Latin America: recovery well under way, but familiar challenges remain
The recovery of air travel across Latin America is well under way.
In fact, for the week commencing 22-Aug-2022 capacity is down just 2.3% on the same week in 2019, according to OAG schedules and CAPA seat configurations. That is the best performance of any region since before the COVID-19 pandemic.
Latin operators are offsetting some of the cost of fuel by pushing fares higher, and they are fortifying their fleets against fierce competition. Consolidation of airlines is viewed as a 'positive development' for the region.
However, speaking at the CAPA Latin America Aviation & LCCs Summit, CAPA senior analyst Lori Ranson noted that some familiar challenges remain - fuel prices, uncertainty with new governments in Peru, Chile and Colombia, and the upcoming election in Brazil. Taxation seems like it is a never-ending threat, and currency fluctuations remain a challenge.
- Air travel recovery in Latin America is progressing well, with capacity down only 2.3% compared to pre-pandemic levels.
- Latin operators are offsetting fuel costs by increasing fares and fortifying their fleets to compete.
- Challenges remain, including fuel prices, political uncertainty in Peru, Chile, and Colombia, and upcoming elections in Brazil.
- Taxation and currency fluctuations continue to pose challenges for airlines in the region.
- Brazil's airlines are deploying capacity in a rational manner, with corporate revenues exceeding pre-pandemic levels.
- Mexico, Colombia, and Chile are experiencing strong demand, while Argentina is seeing a solid recovery in domestic passenger numbers.
Summary:
- The recovery of air travel across Latin America is well under way.
- Capacity in the week commencing 22-Aug-2022 is down just 2.3% on the same week in 2019 - the best performance of any region since before the COVID-19 pandemic.
- Some familiar challenges remain - most notably fuel prices, uncertainty with new governments in Peru, Chile and Colombia, and the upcoming election in Brazil.
- Taxation seems like it is a never-ending threat, and currency fluctuations remain a challenge.
- Latin operators are offsetting some of the cost of fuel by pushing fares higher.
- Latin airlines fortify their fleets for fierce competition.
- Airlines facing inflation are encountering challenges, but ticket prices holding steady.
- Consolidation viewed as 'positive development' for region.
- Governments are a historical, and still current, challenge.
In a State of the Industry presentation in Salvador, Brazil, on 26-Aug-2022 Ms Ranson noted that airlines are bullish on the recovery. This was most evident in GOL's most recent quarterly revenues, which were among its highest recorded levels in its history.
"The second quarter represents a milestone in the recovery of the demand for air travel. We had resumption of the corporate travel stimulated by new forms of hybrid working in companies and stability in the leisure market", says GOL CEO Celso Ferrer.
In the case of Copa Airlines, despite the current fuel price environment affecting the entire airline industry, according to CEO Pedro Heilbron the airline has "established our capacity and network to near pre-pandemic levels and continue[s] delivering profitable financial results".
Latin operators are offsetting some of the cost of fuel by pushing fares higher
Fuel prices have come down a bit, but remain at five-year highs - and there's a lot of unpredictability in those costs in the near term.
For now, airlines are passing the majority of the increase through to customers.
Volaris in Mexico said that in the second quarter the fuel price increase was broadly equivalent to an incremental cost of USD150 million compared with 2019, but it did push through about 75% of that increase.
Regional variations…but positive trends
Ms Ranson offered some oversight of capacity recovery in the regions of Latin America.
In Central America capacity is "trending above 2019 levels" - driven largely by Mexico's swift recovery.
In upper South America capacity deployment should "inch towards a full recovery by year-end", according to Ms Ranson, while capacity recovery in lower South America is "moving at a steady pace".
Brazil: corporate revenues are at, or are exceeding, pre-pandemic levels
At a country level, the big trend in Brazil in 2022 has been that its airlines "are deploying capacity in a rational manner, according to Ms Ranson.
An interesting trend in the country is that even as corporate volumes haven't fully recovered, corporate revenues are "at or exceeding pre-pandemic levels," which should lead to "more revenue momentum as those corporate volumes fully recover", she explained.
Brazil's operators continue to deploy capacity in a rational manner: capacity, 2019-2022
Mexico: domestic and international demand remains strong
In Mexico, domestic and international demand remains strong. The country's Ministry of Tourism recently said that 10.2 million international tourists had arrived in the country by air in the first half of 2022 - up 1.5% from 2019.
But there are some clear near term challenges the country's airlines are facing, according to Ms Ranson, including air traffic issues in Mexico City and the country's safety rating remaining downgraded by the US Federal Aviation Administration.
Domestic and international capacity in Mexico remains robust: capacity, 2019-2022
Colombia: traffic levels already up on pre-pandemic levels
Colombia is another market that has recovered quickly.
Data from its aviation agency Aerocivil show that passenger levels for the first half of 2022 were almost 18% above 2019 levels.
Colombia's schedules have exceeded pre-pandemic levels since early in 2Q2022: capacity, 2019-2022
Chile: still some room for recovery
According to JAC data: in Chile domestic passengers were down approximately 12% in the first half of 2022, and international traffic is down 48%, showing that there is still some room for recovery there.
Positively, the country's capacity trends show a clear path closer to pre-crisis levels.
Chile: capacity trends show clear path closer to pre-crisis levels, capacity, 2019-2022
Argentina: experiencing solid recovery in domestic passenger numbers
Argentina is also experiencing a solid recovery in domestic passenger numbers, but in Jul-2022 they remained down by approximately 22% from their 2019 levels, according to ANAC.
Similarly, international passengers were down - in this case, more than a third, by 37.4%.
Argentina: capacity trends also show path to pre-crisis levels, capacity, 2019-2022
Latin airlines fortify their fleets for fierce competition
During the past year Latin American airlines have worked diligently to build their fleets to be competitive as the COVID-19 pandemic moves to an endemic state.
Airlines restructuring in Chapter 11, and those fortunate enough to weather the crisis without seeking formal bankruptcy protection, have engaged in a flurry of activity to ensure that they will remain competitive for years to come.
The fleet moves made by airlines in the region are unsurprisingly tilted towards next generation narrowbodies, as operators look to gain fuel efficiency and, in some cases, to compete more effectively with low cost operators.
It is not a surprise that next generation narrowbodies are in high demand in the region.
Those aircraft have improved fuel burn and help to lower unit costs, which is an increasingly competitive benchmark among airlines in Latin America.
From 2023 to 2025 Latin American airlines will take delivery of 282 aircraft - the majority are narrowbody jets: aircraft on order, 2022-2031
Ms Ranson revealed in her presentation that data had shown that regional jet and widebody utilisation remained below pre-pandemic levels - around 90% of Jul-2019 amounts.
Narrowbody utilisation is at 103%, 3% higher than in Jul-2019, and regional turboprop utilisation is almost 10% up on Jul-2019.
Interestingly, she noted that it doesn't seem like Latin airlines are facing significant delays, unlike airlines in other parts of the world.
"Obviously, the order books at Latin airlines aren't as vast as [at], say, Southwest Airlines or Ryanair, but it is noteworthy they are aren't facing the same level of disruption in deliveries", she explained.
Airlines facing inflation facing challenges, but ticket prices holding steady
Inflation remains a headwind. Information released by ALTA in Apr-2022 showing CPI for Latin American countries highlights that this is most evident in Argentina, but Brazil and Chile also recorded double-digit rates.
All airlines are "facing challenges with inflation", acknowledged Ms Ranson, but at the moment, ticket prices in the region "appear to be holding steady".
But if cost inflation continues to linger, "some pressure on airfares could emerge", she warned.
Consolidation viewed as 'positive development' for region
Although airline consolidation in the Latin American market appears to be occurring at a rapid-fire pace, the reality is that the latest agreements to emerge took some time to develop and finalise.
Yet even as Abra Group, which comprises Avianca, GOL and Viva, works to gain all the necessary regulatory approvals for its creation, the consolidation story in the region is not over.
There could be "some pushback", according to Ms Ranson, but notably a lot of the larger airlines there view consolidation "as a positive development for the region".
It is widely believed in the industry that more M&A in Latin America will occur, creating a more tenable aviation industry in the market.
The question is: who will make the next move? Could burgeoning ULCCS opt to merge, in order to attain a level of scale that would otherwise take years to achieve?
Governments are a historical, and still current, challenge
Airlines throughout Latin America have been historically challenged by government policy. Also, uncertainty with new administrations makes it tough for airlines in the region to have a broader view of the future, since issues always emerge for the short term.
A recent example has been legislators in Brazil trying to push through the return of free baggage allowance policy.
"But at the same time the opportunity for air traffic growth here is substantial, and I think we all know that's the guiding force for the region's airlines as they gladly welcome a strong recovery now that the pandemic is hopefully in the rearview mirror", believes Ms Ranson.