07-Aug-2018 11:36 PM

Latin America: leading airlines, the start-ups and market stimulation

Analysis

Now that Latin America has weathered a recession and reasonable demand patterns have returned, airlines operating in the region can direct more attention to the way the market is evolving and focus on their long term competitiveness.

Avianca has made no secret of its ambitions to emerge as one of two pan-Latin American airlines that will dominate the region as a result of consolidation. The other airline group, LATAM, continues to maintain its dominance in key markets, including Chile, Peru and Brazil.

But as full service airline groups work to maintain and expand their strength in Latin America, low cost operators are also working to establish pan-regional groups. These developments set the stage to determine whether those regional groupings can coexist peacefully.

CAPA will feature a panel discussion at its upcoming Latin America & LCC Summit 11-12 Sep in Cartagena, Colombia. Details below.

Summary

LATAM Airlines Group and Avianca hold a solid share of seats in upper South America, home to the strategic markets of Brazil and Colombia.
Avianca could bolster its position in lower South America through deepened cooperation with Avianca Argentina.
LATAM seems open to establishing a separate LCC to combat growing low cost competition while Avianca does not believe a separate LCC operation is necessary.

The intra-Latin America Outlook

Latin American airlines are holding a reasonably positive outlook for 2018 as a crop of new low cost carriers continue full steam ahead in their efforts to stimulate traffic in the region, and larger network airlines balance new competition with their quests to build global network utility and pursue JVs within alliances.

Steady capacity increases are planned for the domestic markets of Brazil and Colombia as both countries begin to recover from economic downturns, but some uncertainty remains in Brazil pending the outcome of the Oct-2018 presidential elections. Increasing liberalisation has also helped catalyse the growth ambitions of LCC start-ups.

In Chile, which allows 100% foreign airline ownership, the airline duopoly has been disrupted by the arrival of the Indigo Partners-controlled ULCC JetSMART. In the once highly protected Argentina aviation market one of the more closely watched developments will be the launch of Norwegian Air Argentina in Oct-2018, whose debut will put conclusions that the country is ripe for new low cost competition to the test.

But favourable market and regulatory conditions cannot overcome inadequate infrastructure and archaic air capacity management systems, with many of Latin America's key markets in urgent need of infrastructure upgrades and air traffic modernisation to support airline growth. And the region is one of the most expensive in the world when it comes to passenger and airline charges - in some cases, taxes and boarding fees represent more than 40% of the final ticket price.

Full service airlines have a solid grip on seat deployment in Latin America

Over the course of the past eight years Avianca and TACA have merged to form the Avianca Group, while LAN and TAM have combined to form the LATAM Airlines Group.

Data from CAPA and OAG show that Avianca and LATAM Airlines Group hold a 39% seat share of upper South America's seats for mid-Jul-2018. If Avianca Brazil's seats are added to that total, the two airline groups hold a 45% share.

Synergy is the major shareholder for both Avianca and Avianca Brazil, but for now the airlines operate separately. There has been talk about a merger between the two companies for years, and now that Avianca Brazil appears to be on more solid footing, a merger could materialise in the not too distant future.

Upper South America system seat share by airline as of mid Jul-2018

Avianca is a member of the Star Alliance whereas LATAM participates in oneworld. Combined, the Star and oneworld alliances hold a nearly 53% seat share in upper South America.

Upper South America system seat share by alliance grouping as of mid Jul-2018

In lower South America LATAM is the dominate airline with a 37% seat share, followed by SkyTeam's Aerolineas Argentinas, with a nearly 25% share.

Lower South America system seat share by airline as of mid Jul-2018

Given LATAM and Aerolineas' seat dominance, oneworld and SkyTeam control approximately 70% of lower South America's seats.

Lower South America system seats by alliance grouping as of mid Jul-2018

Mexico is Latin America's second largest economy and aviation market, and Mexican airlines dominate seat share in Central America.

Central American system seats by airline as of mid Jul-2018

Close to 46% of Central America's seats are unaligned, while the three alliance groups operate 54% of the region's seats.

Central America system seats by alliance grouping as of mid Jul-2018

When LAN and TAM merged, LAN gained a strong foothold into Latin America's largest market - Brazil. And if Avianca and Avianca Brazil eventually merge, Brazil's third largest airline will fall under the Avianca umbrella.

Both Avianca and LATAM have solid position in Latin America's third largest market, Colombia, holding domestic passenger shares of 58% and 19% respectively in 2017. In Peru, LATAM is the dominant airline with a passenger share of 55% for the 4M ending Apr-2018. Avianca was third behind Peruvian Airlines with a 10.5% share.

For Avianca to realise its ambitions of becoming a pan-regional airline group, it needs a broader presence in lower South America. Synergy has established Avianca Argentina, which operates two ATR turboprops. However, the airline will be adding up to 10 more aircraft this year, including two Airbus A320 narrowbodies for international service, Synergy Group chairman Germán Efromovich told CAPA at the recent IATA AGM.

Mr Efromovich remarked that Avianca Argentina would feed into Avianca's larger network, giving the Avianca group a foothold into Argentina, which is becoming more liberalised under the government of Mauricio Macri.

Synergy Group chairman Germán Efromovich in Jun-2018; Synergy is "kind of consulting" Aeromar

Avianca has expressed interest in taking a stake in the Mexican regional airline Aeromar, but has yet to finalise the deal. Mr Efromovich said that Synergy was "kind of consulting" Aeromar, and if conditions are favourable at the end of the year, the timing could be right for a deeper relationship.

LATAM and Avianca take different approaches to combating new LCC competition

As LATAM and Avianca work to carve out their positions in Latin America, several LCCs have emerged in the region during the past couple of years, including Indigo Partners' JetSMART in Chile, a new Viva franchise in Peru, Volaris Costa Rica and Flybondi in Argentina.

Viva Air Peru and Volaris Cost Rica are showing their ambitions to spread the ultra low cost model across Latin America, while reportedly JetSMART has recently stated that it is planning to launch service to Argentina by YE2018; the airline has also expressed an interest in serving Bolivia and Paraguay. Additionally, Norwegian is also in the process of establishing an operation in Argentina.

See related report: Chilean aviation hopes for solid air passenger growth under a new President as JetSMART arrives

Neither LATAM nor Avianca seems overly concerned about the new raft of low cost competition.

LATAM has previously stated that Chile was absorbing capacity increases, and Avianca CEO Hernan Rincon told CAPA TV at the IATA AGM that the new crop of LCCs in Latin America were not stealing market share.

Avianca CEO Hernan Rincon; will be speaking at CAPA's Latin America Summit in Sep-2018

One of LATAM's responses to the proliferation of LCCs and ULCCs in recent years has been the creation of a branded fare structure in its South American domestic markets, where fares at the lowest rung are 20% cheaper.

Previously, LATAM has stated that it expects 50% passenger growth in Argentina, Brazil, Chile, Colombia, Ecuador and Peru by 2020.
LATAM has also stated that it was not ruling out establishing a separate stand-alone LCC, noting that it was a "very possible project".

Avianca has no plans to examine a stand-alone LCC, Mr Rincon has said.

See related report: LATAM studies a low cost operation to meet market conditions

Low cost and FSAs alike are working to capitalise stimulation in Latin America

Latin America remains one of the most promising markets for passenger stimulation, given that the average trips per capita in many of the region's countries remain far below those in the more developed markets in North America and Europe.

The opportunities for low cost penetration in Latin America remain ripe; however, the region's entrenched airlines are working equally as hard to remain relevant in Latin America's changing market landscape.

CAPA will feature a panel discussion at its upcoming Latin America & LCC Summit 11-12 Sep in Cartagena, Colombia

The Intra Latin America Outlook

Latin American airlines hold a reasonably positive outlook for 2018 as a crop of new low cost carriers continue full steam ahead in their efforts to stimulate traffic in the region, and larger network airlines balance new competition with their quests to build global network utility and pursue intra alliance JVs.

Steady capacity increases are planned for the domestic markets of Brazil and Colombia as both countries begin to recover from economic downturns but some uncertainty remains in Brazil pending the outcome of the Oct-2018 presidential elections. Increasing liberalisation has also helped catalyse the growth ambitions of LCC start ups. Chile, which allows 100% foreign airline ownership, has seen its airline duopoly disrupted by the arrival of the Indigo Partners controlled ULCC JetSMART, while in the once highly protected Argentina aviation market, one of the more closely watched developments will be the launch of Norwegian Air Argentina in Oct-2018, whose debut will put conclusions that the country is ripe for new low cost competition to the test.

But favourable market and regulatory conditions cannot overcome inadequate infrastructure and archaic air capacity management systems, with many of Latin America's key markets in urgent need of infrastructure upgrades and air traffic modernisation to support airline growth. And the region is one of the most expensive in the world when it comes to passenger and airline charges - in some cases, taxes and boarding fees represent more than 40% of the final ticket price.

Reviewing the core markets of Brazil, Peru, Chile, Colombia, Argentina and Mexico and prospects for growth
Will an operating utopia ever be within reach for the region's airlines or will infrastructure constraints and high taxes impede growth?
Will pan regional brands come to dominate the competitive landscape?
What is the current state of play of JVs and alliances among the region's larger airlines and how effective is it as a mechanism for bolstering network coverage?
Can Latin American carriers learn from their global counterparts and launch low cost subsidiaries to avoid ceding market share to LCC competitors?
What else must they do to defend against LCC market incursions? How to bring Latin American taxes and charges in line with international best practice?

Moderator: ALTA, Executive Director, Luis Felipe de Oliveira

Panel Members:

Copa Airlines Colombia, President, Eduardo Lombana
GOL, Director of Planning, Celso Ferrer
IATA, Regional VP, The Americas, Peter Cerdá
LATAM Airlines Colombia, CEO, Santiago Álvarez Matamoros