [itself] from the world".

The Venezuelan government has no interest in establishing a dialogue with the industry, or maintaining an environment that is healthy for aviation, said Mr Cerda. He cited the significant pull-down in service by airlines serving the country, noting that those companies were flying "bare minimums" just to retain their airworthiness for operations to Venezuela.

Data from CAPA and OAG for the week of 25 Apr-2016 show that international seats to Venezuela are up year-on-year compared with 2015 but still below the levels of 2014, when the government started freezing monies owed to airlines and the country embarked on a path to economic collapse.

Venezuela international seats per week: 2014 to 25-Apr-2016

Mr Certa said that the government's decision to abandon supporting necessary aviation infrastructure in Venezuela results in challenges for its citizens to travel outside the country and to obtain goods and services.

IATA sees signs of promise in Argentina and Latin countries on the Pacific Rim

As Venezuela continues to shut itself off from the international aviation industry, other governments in Latin America are moving towards a more liberalised stance. Describing a mindset shift in Argentina, Mr Cerda said: "We've just now overcome 14 years of very gloomy relations with the government [Argentinian] from an aviation standpoint." He remarked that the country's new government had made aviation development a priority and is willing work with stakeholders.

The outlook for Latin American countries located on the country's Pacific Rim is much more positive. "While some countries were having a party with commodities exports[,] like Venezuela and Brazil[,]...others were doing their homework and saving for the future," said Mr Iglesias. Indeed, Mr Cerda remarked that Mexico, Colombia and Panama should grow between 3% and 6% during the next couple of years. Further, that those countries have pro-aviation regulations that do not impose unreasonable taxes and fees on passengers. He cited more than 130 different types of taxes in the Americas, and noted at times it is cheaper to fly on a 15-hour flight from Miami to Dubai than a 2-hour trip from Miami to Antigua.

Even with the formidable challenges that Venezuela and Brazil are creating for Latin American aviation, data from IATA show international traffic and capacity growth of 9% for the region in 2015, which is higher than the industry's performance in both 2014 and 2015. The numbers reflect the overarching belief in Latin America's stance as one of the largest growth markets in the future.

Latin America international traffic and capacity growth: 2013 to 2015

Year RPK growth ASK growth
2013 8.1% 7.4%
2014 5.8% 4.7%
2015 9.3% 9.2%

However, much of Latin America is unprepared for the region's growth prospects. Mr Iglesias stated that many of the area's largest airports are landlocked and operating at full capacity. He also cited a lack of uniformity in the region, noting that by contrast the US, EU, India and China all work under a single regulatory framework.

FedEx wants a small piece of the Cuban pie, arguing that cargo plays a vital role

One area that has not lacked attention in 2016 is Cuba, and the opportunities that has been created by a new aviation agreement between Cuba and the US, allowing a total of 110 daily flights between the two countries - 20 to Havana and 10 each to nine other Cuban airports.

A dozen US airlines spanning various business models are vying for the new service opportunities. Additionally, the US cargo airline FedEx Express has also entered into contention for service to Cuba.

See related reports:

The FedEx Express managing director of regulatory affairs, Nancy Sparks, remarked to the CAPA audience that the company's service proposal was modest, entailing a single daily flight five days per week between Miami and Havana. Ms Sparks also highlighted that one point to remember is: as "a matter of law" Cuba is not a tourist market. Travellers must fall into one of 12 other categories for travel to Cuba.

Citing visits to Cuba by various governors of US states, Ms Sparks made the observation that US stakeholders are travelling to Cuba to sell American products, which must be transported. She stated that FedEx Express has a "national network, going to every address in the United States[;...] we feel like we're giving the [US] DoT plenty of value for a small expenditure of opportunities" - that is, by making the company's application for air services.

The majority of route requests for service to Cuba being made by US passenger airlines are for flights from Florida. Miami is home to nearly half of the Cuban American population, and Tampa and Orlando are the third and fifth largest metropolitan areas that are home to Cuban communities.

The route evaluations are now in the hands of the US DoT, and the agency must weigh the pros and cons of allotting most of the rights for service to Florida, or awarding a portion to other points where there is solid Cuban representation, including Los Angeles and Chicago.

The question is whether the Cuban government rise to meet the country's potential - only time will tell

As US airlines await the DoT's route awards they must carefully consider the unique challenges of serving Cuba. Mr Cerda stated that three million tourists travelled to Cuba in 2014, and data from CAPA show that tourist arrivals jumped by 17% in 2015. By 2034 those numbers are projected to multiply by 10, said Mr Cerda.

Cuba annual tourist arrivals: 2008 to 2015

That time period may see far off, but in the context of having the proper infrastructure to serve Cuba's tourist projections Mr Cerda remarked, "there is a lot to do...just getting 20 additional frequencies a day into Havana is going to be a challenges in and of itself".

He observed that Havana is constrained, and stated that it can take upwards of two hours for passengers to collect bags, plus an additional hour for screening. "Kiosks, e-boarding, all the experiences we enjoy in the rest of the world are not there", Mr Cerda said.

Cuba has 12 international and 15 domestic airports, said Mr Cerda. One message that IATA has communicated to the Cuban government is, "do not forget about domestic airports. Those airports will very quickly become international airports".

If the Cuban government is open to change, improves services and implements reasonable costs, Cuba could become a formidable force. "We've told the rest of the Caribbean to watch out", said Mr Cerda.

A lot of pieces need to fall into place for Cuba to become a threat to other tourist destinations in the region. The onus is on the country's government, and the attitude it adopts toward more liberalised air service with the United States.

Open skies agreements are key to long haul service for US non-hub airports

As the subsidy debate ignited between the three large US global network airlines and Emirates, Etihad and Qatar in 2015, the value of liberalised open skies agreements was cast into the spotlight. In the middle of the rhetoric being tossed back and forth, Emirates unveiled plans to launch service from Dubai to Orlando International airport.

Emirates' daily service debuted in Sep-2015, and the Orlando International airport senior director of marketing and air service development, Vicki Jaramillo, stated that more than 50% of passengers, "on that aircraft [Emirates 777-200LR]", originate in central Florida. "Emirates listened to what we had to say about the community," said Ms Jaramillo, noting that the airline has an employee specifically assigned to Orlando.

See related report: Orlando International's growth is testament to open skies at Emirates enters

"We've been very outspoken on open skies," Ms Jaramillo stated. Similarly to Oakland, Las Vegas or San Diego, Orlando's success in international markets is "being a spoke off of an international hub", she said. Since it is rare for a large global US network airline to launch long haul international service from a non-hub airport, "open skies is very, very key", in her view.

A more liberalised bilateral between the US and Mexico that lifts caps on the number of airlines on certain routes between the two countries should benefit Mexico's low cost airlines, which have been blocked from accessing certain transborder routes, said Mr Iglesias (ALTA executive director).

Under the current agreement, the number of airlines allowed on certain routes between the two countries is limited to two from each jurisdiction. Some of the former Mexicana routes have gone to LCCs, but there is still uncertainty in that process, he explained.

Originally, the more liberalised agreement between the US and Mexico was supposed to be formalised in Jan-2016. Mexican pilot and flight attendant unions have protested against the agreement, arguing that it is unbalanced towards US airlines. In an interview with CAPA TV, the Delta Air Lines General Counsel, Peter Carter, stated that the Mexican Senate was currently considering the bilateral, and the agreement should be adopted some time in Apr-2016.

See related report: US attack on Gulf airlines may prove a tragic miscalculation by Delta & partners as Mexico rebels

The US government needs to weigh both sides in the Gulf subsidy debate carefully

Arguably, one positive element stemming from the Gulf airline debate is just how important open skies agreements are to smaller airlines and airports that do not enjoy hub status. The Greater Orlando Aviation Authority has estimated that since the liberalisation of air service between the US and Brazil started in 2011 visitors from Brazil to Orlando have jumped from 74,000 in 2004 to 768,000 in 2013. JetBlue's launch of service from Boston to Detroit was a result of its partnership with Emirates, which launched service to jetBlue's focus city of Boston in Mar-2014. Armed with feed from Emirates, jetBlue at the same time broke Delta's monopoly on flights from Boston to Delta's Detroit hub, and has stated that fares on the route fell by 39% after its entry.

After a quiet period in the subsidy debate, American and Delta have again ratcheted up their rhetoric about alleged government subsidies to Emirates, Etihad and Qatar. Mr Carter of Delta told CAPA TV the airline was firmly committed to the issue, "and we will not go away..." He also stated, "we will raise it to the next administration", if the current US Presidential administration does not address it.

American Airlines CEO Doug Parker, speaking at the conference, remarked that the coalition supporting the exploration of subsidies is continuing dialogue with the US government, which continues to listen to the group's arguments. "We're pleased with the reception we've gotten in Washington", Mr Parker stated.

Just as the "Big 3" and their allies in the Gulf debate continue their march to obtain government-to-government consultations on the open skies agreements between the US and the UAE and Qatar, smaller airlines including jetBlue and Hawaiian, and cargo titan FedEx Express, will continue to push their agenda strongly. The US government (no doubt) is also giving those entities a warm reception.

International expansion and open skies are intertwined; preservation of those pacts is key

Weighing the viability of long haul routes is a particularly complex task that intertwines profitability projections, infrastructure, government support, and in some cases, a willingness by an airline to understand that the spool up period of routes depends on the specific region.

There is no argument against the conclusion that more liberalised aviation agreements between US and countries worldwide provide concrete benefits to aviation stakeholders - airlines, airports and tourist organisations. The US government must carefully consider how it will rule on the subsidy debate in order to preserve existing open skies pacts and ensure fair negotiations in future agreements.

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