How does Latin America sustain itself as the world’s fastest growing aviation region?

Transcript

Dave Appleby:Thank you both. So just to introduce the panelists that we have. So Abbie was a member of the startup team at Azul Linhas Aéreas in Brazil, Brazil's 3rd largest airline and one of the world's fastest-growing low-cost airlines based in São Paulo, Brazil. The airline currently flies to 100 destinations, almost 900 daily flights, and serves 100 million passengers.

Abhi Shah:Thank you.

Dave Appleby:daily departures and more than 230 nonstop routes. Previously with JetBlue Airways, Abhi is based in São Paulo working in the areas of network planning and revenue management. Abhi, thanks so much for joining us.

Peter Cerda:Thanks.

Abhi Shah:Thanks for having me.

Dave Appleby:And Peter Serda, many know Peter, the Regional Vice President in the Americas for IATA, the trade association whose 260 member airlines transport more than 84% of total air traffic. He leads a multinational team of professionals which proactively pursue IATA's industry priorities with government authorities and industry stakeholders to make the air transport industry safer, more secure, efficient, and profitable. Peter, as many will have read, was also named very recently the Executive Director of ALTA, a role he started just these last few days, and he'll be— we'll be talking to Peter actually about all of that a little later on in the session. Without further ado, let's get started on our discussion on the Latin American Caribbean region. Abbie, thanks so much for being with us. It's a pleasure to have you on the panel. Can you start maybe with a little overview from yourself, just how you see right now the region in general and maybe more specifically Brazil? I spoke in the introduction there about the growth that's been seen in the first month of 2025 in the LAC region. The Brazilian domestic market was actually one of the true drivers of that growth with a 44% increase. equating to almost half a million more passengers over January 2024. What do you think drove that exponential growth and will it continue?

Abhi Shah:Yes, thanks. Brazil, the 3 airlines, Azul, GOL, LATAM, have all gone through their restructurings. You had LATAM that during COVID did Chapter 11. GOL is in Chapter 11 right now. Azul has gone through its restructuring. It's going through one right now as we speak as well. We're all in different phases, but the market overall was one of the first to recover post-pandemic. Brazil, very large country, continental size, 220 million population, no alternative modes of transport, diverse population centers. Really, aviation was the driver to get the country back on its feet. We actually grew through that period. One of the reasons we did that was through our flexible fleet. We actually, as I mentioned yesterday, we have multiple fleet types, which is very not common at all for an LCC, but really allowed us to test demand post-pandemic. We had some routes that we actually came back with a caravan that went to an ATR, went to an Embraer, and then went to a A321. That really allowed us to recover our network very quickly. We've always believed that that Brazilian market should be larger. I mentioned before, it's grown 50 million passengers, but it's still only 100 million out of 220 million. If you look at enplanements, it's 100 million, but if you look at individuals, actual people, it's probably more like 15 million.

Dave Appleby:At most.

Abhi Shah:At most. There's a lot of still air travel that can be grown. We think that that number should be double or triple and things like that. We've grown the market through network. We're an LCC, but we're not a ULCC in terms of fares. We've grown the market. Our primary hub in São Paulo, for example, in 2008 had 10 total departures. The entire airport, and it has a catchment area of 4 million people. It's like imagine Newark having 10 flights in total, completely ignored, completely not accessed. Now, we alone have 180 departures at that hub, in addition to other hubs in the country. There was just a lot of connectivity that was not being explored. The key for us was using the flexible fleet, which was not being done before. We have ATRs, we have Embraers, we have Airbuses that we use like the US majors do, the right airplane at the right time in the right market. That allows us to bring demand at the lowest cost possible.

Dave Appleby:Thank you very much. I think wondering whether you could touch a little bit on staying on the Brazil market, whether you could speak a little bit about potential tie-up between Azul and GOL and just what that current status is and how that would shape the market, those 2 airlines coming together.

Abhi Shah:I talked about this briefly yesterday, but I can expand upon this. We really think it's about growth. Azul serves today, along with our Caravan subsidiary, about 150 cities, but we're doing this all within our own network. It doesn't always go right. For example, in the month of March, we've had to close service to 12 cities because the dollar spiked, fuel spiked, those markets don't make sense anymore, so we've actually closed service to 12 cities in the month of March. We think that that number that we can get to is 200 cities served, but it would be a lot more possible if we're doing it by connecting Azul's and GOL's network, if we're able to feed each other. if we had 2 loyalty programs that were working together to create that network. That's one example. We think that many more cities in Brazil should have service to the US nonstop. Azul was one of the first to start flying from the northeast of Brazil. Brazil is so large, on an 8-hour flight from São Paulo to Miami, half the time you're in Brazil. 4 hours in Brazil, 4 hours outside Brazil. If you live in the northeast of Brazil, you have to come all the way down south and go up again. It's very inconvenient. We think many more cities can have service to Europe, to the US, but again, doing that alone, only one network, is more risky. If you're connecting 2 networks, now you're reducing that risk and you're allowing yourselves more opportunities to grow. We're also competing globally for engines, for maintenance technicians. for airplanes, for cost of capital. We think really putting those 2 networks together is going to give us the ability to be able to grow the market even faster than we are now.

Dave Appleby:Thank you very much. Peter, moving on to you. Can you also give us your overview of the market right now, the region, and also maybe touch a little bit on this element of consolidation? in the region, and is it a good thing for Latin America?

Peter Cerda:From a regional standpoint, the region is doing very well. It recovered strongly. It continues to do well in most markets around the region— Mexico, Colombia, Argentina is picking up. What's the big— The great thing about it, and I said this yesterday, when we look over the last 3.5 years, we have over 1,300 new city pairs. in the region. I think that's very powerful on how much the industry has grown and its ability to adjust to consumer needs. Very similar to what Abhi was saying with Brazil, there's challenges and opportunities. Just this morning, we woke up to news that in Colombia, we have a fuel shortage in Bogotá. These are the challenges that we have on a daily basis in our region in terms of Really being able to build that connectivity, building a sound ecosystem. When you look at travel in terms of passengers, there's still a huge amount of opportunities to grow. Avi was talking about how many Brazilians travel on an annual basis. It's the same thing throughout the entire region, where you have countries like Spain, where their citizens travel 4 times a year, US too. In our region, on an average, it's less than 1 trip per year. When you look at the geographic challenges of the regions, air transportation is the mode of social and economic well-being.

Dave Appleby:Yes.

Peter Cerda:In countries like Argentina, Brazil, Colombia, where you don't have good ground infrastructure, you don't have good access, air transportation is the means of connecting communities, not only from a people standpoint, but from an economic standpoint. That's one of the areas that I've said many times, we have to continue to work Very, very closely with governments, keep pushing, and make them understand how important air travel is so we can have a common plan to have more people travel in the future. The issue here is how do we get more people on planes to travel from point A to point B, and that ultimately will help with more connectivity on a global basis. In terms of consolidation, you know, our industry extremely dynamic. We are reinventing ourselves every single day. Part of it is because consumer needs and wants change. Other economic and social factors impact the change. Abhi was talking about consolidation in Brazil. We've seen a whole slew of different types of different partnerships, different ways of doing business in the region. We look back 25 years ago and Grupo Ataca, if you can remember that, how that kind of—

Dave Appleby:Yes.

Peter Cerda:started bringing small airlines in Central America together. Grupo TACA now is part of Avianca. You look at how LATAM grew and now the possible merger. Our industry continues to evolve because customers want us to continue to change to provide better services. As Avi was saying, it's the way to bring more connectivity, more connections, more competitiveness, and have more passengers travel. It's the law of the game. We will continue to have to reinvent ourselves, to look at new mixes in order to be able to be competitive.

Dave Appleby:Thank you. As we know, there's some quite challenging times right now. Markets facing high inflation, currency devaluations, a rather precarious geopolitical environment with impending tariffs, etc. What can the region do, in your opinion, to navigate these tough times and to keep the aviation market growing in all areas?

Peter Cerda:I'll say something about I'll base it in 2 parts. When you look at the Latin carriers, and Abhi alluded to it yesterday, and I think it's a great point, you look at all the challenges that we face as an industry in Brazil, taxation, fuel taxes, litigations, and when you look at the top airlines in the world in terms of on-time performance, they're Latin carriers. Our airlines based in the region have done a great job on reliability, customer service. But for some reason, throughout the entire region, we continue to get penalized. We continue to get this slew of consumer regulation proposals in different governments in Colombia and Peru and Chile. Then they mix it up with the environmental taxations and fees. It's an industry we keep getting hit one after the other when the level of service continues to improve in our region. not only by the Latin carriers, but also our international airlines that are bringing more connectivity, more flights. The issue about, well, do I want to connect Miami to São Paulo? It's not about Miami and São Paulo anymore. It's how do we connect the northeast of Brazil? How do we connect Mendoza, Rosario? How do we bring Europe to other parts of the region? That we are seeing. It's coming, but governments want the entire cake.

Dave Appleby:Yes.

Peter Cerda:and they cannot have the entire cake unless it's a balanced playing field. We have to begin to do a better job, and governments need to be much more open and transparent in the way we impose regulations, how we increase taxation. Today, the average tax on a ticket in our region is between 27% and 30% on an average. We have countries in the Caribbean, actually, and my Caribbean friends know because I tackle them all the time, it can reach as high as 60%. You're actually paying more for your taxes than you are in the airfare. The one thing I try to educate and we try to do with governments and even the traveling public, because the traveling public sees the end price, but when they begin to see what the total price is, the airlines are competing with the buses and we're at that level. When you look at domestic fares in Colombia and Argentina and Brazil, they're as low as the buses.

Abhi Shah:Yes.

Peter Cerda:between cities. But when you start looking at the additional fees, the buses don't have that, we get that. So that's where the playing fields are uneven. That's where we need the rules of engagement to change so we could get more people to travel, so it won't be less than one flight per capita per annum, and we can have more people traveling on a more regular basis.

Dave Appleby:Thank you. Abhi, do you have any thoughts on those points of the sort of geopolitical environment right now?

Abhi Shah:Yeah, sure. I mean, obviously, you know, Brazil in some sense is a little bit isolated. It's isolated, which is good. It's got a large domestic market, which is good. Brazil demand is very Brazil-originating, so the point of sale is strong in Brazil. I think the noise we're seeing right now, Brazil can be a little bit isolated, which I think overall is good, but of course, it doesn't help the sentiment in general. On the regulation side, airlines in Brazil are a target of trying to get money out as opposed to seeing them as a way that really Obviously, we're a business and we want to make money, all those kinds of things, but we also see a big part of our responsibility, which is developing Brazil. When an Azul airplane shows up at a city that's never had air service, never, ever, people line up along the fence. Now you've changed people's lives in terms of education, employment, opportunities. Healthcare. In the remote Amazon region, if you want to get medical treatment, it's an Azul 45-minute flight or a boat ride for days. Medical treatment. We really believe very strongly that that's our contribution, if you will, to help Brazil develop and grow and things like that. It's obviously not always seen that way, but that's what we believe.

Dave Appleby:Yes. That takes me on to that specific matter because I was going to ask on the question of markets. Throughout Latin America, there are many sort of small regional population centers that have no service at all or very limited service and a lack of infrastructure really to be able to handle more flights. How have Azul and others gone about being able to map out ways to connect these areas to larger hubs and to feed that traffic into their respective networks?

Abhi Shah:For us, it's our fleet. Our 2 competitors in Brazil have a single fleet type mostly, and so that prevented Brazil from really growing significantly over the last many years. We came in with this different model of, as David said yesterday, with the Embraers and the ATRs, and we've gone down, then we've gone up as well. It's similar to the US. Smaller airplanes in smaller markets, bigger airplanes in bigger markets. We're actually a hub-and-spoke airline. For being an LCC, a significant part of our traffic is connecting. That's something that's different as well. We use connections as a way to bring demand into our network. We'll have a Caravan feeding an A330. We'll have an ATR feeding an A321. That's a good point. But again, all of them work together, and so we've grown the market. 80% of the routes that we fly have no nonstop competition. That's by design as well. We started by doing things very, very different, and we've continued that way. We grew the market by being different, by connecting different cities that never had service, or if they had service, you couldn't go and come back on the same day, or you couldn't go and come back in one day, all those kinds of things. Really, it's about having a different network, competitive advantages, and that's allowed us to grow the market. We've done it just by having a completely different business model in Brazil.

Peter Cerda:I just want to add, and that's a bit of a challenge for the rest of the region in terms of Azul. They have that flexibility in types of airplanes, but when you look at most of the other network carriers in the region and you look at the infrastructure, It's limited because they have 1 or 2 fleet types. When you look at the infrastructure in many of the other countries in secondary, third-tier markets, if you put 1 airplane on the ground, you just saturated the airport. It's how do you build that infrastructure to slowly begin to grow to create that connectivity to bringing more people to travel. That's probably the biggest challenge that we have in our region when you look at Colombia, and again, Brazil, Chile, Argentina. It's the 2nd and 3rd-tier airports. Is the infrastructure ready to begin to receive all these flights? In Chile, in some of these airports, you put 2 airplanes or 1 airplane, you're collapsed. We have to build for the future, and that's something we have to do also better as an industry, is building towards the future. All our infrastructure, the moment we open it, it's already saturated. I said this the other day. With airports, we have to do a better job working with them, with the governments, to begin planning for the future. We cannot continue to be slot-constrained. Our region is becoming very quickly one of the fastest slot-constrained regions in the world. That's not good. What we want is to have ample infrastructure so we can continue to grow responsibly when the needs are there, but every time we tend to be in a catch-up mode. all the time, so by the time we build a new infrastructure, we're already behind the curve.

Abhi Shah:I'll give you one more example. We actually— Brazil is mostly a corporate market, maybe 60%, but on weekends you have very little corporate demand, right, high-frequency market demand. So on weekends what we do is we completely shift our network to a leisure network, and so we fly city pairs just on weekends together with our vacations business. where we sell vacation packages, 7-day or 4-day packages. Then we connect city pairs that have no nonstop service, have never had nonstop service, but now they do just on the weekend to take you from an interior city to a beach destination. Brazil has a lot of beach destinations. That's one other way where now we're finding demand on weekends. Otherwise, the airplane would just be sitting there doing nothing. It's a way to increase utilization and also access demand together with our vacations business to grow the market. It kind of gives people a reason to travel, much more convenient than otherwise.

Dave Appleby:Thank you. Thanks very much. Peter, you alluded to this point before. I think on many panels I've moderated or been on personally, the element of Caribbean taxation comes up a lot. What do you think can be done for a better working arrangement maybe between the governments and the airlines to try and drive that taxation down?

Peter Cerda:I think it's a general problem that we have across the board. It's not only in the Caribbean. We're seeing it. We understand because of COVID the governments are trying to find ways to recuperate financially, and they see the air transport system as an easy way to do it. But that's also having ill effects. I've said it many times here in the Caribbean, you're competing in a competitive world right now. It's not about Antigua competing with Cayman or Cayman with Barbados. You're competing on a global scale. You need to be competitive. You need to give good service. It needs to be very much market-driven. If some of these island states have taxation that are 60% of your total ticket, people are going to start looking elsewhere. Then on the flip side, the governments are consistently asking, we want more service. We want more planes. We want more airlines to come. Well, in today's environment, Airlines are going to be extremely cautious where they begin to operate new service or add because they're limited in terms of the amount of aircraft that they have because of the supply chain challenges. It's how competitive can countries be. I'll give you one example in Barbados. Barbados actually brought down their taxes because they wanted to stimulate more intra-regional connectivity and they wanted to stimulate more connections. They did exactly that. What we've seen in Barbados is a spike in more travel between the islands. That's what we need states to do is understand by lowering taxes, it doesn't mean you're going to lose money. Actually, the lower the taxes, the more you're going to stimulate overall because you're going to have more people coming to your islands or to your cities, and they're going to spend more. Is it the $25 that you're going to add on to your already $86? Or is it, you know, let's bring it down, let's be competitive, let's bring it down to something that's reasonable because I'm going to attract more airlines, I'm going to attract more passengers, and ultimately they're going to spend more in your cities. It's going to stimulate more business, more jobs. That's the tough— now, with the government standpoint, it's all about today. It's all about votes. It's all about how popular I'm going to look. Raising taxes to help, it's how you sell it. Unfortunately, in many parts of our region where we've seen these spikes in taxation, it has not helped growth. It's a crusade that we continue to work. Will it ever be resolved? I don't think so, but we have to try to create this partnership amongst the private and the public sector on working collaboratively so it's a win-win. That's what we're trying to really preach and advocate. Let's make it a win-win for the industry. Let's make it a win-win for the community. If we're able to do that successfully, there are cases we've seen in Cartagena, we've seen it in different places around the region where the private-public sector working together, you have positive results in the end.

Dave Appleby:Thank you, Peter. Abhi, I think I just wanted to touch also on the LCC model in the region. When you look at Mexico, you've got Viva Aerobus, you've got Volaris, Obviously, as you say, in Brazil there's Gol Azul. In the US, I think it's fair to say that there's been some not having the best of times of late, some of the LCCs. Even one CEO of the US legacy carriers was quoted as saying that the model will lead airlines out of business. What do you think about that? Do you think the LCC model has a strong future in Latin America and the Caribbean?

Abhi Shah:Yeah, absolutely it does. It's proven itself around the world. but you actually have to be able to have those low costs. That's a challenge in Brazil. Brazil, for example, is one of the few countries, if not the only, with 100% foreign ownership of airlines. Anybody here in this room can come to Brazil and start an airline. I don't recommend you do so, but feel free. You're welcome. Let's say you want to start a ULCC in Brazil. What's your cost advantage going to be? You're going to have customer lawsuits, as I talked about yesterday. You don't have secondary airports. Everybody has the same cost of airports. Labor is the same. Maybe you have a larger airplane and you have a lower aircraft lease, maybe. You have labor claims. You have taxation.

Peter Cerda:You're not—

Abhi Shah:Honestly, you have incumbents that are pretty well managed, I think, all 3 of us. Even if you didn't have that, what are your actual ways of getting lower cost? That's why I think it's a model that works. Absolutely, it works, but only if you can actually have that cost differential because otherwise, all you have is a revenue differential, which doesn't work.

Peter Cerda:Distribution cost.

Abhi Shah:not going to be able to distribute only directly, for example. That's why I think it's tough. It really matters case by case, and it really— you have to look, what is it that you're bringing to the table? If you really are going to bring lower costs in that geography, great. Otherwise, I think you have to look at what your revenue competitive advantages are going to be, whether it's diversifying, whether it's fleet, whether it's network advantages or other types of businesses. For me, the ULCCs, are you really, really able to bring those lower costs? In Brazil, I think it's hard, but obviously, it's possible elsewhere.

Dave Appleby:Thank you for that. David?

Peter Cerda:I just want to add to the point. Governments want new entrants all the time. From Brazil to Argentina to Colombia, they're continuously pushing the envelope to see getting more airlines in. No one's going to go into Brazil with the current operating environment. No one. In Colombia, we had 2 airlines within a year that went bust. It's a very competitive market. Governments put a lot of pressure on the industry to do more, but unless they do their part, they're not going to go. The best example is in Argentina. This government has done significant, significant reforms To open its market, they've done a great job. What we haven't seen in 20, 25 years in Argentina, we're seeing it in the first two years. But no one's coming, and as much as now the government's getting a little bit frustrated, you know, we've opened, you know, signed a whole slew of open sky agreements. We've, you know, the monopoly of the ground handlers are going away. Aerolíneas Argentinas doesn't have the the the favors or the support it did before. But as we tell them, opening and investing and committing to a market, it's a significant business decision. In the case of Argentina, while we may have 3 more years of this government that's going to be very pro-aviation, the indication for the rest of the industry is what comes after, because if there's a change of government and we regress again, imagine that investment that that airline has just put into that market will just go out the window. The decisions of airlines, it's not from one year to another, it's long-term. Making decisions to invest and commit to a market or a country, it's a significant commitment. Again, I think that's something that many other countries in our region become very frustrated about when they tell, well, the industry is very slow. They don't invest. Low costs are not coming in, or the traditional international carriers, Because these are difficult decisions, but when you— you have to create the right environment for airlines to begin to evaluate. Do I want to commit? Do I want to— it's a long-term commitment. Unfortunately, governments, their terms are not long-term. It's 4 years, you're out, we'll see who comes after that. In our region where the pendulum changes so significant from right to center to left, the decisions are even more difficult in our region because A bad decision within the wrong timeframe can mean the end of that airline.

Dave Appleby:Thank you, Peter. So we're actually coming to the end of the session, but I did mention at the beginning about your new role at Alta, and I was wondering if you could speak a little bit about that and how that's going to work with the parallel position at IATA.

Peter Cerda:Well, I have the same bosses. They're my bosses in Alta and they're my bosses in IATA. Look, it's about synergies. The board, the ALTA board looked at it as an opportunity to see how we can, as the trade associations, can work more aligned, more efficient with all the challenges that we have through the region. It's a collaborative agreement that we have in place. We're going to see how it goes through the end of the year. It's all about synergies, efficiencies, speaking with one common voice, maximizing the resources to make sure that we can be relevant to Our members, both the airlines based in the region and those that are based outside the region. What we want to do is make sure that the 2 trade associations are trying to ensure that aviation has a seat at the table with governments, that we're able to push our industry positions to grow air connectivity, to bring down prices, to have more airlines come into the region, be more successful, and that's the intent. We're going to see how it works throughout 2025. I hope not to lose more hair. I don't want more work. Look, it's an exciting time for both our organizations. It's something we haven't tested ever around the world, and we're going to see how it works.

Dave Appleby:Brilliant. Thanks very much for that. Abhi, just to close, probably go into a bit of a Q&A after if anyone has any questions. Just to close, what are your thoughts on the future? A bit of a loaded question to end on, but I think we need to touch on it, the whole AI matter being incorporated into the business at Azul and generally in the industry. How do you see the future and becoming more successful?

Abhi Shah:Look, I think the region is going to keep growing. I think Brazil is going to keep growing. We certainly believe in that. Azul exists to grow the market. That's our reason to exist. We will continue to do things differently. We think that that's our competitive advantages. We'll continue to build different elements to our business, whether it's vacations, whether it's logistics, whether it's loyalty. I think we're going to keep adding to our portfolio of tools so that we can keep the business growing. AI, I think, is obviously a very, very powerful tool that I don't know, Azul at least, how well we've utilized it. I think we're very, very early stages. I think we're using it in some ways, but we're definitely not using it like the potential is going to be. I think it takes time as well to make sure that you have a tool that's actually useful and not just a buzzword. I think that that's a little bit of a trap sometimes that we fall into is It's a buzzword that sounds awesome and you have magical solutions, but it actually takes time to implement. I would say we're very, very early stages. I don't think we're accessing it anywhere near its full potential, but it's going to take time. We have some great tools in revenue management, for example, but a lot of things we can do in the contact center, a lot of things we can do on the maintenance side, on the operations side, still to come.

Dave Appleby:Brilliant. Well, thanks very much. I just want to open it up to the floor. Any questions for our panelists here this morning? No? Okay, well, I don't know, we can have a round of applause please for Abby and for Peter for their time this morning.

Peter Cerda:Thank you very much.

Abhi Shah:Thank you.

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