Growing intra-regional travel in the face of shifting travel preferences

Transcript

Lori Ranson:So thank you to our panelists today who are here to talk about inter-regional travel trends. We are joined by Peter Söder, Regional VP of Americas for IATA and ALTA CEO, Victor Mieja, Chief Commercial Officer of JetSmart, Kamal Haddad, SVB and Strategy Network and Strategy, LATAM Airlines Group, and Pedro Navarro, VP and Network Strategy of Sky Airline. Just to build on what Alex said a bit earlier, the population of Latin America and the Caribbean is pushing 700 million, and obviously the desire for travel among the region's residents continues to grow. Intra-regional passenger numbers grew about 10.2% in the first half of the year, and that was on a 10% increase So I think I'd like to start off, Peter and the rest of the panel, can you talk about historical trends between liberalization and market growth in intra-regional travel here? Peter.

Peter Cerdá:Okay, well, good morning. Good morning, everyone. I mentioned it from the back. The region has tremendous potential, and where we have governments that have been forward-thinking with clear agendas and not afraid to be competitive and implement open skies liberalization policies, those countries are beginning to succeed. We're seeing tremendous growth. The latest one is Argentina, where you see the current government implemented a series of measures to liberalize its market. It signed 16 open sky agreements. And that has stimulated a tremendous opportunity for the country. More Argentinians are traveling more than ever before. We've seen international connectivity to the country also increase just because of better agreements with other countries in stimulating competition, opening the market without any sort of fear on protectionism, which was the case in Argentina in the past. We've seen it Dominican Republic, we've seen it in Ecuador, we've seen it in numerous countries. The vast majority of countries in our region have established open sky policies, which I think is very beneficial for our future growth and the potential. You only have a small amount of countries that are still very protectionist, Cuba, Venezuela, Nicaragua, and you see how connectivity kind of struggles to move. But in those countries that you've have implemented, it's been accepted, more competition has come, more people are traveling, and that has ultimately benefited everyone.

Lori Ranson:Victor, you can probably expand on your experience in Argentina as well and the liberalization in that country.

Victor Mejia:Definitely. Thank you. Good morning, everyone. For us, it's been a very important change, and Argentina has become crucial in our growth As Eduardo mentioned, we started operations in 2019, then COVID came, and we were waiting and working with the authorities, with IATA, and with the whole industry to try to move to that deregulation that finally came and happened during last year. As a result of that, we have a much modern legal framework in Argentina, not only for routes but also for aircraft. And I think that's a very important point. Interchange, also for pilots. I mean, it's a full renovation and revolution, I will say, from the legal framework. As a result of that, we decided to grow in Argentina this year, and we moved our capacity to Argentina, growing by 100% in terms of our capacity in domestic and more than 40% in international to the region. And that definitely for us has been the right move for this year. It is— the regulation opened opportunity for us. International traffic or capacity out of Argentina to neighboring countries has grown 25% as a market in total. So definitely the results of these changes, it happened in 2024, and now this year you can see the results And Kamal, LATAM has actually experienced some open skies elsewhere where markets have grown.

Kamal Hadad:Yeah, just to add, hi everyone and thank you for the invitation for CAPA. When you see the markets that are growing the most in terms of the intra-regional are the ones that have moved to liberalization. For example, Argentina-Brasil, Argentina-Colombia. But also, I would like to say something about the— more than growth, in terms of the size of the intra-regional markets. When you see the total of the intra-regional markets, there are 7 markets that make 60% of the total passenger moving within South America. And what that market has in common is what just Peter said before: government incentives, liberalization, infrastructure, and airlines competing for the market. So the opportunity that I see in the intra-regional is huge, that we're going to discuss later.

Victor Mejia:Yes.

Kamal Hadad:But those factors are key, in my opinion.

Lori Ranson:Do you agree as well? Are you seeing an increase in liberalization that's going to benefit Sky going forward in the intra-regional market?

Pedro Navarro:Yes. Hi, everyone, and thank you for the invitation. Yes, I totally agree. And as my colleagues mentioned, I see there is a strong potential for growth. At the end of the day, we, as part of the network planning teams, for us, we can put more capacity into the markets. But for that to be sustainable, I mean, the whole ecosystem has to be aligned, right? Infrastructure, taxation, legislation on ticket prices, ancillaries, so on. So that's the only way that this is going to be sustainable for everyone, and not only for airlines, for the whole community, for the whole industry, because at the end of the day, we are seeking for the same goal, that is More flights for our passengers.

Lori Ranson:Maybe we can be in agreement that while there are a lot of challenges here, traffic rights is perhaps a bright spot going forward in terms of how the intra-regional market is going to develop. Are there still— Peter, you mentioned certain pockets in terms of traffic rights and access, But overall, do you all see this moving in a positive direction?

Peter Cerdá:I think so. I think, you know, I don't see it going back. We could always have the risk. One of the biggest question marks that we have for a country like Argentina is the stability, the continuity. I think in one of the panels before, the challenges that we always face as an industry in a region is the changing of government and the politics. When we've had consistencies, we've seen greater lengths of benefits. In a country like Argentina, if we continue down the path that we currently see, the same government remains, then you have a greater chance of success because you're going to have a longer period of adaptation, of integrating into your system. it becomes much difficult to go back. But the risk is always there. The risk will always be there where you have a significant shift of a government and they want to implement certain policies that can be more conservative or more protectionist, and then we regress. That has also happened to us in the region where we've seen governments that have regressed and that has had impacts. But you don't have to implement liberalization or eliminate it to regress negatively. Bad policies, consumer protection, fees, competitiveness will also impact the market. But I think we are going down the right trend. The industry is evolving on a global scale. We're changing. So I don't see it at this moment that we'll see major changes in terms of protectionism at this time.

Victor Mejia:Yeah, we also have the same view. It's important to mention that for— to deal with a region with a lot of changes, having flexibility and having the capability of moving our aircraft where the opportunities are, and also having flexibility moving our pilots, our crews, And we still have some room to move, to walk through. We have had countries during all these years that have been moving towards that direction. Chile started first. Now also Argentina has incorporated changes to the regulation on the pilot side that will allow us more freedom to move. We have different seasonalities within South America. We have a summer in the south, which is very strong at the beginning of the year, and then not necessarily strong in the northern parts of South America. So having the flexibility to move assets, aircraft, crews, having standard within the region is definitely one basic step towards this modernization of the region. And I agree that we are Moving towards that, and we just encourage and want to be part of more of that.

Lori Ranson:Just moving, I'd like to talk about market evolution from a network perspective, and maybe to start with Pedro and move down the panel. Is there an opportunity for more point-to-point markets within intra-Latin travel? Obviously, capital-capital markets are very mature. capital to secondary markets are growing, but I would really like to get the panel's thoughts about how it's going to evolve over the next 5 or 10 years.

Pedro Navarro:Yes, so our business model allows us to stimulate demand, open new markets by keeping fares down. On the other side, it also helps us to have some flexibility especially with seasonality. That's a good advantage we have. From that point of view, we have taken the lead in some point-to-point destinations that haven't been flown before. For instance, last year we launched the route from Santiago de Chile to El Calafate in Argentina, a new route, which was really successful, and we are announcing that route again for this year. But we also have history launching new routes from Chile to Brazil. Of course, there is a lot of opportunity to grow from that space, but going back to my previous point, it's not only about adding capacity. In order for this to be sustainable, everything has to be aligned and going into the same direction.

Kamal Hadad:In my view, when you see potential of unserved markets, capital to capital, as you say, Lori, is already covered. I would say that the biggest opportunity in terms of the intra-regional is mainly secondary cities in Brazil and Colombia. Chile and Peru are very centralized in terms of the demand. Demand in Chile is almost everything Santiago, here between Lima, Cusco, everything, the demand is there. In Brazil, you have 10, 15 cities that are 2, 3 million people that could develop more airline development. And when you see trip per capita of those cities in particular, it's actually half of the Brazil total. So we are talking about 0.4, 0.5. So the potential of those cities is really good. And in Colombia, it's very similar. You have 4 or 5 cities with a big population that also can develop some new routes that today are unserved.

Victor Mejia:Yes, on the JetSmart experience, flying what we call smart routes, which are routes that don't necessarily go from one capital city to another. This has been part of our model since day one, and we have been exploring these opportunities both in domestic but also in international markets. And right now we have around 75% of our capacity is to non-capital cities, uh, out of the, the international network that we have in South America. Definitely, uh, still, still the combination between having a flight to the— between the main cities, having some connectivity there, it's important, but continue to explore these opportunities point-to-point also serves to, to create some space in airports that are already saturated. Bogotá could be one of those examples that, uh, that airports that has challenges in terms of accommodating more capacity. So having the point-to-point to secondary cities definitely not only creates, uh, growth in the market but also helps to, to free some space where, where space is not finding more Kamal, did you want to—

Kamal Hadad:Yeah, may I just complement something that our LATAM business model maybe is a little bit different than Sky and JetSmart. We are much more hub-and-spokes. In our case, also some part of the regional routes that we launch has much more related with the long-haul travel. Discussion that we were in the previous panel, about taxes for connection, for example, an airport like Lima, is really important because Lima is competing with Bogotá, is competing with Panama, so for the same traffic. So that's also really important when we think about regional routes. Connection taxes are important for the developing of the regional routes.

Victor Mejia:No connection taxes.

Peter Cerdá:And I think what we have to look at is what's happening over the North Atlantic. When you look at seasonal flights and the type of aircraft, you look at the US carriers in terms of flying over the North Atlantic in the summer, of course they're going to go to the main hubs, but they're going to many secondary cities now throughout Europe, from small towns in Norway to secondary and third-tier cities in Spain and Italy, and that's in the summer. It's our winter in this part of the world. I see that as we get more of the MAX coming in or the A321XLRs, we're going to begin to see that coming into our region. You're going to see the US or the Canadian carriers, the European carriers begin to fly to more secondary travel destinations, either for summer or skiing opportunity, cultural, because they're going to have that flexibility. They're going to have those airplanes that in the summertime they're using across the North Atlantic. In their wintertime, they'll look at coming down into the region. What we have to look at is, again, we have to look at infrastructure. That's going to be a major component for our success. We talk about the major hubs. We have the capability, but it's saturated. But when you start looking at the secondary airports, with 2 or 3 airplanes, you have a saturated apron, or you don't have the right navigation aids, or you don't have customs and immigrations. So if you want to have more secondary connectivity, more international connectivity, you have to build your infrastructure to be able to receive those flights from Europe, from North America, or intra-regional, which is, I think, again, a huge opportunity that we have for growth. But what we are seeing in North America to Europe or other parts of Asia or to Middle East, it's going to come to our region. Because the technology is going to be there, the airplanes can fly longer, there are different types of aircraft, and passengers want to have different experiences. They want to fly to different locations that they didn't have that before. I think that's another opportunity that we have looking forward to the region in the years to come.

Lori Ranson:That's a really good point. Pedro, you and I were talking yesterday and you were talking about that same issue, domestic infrastructure, the airports, domestic airports here in Latin America, and how the infrastructure needs to improve?

Pedro Navarro:Yes, and going back to Kamal's point, I agree that there are more opportunities in secondary markets in Brazil and Colombia, because, for instance, in Peru and Chile, we have a lack of infrastructure in secondary cities. For instance, well, we all know about that, the new Lima Airport, but we have had some delays with Chincheros in Cusco, with some airports in Piura and Chiclayo. So there is a gap in the infrastructure that needs to be addressed. Also, in Chile, we have some airports that don't have the adequate instrumental landing systems, and that's tough because sometimes when we have low visibility conditions, it's hard to operate. So as long as these conditions are not— the gaps are not filled, I think there's going to be always a gap between the primary hub and the secondary cities.

Peter Cerdá:If I could just add, of course, we're going to have 218 million new passengers in the next 15 years. The hubs are not going to be able to receive all those passengers, and so we're going to have to develop the secondary airports very, very quickly because that's the only way we're going to be able to offset a little bit of that more capacity that's going to come in because we already find ourselves in Bogotá, in Santiago, in Mexico City, in Guarulhos. The moment you open the new terminal, it's congested. You're already saturated. Unless we develop our secondary airports, it's going to be very difficult to grow over the next couple of years because we're just not going to be able to— Our planning in this region has been suboptimal, I'll say. It has not been very effective. Most airports have to be planned 20, 30 years, and we're always in catch-up mode. We talk about the great success of Lima, but it's 18 years too late. It was an airport built for 12 million, and we're operating at 25. It's the same problem that we have in many other parts. You go to Mexico City now, it's an airport that's sinking, and we're at cap. Every airport that you look at, We're struggling to keep it afloat. How can you grow responsibility if we're always catch-up? We have to do a much better job on the planning. I think this is also an area where airports and airlines have to dialogue much better. We need to understand what the strategy looks like and where we're going in the future.

Lori Ranson:Well, that was a question I had for you and the panel, and it goes back to how can you stimulate connectivity in the region. And so how can you ensure that some of these airport infrastructure issues are going to be taken care of, particularly, like you said, the secondary airports, as the larger airports, you know, reach capacity in a much shorter period of time?

Peter Cerdá:I'm going to be a little bit provocative here. Governments need to take a grander role here. An airport infrastructure initiative It should be a state agenda or a government or local municipal agenda. An airport doesn't only bring airplanes. It brings jobs. It brings growth. It brings social stability. It brings economic richness to your communities. It's about— you're not only bringing tourists who are going to take pictures of your museums. It's about creating an ecosystem that's going to help you stimulate growth for your community. To me, it's very frustrating when you go to certain countries and you're looking at building a new airport or we have challenges in the airport and you hear the echo in the room, no sound from the government. Governments need to take a bigger responsibility in ensuring that we have the right infrastructure, that we continue to grow, not only for the airlines, but for its— for the country as a whole. The new terminal here— and I'm sorry for Peru that we keep picking up Peru. We built a new terminal and it seems that it's an island. The bridge that's supposed to connect the airport to the terminal is 3 years delayed. What comes first, the chicken or the egg here? We built the terminal And you can— we're using 2 semi kind of makeshift bridges. We don't have the road to the city. The train that was built was built to the old terminal. I mean, we've got to be, I think, better coordinated, more responsible to make sure when we do build a connection from the city to the airport, that goes to the new terminal, not to the old terminal that doesn't exist anymore. So the governments have to take a much more involved collaborative role. It cannot only be the industry, cannot only be the airport doing the work.

Lori Ranson:Do any of the panelists— would you like to comment on that?

Victor Mejia:Yeah, I would only like to add that infrastructure, as we said, also involves customs and immigration personnel, but also technology. We have seen good examples in technology to make it more efficient and bad examples in some airports that has not worked. as expected. Opening secondary airports and thinking about infrastructure also has to be hand in hand with that because it has happened in this process of exploring secondary markets. The airport has infrastructure, we want to go there, but there's no capabilities to have customs or migration personnel, and that becomes the bottleneck of the process. As we have mentioned, it's also a coordinated effort of several parts of the chain, not only the airline or the low fares or only having the runways. It's definitely a coordinated effort.

Lori Ranson:I want to move on to a different topic to make sure that we cover because I'm particularly interested in your views on passenger mix in these markets going forward. I would imagine there's a lot of first-time travelers, but corporate travel is also growing in these markets as well. If the airline panelists and then Peter could just tell me how you see the passenger mix developing over the next 5 to 10 years within these intra-regional markets.

Kamal Hadad:Today, approximately, for the intra-regional markets, 10% of the passengers in terms of size are corporate passengers. The trend that we have seen after pandemic has been really good. Actually, we are seeing demand catching up with the high growth rates that we are seeing today in the market. Also, another important comment in terms of the product, the corporate product looks. In the case of LATAM, all of our aircraft, we have Wi-Fi on board. We have the premium economy with seat block in the middle. That product looks like that is working really well for the corporate passengers. Looks like there's no need for a full flat.

Lori Ranson:Pedro?

Pedro Navarro:Yeah, in our case that we are more focused on intra-regional traveling, what we know that our corporate passengers appreciate is convenience in terms of scheduling, frequency, how many options do we give to the passengers, and also reliability in the product, how that in terms of operational performance, right? So I think that's important for the corporate passengers in this sector. Well, in our case, our loyalty program, SkyPlus, has just had its first anniversary. So that's why we are also trying to target these passengers in this segment. But as Kamal mentioned, we are now around 10%. We see that trend growing up, but we want to focus on our strengths and how we build our network around that.

Victor Mejia:From our experience too, we are devoted more to give air connectivity to everyone in the region, whatever the reason for travel is. Definitely, our tour model is more keen of the leisure travel and visit friends and relatives, but the reason for travel of business or corporate, is something, a segment of the market that we've seen growing, growing all over the region. Uh, we want to cater that, that segment. We have been doing, uh, adding more value to our product. We, we just added Advantage as a frequent flyer program for, for our customers that started November last year. We also opened our distribution channels to be present in the, in all the channels that, that cater this, this segment. So we started distributed through GDS with Amadeus and Sabre, but also developing our connectivity travel agencies. So we want to be part of that, to be an option, a viable and valuable option for the, for the, let's say, business traveler in the region. And definitely our forecast that it's going to continue to grow. And as Cabal mentioned, I mean, it's, uh, what they're looking— and Pedro also mentioned— is flexibility, schedule, And not necessarily for the intra-regional, you're looking for that much of a luxury travel, let's call it. It's more about convenience.

Peter Cerdá:No, I think with how post-pandemic you have, there's more flexibility and people are now more willing to travel throughout the entire year. They're looking at different experiences. And this is why I go back to the secondary markets, the huge opportunities.

Lori Ranson:Yeah.

Peter Cerdá:From a mindset, it's looking at the passenger. How do we take care of the passenger? How do we understand the passenger? What are their needs and what are they looking for? As an industry, that's what we have to do a better job at. It's giving them the entire portfolio of services, but it doesn't start when you get to the airplane or to the airport. It starts at home. The moment the person, the passenger leaves, to the point he gets to the end of that route to open the door to the room, the hotel, so on. It's giving the entire experience possible. Consumers today are much more savvier, more— they have much more information. They now have AI. It puts a big challenge on the industry to be more competitive, to be better aligned, to give the whole service. I think you were saying, Victor, about the technology. If your flight is 1 hour and you fly from one country to another and you arrive and then you're in immigration for an hour and 55 minutes, your experience is not going to be very good. It's how do we improve the entire process for the passenger to have that experience, to have the flexibility and the choices. The one thing we have to see as a region where again, I see it as an opportunity. The consumer is going to be very savvy. He's going to look for the best price for what he's looking for with the best service possible. We're competing on a global— this is a regional discussion, but we're now competing against Asia and Doha and North America and Europe. We have to step it up and we have to provide the same level of service to meet their expectations.

Lori Ranson:So, you know, when we think about— there's been a lot of discussion this morning about trips per capita for different countries for the region. You think about scarcity of aircraft. So I don't anticipate that there's going to be an overcapacity situation in these intra-regional markets anytime soon. But if you disagree, if anyone disagrees, let me know. But I'd like to get your perspective on that, on the potential for— overcapacity in some of the markets?

Pedro Navarro:Okay. No, I think there is still a huge opportunity for growth. But as I mentioned, not only by adding capacity to the market is enough to increase the flights per capita. We need the whole ecosystem to work and to be aligned with that. I think that's the key for everyone in the industry to be sustainable.

Kamal Hadad:We have discussed part of this. There is a scarcity of aircraft. That's for me the first part. Also, trip per capita, we see only Chile maybe has 1.1, the other countries half of that. And when, as Peter said at the beginning, when we compare to other European or American countries, it's It's a huge potential of growth. Also, a number that I love always to see is when you see, you say 700 million people in Latin America, but when you do some numbers, that trip per capita is sometimes always the same people flying. Actually, when you see people that really flies, it's only 20% of the people of that 700 million. 100 million that has flown in aircraft sometimes. So the potential is huge.

Lori Ranson:Definitely.

Victor Mejia:One of the things that we monitor and keep track of is how many of our passengers or customers are flying for the first time. And that's something that we welcome and we are focusing on those passengers. That's the fuel for growth for the future years. Um, we, we, we have an index called the Smart Index, which is where we survey more than 22,000, uh, customers and ask them about the, the reason they travel, how many times a year they travel, etc. We just recently made, made this survey in July, and in total it was around 20% of the people flying with us in front for the first time. In some countries, more than 35-40%. when we make the survey. Definitely, the fundamentals of the region for growth are still there. The challenges are the ones that we have been discussing during this panel and the previous panels, but the fundamentals to think that this is a region that will fuel growth in the coming years is still there. It's about to do the things right as an industry.

Peter Cerdá:The potential is certainly there. And we talk about, you know, these are all competitors here. But as an industry, we're still competing with the buses.

Kamal Hadad:Yeah.

Peter Cerdá:Let's be honest. Our region from Colombia to Brazil to Argentina to Peru, Ecuador, the buses are our major competitor. And most of the citizens in our region are very price sensitive. So if the price goes up because you have an airport tax or you have a VAT that goes up, Those passengers that may have flown for the first time, it may be that one time because they won't be able to afford to continue to fly and they'll go back to the bus. So this is why, you know, as an industry, we keep advocating to governments that we have to be competitive. Taxations have to be reasonable. We can't overcharge. We have to have the right regulations because we are consistently competing with the traditional mode of transportation in Latin America. which is the buses. It takes longer. It's probably less safer. It's less reliable. But it's what people in our region can still afford. So that's why when we talk about small, you know, Chile, Panama, San José, Dominican Republic, that you have one flight per capita, the rest of the region is still struggling. A country like Brazil, 200 million people, and you're right, it's not that you have half the the population that's traveling. You have a very small portion of the population that travels multiple times a year, but the vast majority of the population is not traveling. That's, I think, our crusade. That's what we have to continue to push is how do we take more passengers from the buses to the airplanes, remain competitive, provide a good service, but it's not something the industry can do alone. You know, I said this many times, the buses are subsidized, they have fuel assistance, they don't get taxed, they don't have many of the hurdles that we do as an industry. And the industry, you know, the one ask I would have for governments, that they treat air transportation as a public mode of transportation, that we have the same rules as other modes have.

Lori Ranson:Well, we do have one Slido question, and I believe it's for LATAM. Half of LATAM's international capacity is intra-regional, yet many secondary cities stay invisible. Could virtual interlining become a viable solution?

Kamal Hadad:What do you mean with this?

Peter Cerdá:Can you explain?

Victor Mejia:Yes, sir. Right there.

Pedro Navarro:Hi, my name is Pedro, and I work at kiwi.com. Basically, my question is about what do you think the possibilities of new technologies in distribution like Vintor interlining could help connecting the unconnected in Latin America, given the constraints in infrastructure and network?

Victor Mejia:Thanks for you.

Kamal Hadad:Is it LATAM? We are actually developing that technology. That's the reason I wanted to clarify. We are developing that technology internally in LATAM. Today we do a lot of co-chairing through the GDS. This interline technology, we are trying to put it in place. We are not ready yet, but we see a potential for this. So if you are interested, let's discuss later.

Lori Ranson:Very quickly, we are out of time, but for the airlines, could you tell us what percentage of inter-regional travel will represent your traffic In my case, it's 50% of intra-regional traveling, and it has been a huge growth from 25% that it was in 2019.

Kamal Hadad:For LATAM, it's 20% is intra-regional.

Victor Mejia:Yeah, we're going to be around 34% and 40% depending next year, but that's the trend.

Kamal Hadad:That's around the number.

Lori Ranson:Great. Well, we are out of time, so thank you all so much.

Kamal Hadad:Thank you.

Pedro Navarro:Thank you.

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