Regional regulatory approaches, taxation and economic balance

Transcript

Helane Becker:Thanks very much for your introduction, and good afternoon, everybody. So for those who don't know me, and that's probably most of you in the room, my name is Helane Becker.

Adam Scott:Helane Becker.

Helane Becker:I was formerly an airline analyst for investment bank. I have more than 45 years of experience doing that, and I covered airlines, aircraft leasing, and FedEx and UPS. Earlier this summer, I retired from TD Bank and took a job as Chief Financial Officer of a nonprofit that focuses on helping children survive catastrophic events, for lack of a better description. You can ask me about it later. And then in order to stay involved in aviation, my daughter asked me what I was gonna do with all my institutional knowledge. I sort of set up my own consulting firm, although I haven't done a lot with it. But I've been— since it's the summer in the north, I've been spending a lot of time on the golf course.

Peter Cerda:Thank you.

Helane Becker:course, and trying to get my handicap down from 20 back to 16 or lower. And also, because I'm not busy enough, I'm on the advisory board and an executive in residence at the Feliciano School of Business at Montclair State University in Upper Montclair, New Jersey. And so we just started our semester. And I'm very proud of the fact that from a financial analyst perspective, I got the company— the university certified to give the Chartered Financial Analyst exam to our business students, our finance students, which gives them a little bit of a leg up when interviewing. So that's me for those of you. Now you know me. Our panel is focused on regulatory approaches to aviation tax and economic balance. Timely and important because, as I've said in the past, without a robust aviation industry, we can't have robust economies. It plays a crucial role in a country's economy. It brings together people, goods in a timely manner, generates great jobs across a few industries, including tourism. It's also the first responder, and whenever there's a natural disaster, airlines fly in aid. They fly in first responders, and they fly water supplies, and so on. And governments do need to understand how important that is to recovery. But also, according to ALTA, there are 8.3 million aviation jobs in this region, generating $240 billion in revenue, 722,000 direct roles in airlines, airports, and 6.9 million indirect jobs Related to the supply chain and tourism. So with that backdrop, I'm going to have each of the panels introduce themselves, and then we'll go into the questions. Peter? Everybody knows Peter, but go ahead.

Peter Cerda:Good afternoon, everyone. Peter Cerda. I'm IATA's Regional Vice President and also ALTA's Executive CEO.

Garret Malone:Good afternoon, everybody. Garret Malone, Chief Operating Officer at Arajet in the Dominican Republic.

Carlos Gutiérrez:Good afternoon. I am Carlos Gutiérrez, General Manager of the Local Airline Association here in Peru.

Adam Scott:Good afternoon. Adam Scott, Founder and CEO of BermudAir.

Helane Becker:Great. Thanks, everybody. So, Peter, I'm going to come to you first to talk about the regulatory environment in the region, and what specifically is IATA doing to support aviation in the region?

Peter Cerda:Well, if I think it's an understatement to say that we're not highly overregulated in Latin America, and I think we are.

Adam Scott:Mm-hmm.

Peter Cerda:We've seen some progress in some areas, and we've seen some significant deterioration. From a trade association's perspective, and what we're trying to help with the industry, is create smarter regulations. It's about using what's already available around the world within best practices and trying to implement it in our region. The industry understands that we have responsibilities that we have to commit on, deliver, and if we don't, we have to respond to it. The challenge that we have in our region is the abundance of overregulation, new regulations, and regulations that simply are intended by governments to protect consumers, and ultimately what you're doing is creating an environment that you're discouraging passengers from traveling. And that's, I would say, the crusade that we're there is trying to work with governments to create the smart regulations that already exist in places like the Emirates or Qatar or Singapore that work successfully, that protect consumers, but does not strangle the economies of the airlines.

Helane Becker:That's very helpful. Carlos, perhaps you would like to discuss how AETA/IATA is fostering cooperation among the airlines to support a safe and growing industry.

Carlos Gutiérrez:Well, as airline association, I try not to repeat all the topics that the speakers point about the challenge of air transport. I think that the most important thing is try to— not cooperation. Peter said before, cooperation is one of the key. But the other thing is the lack of politics, air policy, I mean, like a white book. Because, for example, here in Peru, Yes. We don't know, as a government, what we want in the next 5 years, in the next 10 years, in the next 20 years. We don't know. Our growth was very inorganic. So I don't know if the hand of God that will help us to grow in the last years, but we— Another example, our Lima Airport. You know that Lima Airport was planned in '21 when they start the concession of the Lima Airport, and everybody knows that the new terminal is supposed to be at 2009. After 16 years, we have a new terminal, but the point is that the last year, 2024, In June, the Ministry of Transport, in this time, they make— made a— how can I say— a study of all the projects around the new airport that impact in the airport for the accessibility. Everybody knows— nobody knows how many projects we have at the same time. Like metro, like the new bridge to the— it's supposed to be the main entry to the terminal, and another project. How many? 16 projects. And these 16 projects, 2 or 3 overlap in the calendar, and it's supposed that we don't have change in the calendar of 2 or 3 projects. The problem is that nobody can go or exit of the new terminal. So this is an incredible thing that you can imagine, but here in Peru, this is what we face every day. In resume, it's a lack of policy that we need to work in cooperation with our authorities, obviously with the airport or all the concessionaries of the airports, not only Lima, Andinos in the south of Peru, and Aeropuertos del Perú in the north of Peru.

Helane Becker:That's very helpful. I think there's also a big new airport being built Outside of Cusco.

Carlos Gutiérrez:Yeah.

Helane Becker:And I guess, I don't know, they're supposed to be ready 2026 or '27, but it didn't work out.

Carlos Gutiérrez:Cusco is another problem because Chinchero, at the beginning of this project, the idea was one government, the Korean government, this is a contract between Peruvian government and Korean government, It's supposed to be this year, but for many problems, it's supposed that we will receive in the next year or maybe 2 years only the terminal, because the money is not enough for finally construct all the terminal platform, the—

Peter Cerda:The—

Carlos Gutiérrez:The tower of the control tower and the—

Adam Scott:sorry.

Garret Malone:Runway.

Carlos Gutiérrez:The runway.

Garret Malone:Part of the runway.

Carlos Gutiérrez:Uh-huh, the runway. So at the end of the day, in Chinchero, we only received the terminal. And what happened with the other things? Nobody knows. At this moment, nobody knows.

Helane Becker:Oh my goodness. Okay, well, moving on from that for a second, Adam, I'm going to shift gears a little bit and talk about Bermuda Air. Bermuda is a relatively small island. I used to visit every year for many, many years, played golf at a number of the courses there. Only 90 minutes from New York, so, you know, really helpful. So how are you making it work? I mean, I would like to ask for service to Philadelphia if you have a chance, just because I live just south of there now, but— We're working on it. How do you make it work with a small island and a relatively small population?

Adam Scott:Yeah, well, it's really nice to be starting a conversation with somebody who knows where Bermuda is, because I like to say Bermuda is the world's best-kept secret. Nobody actually appreciates, or very few people appreciate, that it's only 90 minutes from New York. We have a— we've got a really interesting situation with Bermuda. And of course, with BermudAir, we're unique because we're the first airline in Bermuda. And so from a growth perspective, we were very fortunate because we have a very robust and sophisticated regulatory environment which enabled us to do many things in record time, going from an idea to launch and operation. But I think in the context of how we further develop and how we get to where we need to get to, we've had to be very creative ourselves. Because we're fully private, without state funding, as it were. And so we've had to develop and evolve and look at the various opportunities that are in Bermuda. So looking at being more involved, not just in terms of flying passengers, but flying cargo, doing medevacs, and doing all of this fun stuff. And I think in the context of the growth potential, and where we ultimately want to get to, it's an— it's sort of— it's incumbent upon us to educate those around us, our key stakeholders, about the significance and the importance of, of the air industry to jurisdictions like Bermuda where they haven't had it before. But fundamentally, it's such an important part of the economy. It's such an important part of how we develop as an island. Bermuda is a very unique market. It's one of the wealthiest countries in the world. It has a very robust business market, you know, returning family and friends. But it's also a very seasonal tourist market. And so we've had to be very creative to work and to make things work. And that's why, as part of that challenge for us, our seasonality challenge, until we're able to develop our own year-round demand in Bermuda. We've also recently launched Anguilla, and we'll continue to pursue opportunities like that as well to get to that critical mass level.

Helane Becker:The thing about Bermuda, as you mentioned, it's on the same latitude as North Carolina. In the winters, it's cold, but you don't get snow.

Adam Scott:I wouldn't say it's cold. I would say it's Bermuda is gorgeous all year round, every day. And as a, as a native of Toronto, I can tell you I would much rather be there on a wet Tuesday in January or a freezing Tuesday in January than anywhere else. But I think it's one of those things where, you know, historically people look at things, you know, they look at them as this is a very seasonal market. It's only a summer market. As you know, talking about looking at Gen Z, how people You know, look at things, they change their perceptions on things. They want to travel year-round. They want to experience places when there's less people there, or they want to have a better game of golf or whatever. It's really— it's about those opportunities for us to exploit them and to grow that market and to be very value-adding and important to the local economy.

Helane Becker:That's great and very helpful. Thank you. So, Garret, we have to talk to you about Arajet. It's a different market. Dominican Republic. I've been to Casa de Campo.

Adam Scott:Nice.

Helane Becker:So the only place I've been to in the DR, but not for a lack of time, mostly for lack of time. But why don't we talk about the growth opportunities you see from there to this market, South America, Central America, Canada, and the US, and maybe the challenges that that you face in the DR, especially with the tax situation. I think one of our mandates is to discuss tax in our region, so maybe you can, you know, talk about that for a few minutes.

Garret Malone:Definitely. So the Dominican Republic, when I was offered the opportunity to go there, was one of the last few greenfield locations on the planet. It hasn't had real serious aviation volume since the demise of Dominican Aviation back in 25 years ago. And when you think about it, there are 2 airports, Santo Domingo and Punta Cana, both at sea level, and they're pretty much in a vertical line between the East Coast of North America and all of Latin America. Whereas like for Bogotá, your latitude, Panama, you've got to go to the west, and Lima, much to the west. And yet there's no aviation. People have come and they've tried. You're going to wonder, with such great opportunity, because it's a destination country, you have it for great golf, it's over the Casa del Campo, More golf courses there than most places on the planet per capita. You have the all-inclusive resorts competing with the likes of Cancun, but there was no real homegrown carrier. A few came and went and tried the ACME versions, but never really worked. Well, the reasons behind that is we had— we've spoken so far today about the direct taxation of the passenger taxes, and they're still quite high, close to $100. But even worse than that, we saw these indirect taxes like we used to have a withholding tax. of 27% on everything you spent outside the country. So normally the withholding tax is if I've got contact centers here but I go to them in Colombia, I pay withholding tax. No, if I go to Colombia and buy fuel, I pay withholding tax. So we were at like a 15% journey trip cost disadvantage compared to our competitors flying in, flying out. Good news is that's been done away with. And when we had our inaugural flight, the president came and said, at the moment we collect a high percentage in tax of a zero value. I would prefer to collect a low percentage of a huge value. So we're kind of taking that tax out. We've now brought in 11 aircraft, finishing this year with 13. Other things they did, which again, going to regulatory side, which was amazing. We spoke earlier about the countries that haven't really opened open skies being Cuba, Nicaragua, and Venezuela. We were in that list in January. We had a bilateral agreement with the United States that was signed back in 1948, just after the Second World War ended. We could fly to just 3 destinations in the USA and 2 floating. So you say, oh, let's go to Washington, and you prove the route. What happens? The American carriers go, thank you for proving that route, we'll take that now. So we were the last few to sign that. We signed that— the country signed that in January, and we started flying to Miami and New York 3 months later. And And we're going to open Chicago, Boston, Orlando this year, with more to come in the next couple of years. That said, we still have lots of challenges. I say $100 when tourism is 25% of your GDP and you're charging tourists airport taxes of $100. But the Canaries is a lovely airport. Santo Domingo, we will hopefully get a new terminal in the next 5 years. Not a great experience at $100 you're spending. Fuel is regulated.

Adam Scott:It's tough.

Garret Malone:Like, we're tankering most of our fuel into Punta Cana and into Santo Domingo. So we're paying, and again, from the Caribbean, which already got high fuel costs. So we've lots of opportunities, not to use the word challenges.

Helane Becker:Okay, that sounds, that really sounds very good in terms of opportunity to grow. What about labor? Do you have issues finding qualified employees? Are you able to— we heard this morning about being able to attract and retain. So are you having any issues in either of those areas?

Garret Malone:On the plus side, thinking of the future, the population of Dominican Republic is 12 million. So it's basically twice the population of my home country with half the size of the land. The downside is that for 20 years, there's not been an industry. Nobody's going to suggest to their children to become pilots or cabin crew or technicians. And to create a technician, we're talking at least 4 years to get the license and then 2 years really get them up to experience. So we're really focused on that with the government and with the local schools, from secondary school upwards, and try and get people to say there is a job, come get this, it's going to be a high-paid job working Monday to Fridays, although for the airline you've got to work at nighttime. Doing the same with pilots. So what we're going to do is really focus on developing Dominican talent. From our first anniversary, we launched our first cadet program, which we did together with Boeing. Again, with the big startup on the MAX in the Caribbean but no real history, we want to make sure that we had a good partner with us to kind of really shoot a good top-class world-leading program. So we now have put 6 Dominicans through that program. We've also ascended 6 co-pilots who had experience to the role of captain, and that's really kind of showing the local people that yes, the opportunities are there. It's a fully backed, funded airline with kind of good grade A capital. So they're kind of saying, ah, maybe I will now invest in my sons and daughters to become pilots in Dominican Republic. And in the meantime, we've got to look outside. So we'd have pilots and technicians from We're going to reach all of the Americas. But again, we need so many pilots and so many technicians in this region the next 20 years. We've got to put a lot of focus into getting people back into this industry. It's kind of— we mentioned earlier, it's kind of lost that sexy vibe because aircraft aren't as sexy as they were. But I do believe that what this industry does, connecting people and providing opportunities, has so much more of kind of a purpose and propositum that we can really sell to people.

Helane Becker:That's, that's, um, that's really helpful. Thanks for the answer. So Peter and Carlos, we're going to switch gears again a little bit and talk about the tax environment in the region. We just heard from Garret talk about how excessive it was in the DR and how that limits growth. So talk about the countries— I know, Peter, you've already talked a little bit about it— countries with advantages one over another. Does it make it harder for the airlines to grow their operations in those countries? I mean, we've heard Colombia and Brazil the 2 biggest markets. But it— in— I've been in Peru now for about a week and a half, and I've toured the country and talked to some of my guides, and they've talked about the fact that Americans are visiting again. I think we heard that tourism to the market is down still versus where it was in 2019. But everywhere we went, the flights we took were packed.

Carlos Gutiérrez:The—

Helane Becker:We had no problem getting into restaurants, actually, thinking about that. But a lot of the other places we went to, there were a lot of people, a lot of tourism. So maybe we can spend a few minutes, Peter first and then Carlos, talking about taxes, opportunity, where that lies.

Peter Cerda:I think there is price sensitivity. People do look at going to a place where, first, they can afford, that's comparable in terms of services. In this region, I think it's probably one of the best places to look at good and bad examples. In Colombia, a couple of years ago, Cartagena was a very popular destination for Colombians. It was not on the international map. You didn't have US carriers, you didn't have European carriers flying there, but you had very nice infrastructure, you had culture, you had great beaches, but didn't have international tourists. And what the municipality did with the airport, they brought down their taxes. Within 6 months, you had KLM, Delta, Spirit at the time, and it just began to boom. Now the problem we have in Cartagena is that we have overcapacity. We have too much demand going in there. But now you have a strong connectivity with North America, with the rest of the region, and with Europe. That's an example of where, again, you have all the parties coming together and says, how do we make this an interesting competitive place? And the first thing they thought about was, let's bring our prices down. They were too high, let's bring it down. And that has been a model. Ecuador is another country that with the previous government, they wanted to stimulate tourism. They believed they were underperforming When they were looking at other countries like Peru that were overperforming. They did the same thing. They brought down their cost. I gave the example this morning of Brazil. Brazil is looking at implementing a 26% VAT across the board. That's going to impact aviation. If that is implemented into Brazil, our largest market, both air in terms of population, GDP, Mm-hmm. Our industry is actually going to concentrate. It will become smaller because less people will be able to fly. An average flight international will go from $740 roughly to $950, and the domestic portion will go up by about $98 USD. So think about it in reales. So our market's actually going to go down significantly. So the chances of growing our region growing connectivity will actually shrink possibly or will suffer because you have such a big country in which the rest of the region is very dependent on as well. And this is a challenge that we have in terms of cost. My Caribbean friends who I— we kind of go back and forth at each other in terms of the Caribbean is highly dependent on travel and tourism. Bermuda is high, it's just as high for the Caribbean. And they get very agitated when I'm pressing about charges and charges. Just last week, 6 countries increased their taxation on tourism, just flat out without any justification. So the first thing we tell government, what's the justification? Because if you reinvest those taxations back into the system, into the airports, into aviation, into tourism, okay, there may be a justification. The vast majority of these taxations do go into— the general coffers of the government. They build hospitals, they build roads, which is all very good, but it's not helping the industry. And when you look at the ticket price at the end of the day, when you look at charges and taxation, the global average for a ticket, 27% is on taxes. In Latin America, the average tax on the ticket, taxes and cost, is 40%. We have countries in our region that's 60%. So actually the tax is higher than the cost of the airfare. So think about it. We shouldn't think about, in this case, the Europeans or Americans that may be able to afford it and they're on vacation to say, okay, I can cover it. But when you have countries in a region where people are depending, do I go on a vacation? Do I take the bus? Do I drive? Do I fly? And the ticket is so high because of the added tax, that's the disadvantage that we have. So that's why we're not, we're not moving quicker. If the taxation and charges were lower, we would be talking about much more higher numbers of passengers than the 0.65 trips per capita per annum. But the taxation, the cost is something that is concerning. And governments, and I'll talk to any government about it, we're an easy target.

Adam Scott:Right.

Peter Cerda:You're just an easy— the Caribbean, you don't have airfares, you're going on boat. How many people go from the US to— unless, you know, you're Branson and you have your cruises, but if not, you're not. You don't have roads, you don't have trains, air travel is the only way. In Brazil, to get from São Paulo to Manaus, It's basically air. You don't have road system to get you there. We're an industry that's somehow cornered in because we're just an easy target.

Helane Becker:Right. It's very transient. People come and go because you're either here on business or you're here on tourism, as a tourist for vacation, and you just build it into the cost of your trip. To your point, if you try to grow domestic, and that's usually what happens, when you think about growth in aviation, It's as the middle class grows, the first thing you do is travel locally within your country, then you travel regionally, and then you travel internationally. And if you can't get that initial growth, the local growth, it's going to be harder to get the longer-haul growth, I would think.

Peter Cerda:It is quite unfortunate because when you look at our region, Argentina, south Argentina, north of Argentina, It's the distance between Lisbon and Moscow.

Helane Becker:Right.

Peter Cerda:And in Europe, you have rails, you have highways. We don't have that in Argentina. But you rarely ever hear any country in our region which says, you know, air transportation is a vital mode of transportation. It's treated as a public mode. No government ever comes out and says it. And I don't understand. You talk about trains being public, you talk about the buses being public, why don't you talk about air transportation? You started off saying, you know, how important it is. The vast majority of our medicines, our goods, foods, supplies in our region is moved by air.

Helane Becker:Sure.

Peter Cerda:So, but we're still treated as a cash cow. We're still treated as a— this image that only the rich and famous travel, and they don't understand that air travel is a necessity in our region. It's not a luxury, it's a necessity.

Helane Becker:Carlos, can you talk a little bit about picking up on that theme? How can we get the countries and the governments to respond in a more favorable manner?

Carlos Gutiérrez:Well, in the last 4 years, I mean, we have more than 20 initiatives, legal initiatives in the Congress that impact in the business model of the airlines. So maybe it's not that we need this kind of help. No, we don't need to invent the wheel. We need to see the good practice in the other countries, as Cartagena, for example, in Colombia. After the pandemic, they reduced the VAT from 19% to 5% and recovered in the, in the next year the traffic of 2019. So we here in Peru, we didn't recover the traffic before pandemic. It's incredible, 6 years right now.

Adam Scott:No.

Carlos Gutiérrez:So the other thing that I want to highlight is that as industry, we need to share And try to communicate better the benefits of our industry, because maybe this is our big problem with our authorities. Maybe the focus is not in the real problem from the people about better connectivity. If you have more competition, lower prices, and whatever we try to express. Maybe this is a work for us, a need to try to convince our authorities, not the government, also the congressmen, because from this area, they make laws that impact in our industry, and not in a better way, no.

Helane Becker:Thank you. And then let's see, Adam and Garret, probably.

Carlos Gutiérrez:Do you—

Helane Becker:how do you think— we'll start with you, Garret— about alliances with other airlines? I think we heard, you know, earlier, we know Delta and LATAM have an alliance, and American, I guess, with GOL. But how do you think about that? Does it make sense for you?

Garret Malone:So you actually just recently hired an AD. Look, after partnerships and alliances for us, but alliances with a big A, your kind of, um, one worlds, for most airlines today they're just cost prohibitive. You have a lot of investment to get in and then if you want to leave, as the town discovered with Delta, there's a lot of cost to get out as well. But different partnerships, be it just a simple codeshare interline or kind of more with investment, is definitely— we've spoken a lot, Adrian, beforehand and Roberto in the morning about mergers and acquisitions. So kind of moving that way, either it's just a commercial partnership or mergers, the industry is definitely consolidating going forward. And again, when we have so much complexity in this region, you think of— we've spoken here about 750 million people in Latin America, in North America about 330, 450 in Europe, but the top 5 countries here are about— in South America about 360 million people. However, JetSmart, who were here earlier, have 4 AOCs to fly to that. That's just adding cost and complexity. So they're kind of more obliged to find different types Got it.

Helane Becker:Adam, what do you think about that?

Adam Scott:I think that— I think codeshare, interline partnerships, alliances, all very important. I think the most important thing in our region, specifically with Bermuda, and when I think about the Caribbean and how we interact with other airlines in the Caribbean, it's more about making sure that we have a voice where we're actually showing what we're doing for the communities that we're serving. We operate in, what we're bringing from an economic perspective, because the taxing is a real issue. It seems it's like a structural issue where government sees an opportunity as a bit of a grab, but that's actually suffocating. It's preventing the growth of an industry that is so critical for the markets in which we operate. I think it's about us also showing the benefit that our industry brings to the communities that we operate to. I think about in Bermuda, I think specifically about the cruise industry. Everybody looks at the cruise industry like it's going to be the holy grail, bring as many thousands of passengers to the island as possible. The reality is I actually, I got on a cruise ship to get to Bermuda because I couldn't afford the air ticket. You know, while I was going out, it wasn't that true. It was a case of there wasn't an air ticket available. But the reality is most of the passengers on those ships bring very little value, economic benefit to the island at all, because they can't afford it on the island. You know, it's— whereas what we bring as an airline to the island and to the markets that we operate is, you know, passengers who are going to spend, who are going to, you know, add to the local environment, who are going to add to the economy. And I think that governments should probably think about lowering taxes, getting rid of them as much as possible, and focus on actually helping to support our industry and let it grow in its natural course.

Helane Becker:Well, okay. So unfortunately for us, we still have more questions, but this timer is like beeping at us that our time is up. But so maybe when I get back to the US. I'll work on a Substack piece about why taxation in Latin America, South America should come down to encourage more travel to the region and within the region. Since I have not a lot to do these days, that would be a good use of my time. I'm sorry we didn't get to all my questions, and I'm also sorry we didn't get to audience questions, but these guys are going to be around so you can ask any of them. I suppose if you have more things to want to know. And with that, I'll have to say our time is up. So thank you very much. Thank you.

Copyright policy: All transcripts on this site are the copyright of CAPA - Centre for Aviation. Our reproduction policy is as follows: you may quote up to 400 words of any transcript on the condition that you attribute the transcript to CAPA - Centre for Aviation and link to the original video page. All other use is prohibited. While we aim for 100% accuracy in the transcript, there may be some minor transcribing errors.