Outlook 2023: Latin Airlines bet on partnerships to fuel growth
Latin America was a dynamic market before the pandemic and remains lively as 2023 gets under way.
Demand in the region's three largest air travel markets - Brazil, Mexico and Colombia - has largely rebounded, and shows no signs of slowing down.
Airlines in Latin America have also been working to create new partnerships to position themselves strategically to capitalise on strong demand.
But the fate of some proposed tie-ups remains highly uncertain.
Even with that uncertainty, Latin America's stature as a strategic growth market remains intact, and there is no shortage of ambition among Latin airlines.
- Demand in Latin America's largest air travel markets (Brazil, Mexico, and Colombia) has rebounded and shows no signs of slowing down.
- Mexico's low-cost carriers, Volaris and Viva Aerobus, have restored their capacity to pre-pandemic levels and anticipate the restoration of Mexico's safety rating by the US.
- Colombia has experienced a swift recovery, with new start-ups emerging and Avianca emerging from bankruptcy protection with a lower cost structure.
- Brazilian airlines, such as Azul and LATAM Airlines Brazil, aim to build strategic partnerships with US airlines to expand their operations.
- The fate of some proposed partnerships in Latin America depends on government decisions, which are difficult to predict.
- Despite uncertainties, Latin America remains a strategic growth market with no shortage of ambition among its airlines.
Summary
- Mexico's growth continues at a steady pace as airlines prepare for the US to restore the country's safety rating.
- Changes are in store in Colombia during 2023.
- Brazilian airlines work to leverage partnerships with US airlines.
- The fate of some Latin partnerships sits with governments, and the outcome is tough to predict.
Mexico's low cost operators see plenty of upside in 2023 and beyond
Mexico was one of the first markets globally to rebound from the weakening demand that resulted from the COVID-19 pandemic.
Mexico's two ultra-low cost carriers, Volaris and Viva Aerobus, had restored their capacity to pre-crisis (COVID pandemic) levels by the end of 2020.
Mexico's ASKs exceeded 2019 levels throughout most of 2022, and the growth continues into 2023, based on capacity projections.
Mexico: weekly ASKs, from 2019 to 2023 (projected)
The growth appears to be justified.
Switching passengers from bus to air travel is key for both Volaris and Viva Aerobus.
Volaris has calculated that if it were to convert 10% of the luxury bus passenger segment, the size of the Mexican aviation market would double. The company also calculated that converting 1% of bus passengers to air travel would yield 31 million additional air passengers.
There is a bit of rationality in Mexico's aviation industry as Interjet has exited the market and Aeromexico has reorganised in Chapter 11 bankruptcy protection.
Essentially, the country's two ULCCs and Aeromexico account for 98% of Mexico's domestic market, according to Volaris.
But Mexico's government is evaluating creating a state-owned airline, which could launch in 2023. It's not clear if the airline will actually materialise, but its creation could change dynamics in the market.
Mexican operators are anticipating that the US will restore Mexico's safety rating during 1H2023, which would allow the country's airlines to add new routes and frequencies to the US.
It will be a big boost for Mexican operators - the US is Mexico's largest international market, measured by available seat kilometres.
See related CAPA report: Americas aviation: Mexico's domestic recovery continues full steam ahead
Two airlines looking to grow in the transborder market once Mexico's safety rating is restored are Viva Aerobus and US ULCC Allegiant Air.
The companies have outlined plans to establish a transborder joint venture, and a USD50 million investment in Viva Aerobus by Allegiant.
Mexican regulators have approved the proposed tie-up; but the US government has not yet made a decision regarding the proposed JV.
If the proposed tie-up is ultimately approved, it will be a unique partnership between two ultra-low cost carriers.
Colombia also rebounds strongly as new start-ups emerge
Colombia also experienced a swift recovery, reflected in its civil aviation agency Aerocivil reporting in Dec-2021 that four million passengers had travelled that month by air, which was "106% in relation to the same month of 2019".
Similarly to Mexico, Colombia's capacity was above 2019 levels for most of 2022, and the country's supply is continuing to grow in 2023.
Colombia: weekly system ASKs, from 2019 to 2023 (projected)
Perhaps Colombia is the most pronounced example in Latin America of airlines working to position themselves to seize opportunities in the pandemic recovery.
A new ultra-low cost airline, Ultra Air, made its debut in Colombia in Feb-2022, and the South American ULCC airline group JetSMART is working to establish a subsidiary in Colombia.
The country's largest airline, Avianca, emerged from Chapter 11 bankruptcy protection with a much lower cost structure.
Avianca aimed to acquire its ULCC rival Viva, but Colombia's government rejected the tie-up.
See related CAPA report: Changes are afoot in Colombia as Avianca-Viva merger hangs in the balance
The two companies have offered concessions, including returning slots at the congested Bogotá El Dorado International airport, but it remains to be seen if the government will change course.
The airlines have warned that Viva has a weakening financial situation, driven in part by oil price volatility and exchange rate pressure.
Brazil's airlines aim to build strategic partnerships with US airlines
Although Brazil's capacity will remain slightly below pre-pandemic levels at the start of 2023, the country's airlines are no less bullish than their counterparts in Mexico and Colombia.
Brazil: weekly system ASKs, from 2019 to 2023 (projected)
During 3Q2022 Azul's management declared that demand in Brazil was unbelievable.
At that point, the airline's seats on offer had grown 30% above pre-pandemic levels, and its revenue was approximately 50% higher.
See related CAPA report: Azul and GOL up the competitive stakes from Northern Brazil to South Florida
During 2022 LATAM Airlines Brazil was operating to 54 domestic destinations in the country, compared with 44 in 2019. The airline has previously held the view that capacity growth in Brazil was occurring at a rational level.
LATAM Airlines Brazil and all of the airlines operating within the LATAM Airlines Group are preparing to launch a joint venture with Delta Air Lines, after the US Department of Transportation approved the agreement in late 2022.
The airlines have said that the agreement would cover around 7,000 city pair markets and provide new or expanded service on at least 18 nonstop routes.
Two other partners are also working to bolster their operations between the US and Brazil.
GOL has cited the competitive advantage of its partner American Airlines at the US airline's hub at Miami International airport. The airline (GOL) has launched flights from Manaus and Fortaleza to Miami.
GOL and Avianca are also working to form the Abra Group, which will comprise the principal shareholders of Avianca and the controlling shareholder of GOL.
Viva was also supposed to be a part of the group, but given the latest developments in Avianca and Viva's efforts to merge, the ultimate composition of Abra remains uncertain.
Azul, meanwhile, has been a partner of United Airlines for quite some time. And while the airline has characterised United as great partner, Azul's management has stated that "there are other great partners out there that we're talking to", said Azul CEO John Rodgerson during 2022.
"We see what is happening with JetBlue and Spirit in Fort Lauderdale", Mr Rodgerson said, noting that JetBlue is "another important partner of ours." There is considerable feed from that airport that strengthens Azul's long haul network, he explained.
JetBlue is working through the regulatory process of acquiring Spirit Airlines.
The fate of some Latin partnerships sits with governments
Although some partnerships that have emerged in Latin America during the last few years have been solidified, the fate of others remains in the hands of governments, and the outcome is tough to predict.
However the partnership landscape in the region takes shape, airlines in Latin America will continue to expand in order to ensure they garner their fair share of demand, which shows no signs of slowing down.