CAPA Latin America Aviation Outlook: Finding The Next 20% Yield Improvement In Latin America

Transcript

John Thomas:The wonderful thing about Latin America, the Latin America airline industry, is Latin America needs an airline industry. Obviously, because of the challenging geography, topography of Latin America, the tyranny of distance, and the lack of alternative infrastructure and required investment on alternative infrastructure, Latin America is the sort of— is unique in the world in terms of not having any modal competition to the airline industry. And as such, the industry in Latin America has a history of self-sustainability or self-sufficiency and technological leadership. You look back in the '50s and the '60s, the type of things that people were doing on the air bridge between São Paulo and Rio, those types of things. The industry in Latin America has always had to be self-sufficient and be its own leaders. There's been continued underlying growth in the middle-class demographic and the importance of the middle class, continued investment in airline— aviation infrastructure, and Juan Pablo gave us the example there in Colombia alone, $5.1 million spent from 2011 to 2017. So governments in the area have been very supportive of the infrastructure need. Closer cooperation with overseas airline partners— and I'll talk in a minute about those connections— the industry has been able to achieve a cost advantage and take advantage, where in parts of the industry, in particular, say, Brazil, this isn't necessarily a low-cost industry. There's been mixed results with ancillary revenue. There's opportunities on the horizon, but there's also challenges as well. As we know, we all know the examples that we all hear of why air travel beats road travel throughout Latin America and some examples there. The middle class has always been the important part of the airline industry. I remember doing work in Mexico about 10 years ago, and the talk about the millions and millions of people that were migrating into the middle class, similar in Brazil, where largest part of the market in Latin America. But the share of— middle class share of the total population in Latin America has grown by about 13% over the last 15 years or so, so sitting at about 35% of the overall population, which obviously, as an industry, we always define— Middle class. Our target base as middle class— as people who have entered the middle class. Airport development— more than $46 billion are being invested in the airport infrastructure. As Juan Pablo said, $5 million alone in Colombia. And the area has caught the attention, and always has been on the attention, of the global alliances. OneWorld having, obviously having significant connections through the region, through LATAM. Star Alliance having very strong connections through Avianca, Copa, Azul, and their US partners. And SkyTeam having strong connections as well. So the global alliances have tried to connect to this region as well. And we all remember the massive fight that happened a few years ago when LATAM came together, and it was for about a year or so, everyone was trying to decide whether they were going to go into Star or into Oneworld. And associated with that has been much closer bilateral cooperation. And again, credit to the industry, Latin America was one of the first regions to have open skies with the US, as we all know. US requires open skies in order to, to have immunised JVs. So the region was at the forefront in terms of open skies with the US. We've had examples of cross-ownership— Delta with GOL and Aeroméxico, Air France with GOL, United recently with Azul, Qatar recently with LATAM— and also a number of JVs— LATAM with AA, and we'll hear more about that shortly, LATAM with IAG, Delta with Aeroméxico. And the recently announced collaboration that is developing between United Copa and Avianca. And a competitive CASK— terribly difficult chart to read, but CAPA basically measures the CASK for about 100 airlines around the world. And you can see that on this graph here that GOL, the orange on the left-hand side, is well below the global average. And similarly, Copa, as a full-service carrier in the blue there, is similarly below the world average in terms of the CASK that they've been able to achieve. And there's been reasonable growth over the last couple of years in seats. There was not a lot of growth between '15 and '16, but certainly growth— the red line— in '17, and the green line, 2018, has shown some very healthy growth. in seats over the last couple of years. But ancillary revenue still seems to be one of the areas that the industry still seems to be struggling with here. As we all know, ancillary revenues have changed the economics of the US airline industry, being one of the most consistently profitable airline industries in the world on the basis of what they've been able to achieve with ancillary revenue. Interestingly enough, as a percent of total revenue, the low-cost carriers, Viva AirBus and Volaris, have been able to achieve very high percentages of their total revenue in terms of ancillaries, but in terms of ancillary revenues per passenger, the industry has not been able to break that. And obviously the chart on the right-hand side includes both low-cost carriers and full-service carriers. Obviously the full-service carrier that has led the world in terms of proving that you can get more out of your customers even if you are a full-service carrier is United that sits at about just under $40 per passenger. So again, what— and that's one of the topics we'll be talking about later today is how do the Latin American carriers, in particular the full-service carriers, how can they tap into this rich stream of revenue that comes from And opportunities— offshore investment in Latin America, we've seen from some of the examples before, and I'm sure there'll be further. Network development— Asia with the ultra-long-haul aircraft. One of the topics later today is the North-South. I mean, obviously, the North-South, not just in Latin America, but around the world, in Asia, is certainly where the high growth is happening. And then, And that should be facilitated by both the A321neoLR and Boeing's NMA due for release in 2025. There's a lot of distribution disruption happening, both from within the industry and from outside the industry. We'll be talking about that later today and tomorrow. And then, as I mentioned before, unlocking the revenue opportunities through ancillaries. A significant order book. These are the carriers that have over 50 aircraft on order. A lot of new technology coming to the industry. I thank Avianca. I did my first flight on a 320neo yesterday from Santiago. But there's a lot of new capacity coming into the industry or in the region, not just coming from existing— not just replacing Old technology, but should increase the capacity in the region. And then there's the Asia-Pacific. Already there are some flows, but those flows at the moment are limited to Mexico to Asia through, obviously, Aeroméxico, Hainan, and All Nippon. And then you've got the flows on the southern side to— more to the Pacific, being Qantas and LATAM through New Zealand and Australia. But new technology exists, and obviously one of the technological issues of the region is you've got 2 of your major hubs being Bogotá and Mexico City having operational constraints, but new technology should enable direct services into Asia through things like the A350LR. So we may get those connections again through new technology. But there are challenges. Just like every other part of the industry, we have challenges on what's going to happen with fuel prices, the issue on crew availability. Again, I think there was an airline that reported last week that they had— actually, it was SAS that reported that they had significant operational issues over the summer because of lack of crew availability. Economic stability— obviously what's happening with the trade wars at the moment— exchange rates, and the inevitable black swan events. So just like any other part of the industry, Latin America will have its own set of challenges. But as I said before, to me, Latin America has always been one of those prime regions where you can't do without the airline industry. The airline industry is so critical To some of the economic development that we saw from Juan Pablo before. So there's strong fundamentals to the industry, but there's certainly lots of opportunities going forward. And again, that's what we hope to do over the next 2 days. So if you're not finding those opportunities from the speakers over the next 2 days, every session has Q&A, so please feel free to— Thank you. To ask the relevant questions. CAPA – Centre for Aviation Performance.

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