The Intra Latin America Outlook

Transcript

Luis Felipe de Oliveira:Well, we have an interesting region here. In our region, we grow around— we doubled the size in the last 10 years and we expect to double the size in the next 10 years as well. If we see this chart, we see that Brazil has a huge increase of almost double, but we have countries like Peru that grows around 3 times times in the last 10 years, and with also good numbers from Colombia and from Chile as well, almost triple the size of the aviation industry in the last 10 years. Part of this growth, and great part of this growth, comes from the low-cost carriers. As you can see, 77% of domestic traffic increase in this region coming from the low-cost carriers. And nowadays around 47% of the region is low-cost carriers that are driving the growth. Compared with the other markets, we are around the third market and Asia Pacific and North America of course are leading the size of the industry. However, we have some concerns. In terms of the total fare in the Asia Pacific for example, around 17% only comes from taxes and fees. And in our region, 37%, as you can see. And some of the locations we have more than 50% of the cost of the ticket is linked with with the fares and fees. We have some nice examples. We are here in the city that benefits from one of the incentives. We used to have a PFC here around $92 around three years ago in in the joint efforts between the government airlines. and associations, this fee reduced to $38 and basically drove an increase in number of the passengers, international passengers around 90%, and of course international tourist arrivals around 70%. We have another issue in the region is airport capacity. We have— we expect to have with the current projects like a new airport in Mexico City, Around 7,000— 741 million passengers capacity in 2040. Unfortunately, to cover the gap, we need investments around $53 billion. I saw Colombia has already invested $55 million in the airport capacity. The other countries have a gap of at least $48 million— billion dollars to invest to cope with the growth. Well, now I'm back to the panel. I will start, basically start with Abhi. Abhi, you are a successful executive in one airline in Brazil, one of the fast-growing airlines in the region. You are there since the beginning and basically you face some issues in the region that maybe is different from other markets in the world.

Santiago Alvarez:Yes.

Luis Felipe de Oliveira:The cost of the fuel is the same and is high. Airport constraints are the same and high cost as well. Tell us your success history in Azul and how the LCC approach is working in this region.

Abhi Shah:Yeah, thanks. So I think the most important thing for us in Azul, you know, we went to Brazil 10 years ago. And David Neeleman, founder of Azul, founder of JetBlue also, you know, he was looking at the market and saying, why are people not flying? You know, at 47 million enplanements, the air travel penetration was much lower in Brazil compared to Colombia, compared to Chile, compared to Mexico. A very big geography, things very far, no train system, etc. There was a reason that people were not flying because the existing airlines were only focused on the big routes. So the example, when we talk to investors, we say, imagine the United States where the only service you have is New York to Boston and New York to LA. There's no nonstop between Chicago and Miami, right? So that would never exist in the US, but that was existing in Brazil at the time. So For us, the most important thing is we were always trying to do something different. São Paulo and Rio never needed more capacity. It's beautifully well served. But there were so many different parts of the country that were not served at all. And so that is our reason to exist. And so, you know, for any business model out there, you know, what is our reason to exist? What is our competitive advantage?

Santiago Alvarez:Yeah.

Abhi Shah:is that we provided service where there was no service before. So we know— so the chart that you showed that the air travel in Brazil has doubled, that's true, and half of that growth is Azul. Of the 44 million passenger growth in 10 years, 22 million of that is Azul alone because we went into markets that nobody served. So today, you know, 70% of the routes that we fly, we fly alone. And why? Because we have ATRs, we have Embraers, we have A320s, we have A330s, and so we use the fleet flexibility model. So, you know, we're an LCC, you know, we're hyper-focused on cost, on efficiency in terms of employees per aircraft, but we're also not an LCC because we have 6 fleet types, and normally LCCs have 1, maybe 2. So But in a market like Brazil, we're going in, we needed to bring something different. We needed to provide a network and create demand that didn't exist before. So we're also very hub and spoke, we're very connecting, and most LCCs are also point to point. So I think the most important thing for us is doing something different, growing our market, not really focused on taking away from anybody else, but doing something different. And that continues to be our philosophy today is we're in the market to grow, And to do something that other airlines are not doing. And now we have a network that has 100 cities in Brazil that we can defend and is very hard to attack, if you will. And also evolve the business model. You know, now we're upgauging to A320s. Azul charges for checked baggage. We charge for seat assignments. So, you know, you have to keep evolving the model as opportunities arise. But I would say the most important thing is You have to have a reason to exist. What is your competitive structural advantage? And for us, it's the network.

Luis Felipe de Oliveira:Fantastic. And after that, we'll talk a little bit about infrastructure and also the possibilities or not to charge ancillaries, especially in countries like Brazil that sometimes is very heavily regulated. Thank you. Santiago, in terms of the regional forecast, we are seeing a very positive outcome. We in Latin America, we're still flying a third of the Europeans and a quarter of the Americans. And there's a very good potential growth. And of course, this growth, as I showed you before, comes in part from the low-cost carriers. How do you see the competition and the market in the current environment? And of course, the main concerns to obstruct the potential growth in this region?

Juan Carlos Salazar:Well, thank you.

Santiago Alvarez:Hello. Okay, well, thank you. Competition, the first thing I have to say is that competition is great, especially for the passenger, because it gives them more options, less prices, and that's what's happening here in the region and in Colombia as we speak. I have to say that the economic environment has changed a lot in the past few months. 2 very important macroeconomic factors are hitting us very hard. Jet fuel, as you already know, has increased by around 30% in the past 12 months. And then currency devaluation is hitting us very hard because of different aspects of politics and economics going on into the region. But for example, in Argentina, the Argentinian peso lost 123% of its value in the last 12 months. You can buy now $1 with 38 Argentinian pesos, and 12 months ago you only needed 17. In the Brazilian case, the Brazilian real lost 33% of its value in the last— in the same period, sorry. And talking about Colombia, the Colombian pesos In the last month, devaluated by around 6%. So we're having a lot of pressure coming from devaluation. And the combination of these 2 aspects, the jet fuel increase and the devaluation of the currencies, are hitting our costs, are lowering our margins, and especially are hitting the demand. We're seeing huge demand Demand decreases, especially in Argentina and Brazil for international flights. So this situation makes it very difficult for everybody, low-cost carriers and legacy carriers. And it is true that there's not much differentiation in the airport fees, in the fleet cost, in the fuel cost, but we— Yeah. Legacy airlines have a lot of inefficiencies around labor costs, distribution costs, and a lack of use of technology. So we're working very hard. The low-cost carriers coming here to the region are putting us a lot of pressure. And as Iberia told us this morning, we are working as well In increase of utilization, increased productivity, and densifying our fleet. So that's what we're working right now, and it's following the trends that already happened in the U.S. and in Europe. And finally, I have to say that we have 2 main concerns to get the goal of achieving the growth that we expect. that the market is going to have. The first one has to be with taxes. We're in a region where taxes are very high. For example, in Colombia, around 30% of the ticket final price is represented by taxes. And the other one, the second one, is airport infrastructure. When you go see Lima or Santiago, there are collapsed airports. In Colombia, the story is a little different. As you already heard, the government has invested around $5 billion, but we always talk to the authority and we have close meetings with Juan Carlos here where we always insist that we can't stop those infrastructure efforts because we already upgraded some airports, But the demand is still growing and sometime it's going to catch up again.

Luis Felipe de Oliveira:It's incredible how the infrastructure and the cost for our industry is very important and the effect, of course, of the currency. As you know, basically our industry that is the main— our main costs are linked with the hard currencies like the dollar, for example. And it's very difficult to cope with big devaluations like we have in Argentina. Brazil and other countries as well in the region. Peter, regarding the cost and infrastructure, IATA is doing very good work in these issues in the region, and recently with a very positive outcome, especially in Cartagena, as you spoke 3 years ago, but very recently in Chile with a very good outcome from a campaign. And I would like to If you can share with us a little bit about these campaigns and how we can improve also the same issues in other countries in the region to hope the region to continue to grow and reach the target to double the size in the next 10 years.

Peter Cerdá:Okay. Well, I think first of all we have to say we have a good problem. And the problem is that we've had very good growth over the last decade. This is one of the most progressive regions in terms of growth with new entrants into the market, increased capacity, new airlines blossoming, good regional carriers are continuing to grow. The challenge is that our governments have been— were very slow to prepare for that growth. So we're always in a catch-up mode. And we see it throughout many of the key airports in the region. When we open a brand new terminal, we look at it as— A success, but the moment you turn the light switch on, the airport's saturated again. So as a region, we've always been in a catch-up mode. The other challenge we've had with airports is cost and how do we go about it. And they're a natural monopoly in most cases. Many of the airports now are concessioned. Many times we put the blame on the airport operators, but from our standpoint, what we're— we're taking a very proactive approach is How do we educate our governments to put in place better rules of the games in terms of how the concession process goes about? Because what we've seen is while we've had some successful concessions, we've had many that have failed, not because the operator has not tried his best to have good infrastructure, good services, it's the conditions of the contracts have really made it very difficult for everyone to play on an equal playing field. What we've had in a successful occasion in Chile with a new government, a government that is very progressive, that wants to stimulate the market, the government working with the industry has said, well, let's look at what the concession plan looks like. Have we made some mistakes? And we're partnering with the airport operator, with the users, with the entities, the authorities, to review the concession plan. Can we improve that? And for us, from an industry standpoint, we think that is a very important way to move forward in the future because not everything is done in a perfect environment. Our environment in the region changes very, very quickly. What is today very sunny, tomorrow could be a very rainy day, and we have to adjust to those changes. And those, in the case of aviation, it's sometimes modifying and adjusting contracts. So we hope in the case of Chile that we can obtain some improvements to what the agreements are which will give more flexibility, which will bring costs down and improve efficiency and give a better service to the customers, which is what we ultimately want. That's the type of campaigns and initiatives what we're driving across the region, is getting closer to the governments, educating our governments. We are in a period of transition is what we say in the region. We have several governments, several big governments that have gone through or are going through elections. And as we know, when you have a government that may be on one side and then radically changes to the other, policies change very, very quickly. And from our standpoint as an industry, we need to be front and center to make sure that when there is changes in government, the industry agenda and And when I talk about the industry agenda, it's the airline agenda, the airport agenda, the suppliers, we're all together educating the governments in terms of what is good for the industry and how the industry can help that country continue to stimulate economic development. So from our standpoint, Luis Felipe, it's really on the government. It's our approach to the governments is getting them to understand the aviation industry better.

Santiago Alvarez:Right.

Peter Cerdá:We are not a cash cow industry. We are not. This is a very competitive industry with very small margins of success, but we can provide great, great advantages to a country. We are, as you said this morning, we don't have high rail in the region. We don't have good infrastructure in terms of roads. This region, most of our countries are dependent on air travel. And if the governments treat us as that business partner, we will help the country and the country can help us improve connectivity for the region.

Luis Felipe de Oliveira:That's a great point because basically if you see aviation as a potential partner for the economic growth and also the democratization of the travel helps the countries to develop and grow, that is our objective as an association as well. That's why I'm very happy to see the views of Peter and the opportunity that we can have to work together with the governments. And we have a government official here close to me, and I'm very happy to see Colombia in the next 10 years growing around 3 times of the size of the market with expectation to grow again 3 times by 2030. And for that reason, the CAE has a vision of the Vision 2030, and I would like to see your views and if you can share with us a little bit about the aviation industry, the investments, and also the public policies.

Juan Carlos Salazar:Thank you very much. Good morning to everyone. I would like to take this opportunity to show a little bit about what Aerocivil of Colombia is and the public policies that we are putting in place and the forecast for growth that we face. There is a small presentation or small slides that I would like to share. Aerocivil is at the same time an authority and a service provider. And it's not showing the presentation. So at the same time, we are an authority and a service provider. We would like to say that Aerocivil is a trademark in aviation. We exist since 1951. Colombia is one of the pioneers in aviation, and we are at the same time an authority, an accident investigation body, and a service provider. We provide infrastructure, air navigation services, and airport infrastructure services. So we own— What is Aerocivil? All public airports in Colombia, and we operate most of them. You have heard a lot of the growth story about Colombia, and it's amazing to see that since 2005, where we were moving 12 million passengers, till 2017, we have trebled the number of passengers. And this growth has Award us the, the recognition of being one of the fastest growing countries in passenger movements worldwide, as the forecast is for the next 20 years. And when we sat together and we, we did our calculations, internal calculations, you have heard a lot about the forecast for growth for the next 12 years. We expect passengers to reach over 100 million origin and destination passengers, which is again triple the number of passengers that we have right now. And the same forecast for cargo movements. Colombia has been a very important cargo hub in the region, and we expect cargo to continue to grow as our economy grows. Based on that, we have casted our vision 2030. It's not the vision of the authority, it's not the vision of the government, but it's the vision of the Colombian civil aviation system. And we expect that we will mobilize 100 million passengers and double the cargo. And basically we have a strategic focus in 7 different areas. Today I want only to mention the area of competitiveness. Competitiveness. Is a great focus for our industry, for our sector, and I don't want to bore you with all the elements of what we are now translating in our national planning legislation, but in matters related to competitiveness, we have a focus or some specific objectives to discuss, analyze, and simplify The fiscal heaviness that we have in Colombia. We also have a focus in reducing the costs for infrastructure. There is a second wave of public-private partnerships in infrastructure developments, and we want to focus a lot in the cost of these infrastructure services, as you can see here. So maybe to highlight also that Colombia has invested a lot. You just heard about $5.1 billion in investments, and that's mostly for the airport concessionaries. But Aerocivil, as a public body that provides air navigation services and responds for the airside investment in the airports in The country has invested $1.2 billion in the last 5 years, and we have development not only in airport infrastructure, but we have state-of-the-art air navigation center. Our airport in Bogotá is Cat 3 airport. We are completing our works for the second runway in Bogotá, and we have a new airspace design, a new operational concept. That is a model in the region and maybe for the world. And our planned investment now, as per the discussions we are having with the government, we have again $1.3 billion forecast in investment for the next 4 years. That is our own investment again. It probably will be double or triple if you count the private-public partnership projects that we have in the pipeline. But what is important to mention is that Aerocivil of Colombia, differently to many other organizations in the region, is a self-funded organization, is self-sustainable, and we provide these services that we want to put the money in the work as we have our vision. Here you can see how these 7 key factors that are the focus of our public policies are accompanied by 33 different investment projects that are designed to improve the services that we are delivering in the infrastructure services and regulatory services we provide, and we expect that to enhance more and more the level of services that we have. So that's what I have to say.

Luis Felipe de Oliveira:Thank you. Thank you, Juan. And one of the points that you mentioned, you spoke a lot about investments, and when Peter commented about the possibilities to do something different in the region, do you see an opportunity, for example, in Colombia To rediscuss certain kind of old-style concession contracts in terms to maybe reduce the participation of the government revenues from these contracts in terms of the reduced tax and fees as well apply for aviation. How do you see that as a possibility to do that in Colombia with a new environment or It's very difficult to change what is done from the past.

Juan Carlos Salazar:Indeed. We do see that opportunity. We are not only in discussions with the National Infrastructure Agency, with ANI, regarding the ongoing concession projects. Some of them have already exhausted their level of investment, the mandatory investment. And Aerocivil wants to partner with that. Because if we forecast that the number of passengers is going to treble, we cannot just wait until these concession projects or contracts finalize. So Aerocivil is actively considering to contribute in the infrastructure investments that are key to deliver certain services that are being demanded. And also, we are reaching, or we are having the end of the first row of concession contracts, and we are in the process of new bidding processes, structuring new contracts by the Colombian government, and we are very keen that this new wave of concessions that Colombia is going to launch very soon are more, or consider better, the needs of the industry and the costs that, and the impact that this has in the development of the air transport industry. We believe that air transport is a key factor to develop. It leverages our economy. Our president is saying tourism is the new oil industry, and we are focusing very much in developing services and tourism as a leverage for our economic development.

Luis Felipe de Oliveira:Thank you, thank you. Very exciting as well about the future of the aviation industry in We have around 7 minutes left and I would like to focus a little bit on infrastructure again. Coming back to Abhi, in Campinas in São Paulo you have your main hub. The airport was concessioned a few years ago with the intention to be one of the biggest airports not only in Brazil but in the region, attracting new airlines and improving the connectivity. Now they're in Chapter 11. What kind of things went wrong? Well, And how is the situation interfering in your ability as an airline to grow?

Abhi Shah:Yeah, so in terms of the concession, you know, what went wrong, I think that it sounds obvious, but the group that won the concession and then built the airport, they didn't really build an airport that was suited to the operator. You know, they wanted to build a Frankfurt or an Amsterdam, And probably what we needed was what Copa has in Panama, you know. And I don't know if they were— they had wrong estimates for growth or they were misled or they misled themselves. I don't know. But they built something that we didn't need. And so, you know, for— and so I think that one key lesson here is that whoever any airport operator out there that's going to build an airport, and especially one, you know, in Campinas, we are 99% of the operations. And so it does sound obvious that they would have come to us first and say, hey, what do you guys need? What should we do? But they built something completely different. So that's the unfortunate part. As a result, they are now in Chapter 11, and I don't know what will happen. It's a long story, will not end quickly, but I think the The main takeaway is that the airport should really have, while they were designing the airport, you know, really talked to us, talked to Azul, and gotten a much, much better picture of what really is needed. You know, I think the airport has A380-capable gates. I don't see A380s there for a very long time. And so I think, you know, it was just wrongly designed. In terms of the day-to-day operation, it actually There's plenty of space, which is good. So there's plenty of room for us to grow. For the customer, it's an excellent experience. I think it was rated the best airport in Brazil. We operate on time, number one in Brazil. So for the customer, it's great. There's food court, there's Starbucks, there's all that kind of stuff. It's very modern. It looks nice. And for our future growth, there's There's plenty of space in terms of terminal capacity, but I think it was not designed well and I think they wasted some money in the process that we could have used, put to much better use.

Luis Felipe de Oliveira:That's clear that any kind of investment, especially we need to consult with the users and the airlines are key in this process in terms to help to have the better outcome at the end in terms of what we needed in terms of how we can better serve that location. For that reason, I'm going to Peter now and say, well, many concessions in the region, a lot of improvements, a lot of issues as well. How the issues that we face in terms of the concessions in Latin America is affecting our growth, our possible future growth that we are seeing? So we are— we still have a kind of difference between the investments we already planned and the investments we needed. So what is your impressions about that?

Peter Cerdá:I think the biggest challenge that we do is how do we have a balance between what's needed short-term and how do we plan for the long-term? Because the long-term will arrive very, very quickly. Over the next 15, 18 years, we're going to double in the region, which is fantastic news. But it usually takes us about 10 years to produce significant— Okay, I'm back. It usually takes about 9 or 10 years to build a new airport or a new runway. So we don't have enough time. And we've seen when there's bad consultation what can happen in the case of Campinas. What could Campinas be if There would have been proper consultation with their biggest user. We see on the flip side when you go to Panama, when there is consultation, you see a mega hub that's booming, continues to grow, and will continue to grow not only for Copa as the main carrier but anyone else who wants to grow there. So for us as a region and as an industry working with government and the concessionaire, it is critical that the Calibre Collaboration. Collaboration be there in terms of understanding what the needs are, what we need at a cost that we're willing to pay for, which is very important. We don't want mega airports when we really need efficient airports that provide a good service. We can't— the industry cannot afford paying for airports that are, you know, probably Good for other regions, but not necessarily for what we need here. So cost, transparency, open cooperation between the users is going to be critical, short term and long term. And this is an industry that is very fragile. Unless we're— The government's cutting me off, I think. Unless we're able to do this efficiently, we may find ourselves in trouble in the future. And we have a great opportunity as a region. The middle class is increasing. People want to travel to this region. The airlines are doing their part in improving capacity. But we need to make sure that from an infrastructure standpoint, we're ready at a reasonable cost.

Luis Felipe de Oliveira:Thank you, Peter. Well, we have 1 minute left. I have 2 questions more. Probably we'll pass a little bit, but it's important to see the views from Santiago. In Colombia, we have a lot of works in the airports, and that also puts some stress on the operational side as well. In terms of the airline, how do limitations affect your operations in the country and how are you dealing with that?

Santiago Alvarez:OK, I'll be very brief Because we're running out of time, but it's great to have the limitations when you see that the works are being done. Although we had a lot of limitations for around 2 years while the industry was growing very fast and the upgrade of El Dorado Airport was being done, we had to operate around 30% to 35% of our operations in in remote positions that had an impact in the service, in the passenger experience, in the logistic costs. But when you see the works going on, you can't complain. We worked hand by hand with the concessionary and we passed through those years and now we have an airport where we can operate very efficiently.

Juan Carlos Salazar:But?

Santiago Alvarez:We always say that it's time to start with the short-term investments because the industry is still growing and it's going to catch up there.

Luis Felipe de Oliveira:Thank you. I have a last and quick question for each of you. If hypothetically you are working as a consultant for the Mexico government and you know they are in a big issue now to decide if they will construct or not the new airport. That's why, just a direct question, if you are in that position, what is your answer?

Juan Carlos Salazar:Build a new airport.

Abhi Shah:I don't really know much about Mexico, but I think more airports is probably better.

Luis Felipe de Oliveira:Peter?

Peter Cerdá:New airport.

Luis Felipe de Oliveira:Santiago?

Peter Cerdá:New airport for sure.

Luis Felipe de Oliveira:That's great. Thank you very much. Thank you very much for the panel. Great discussions. Thank you very much.

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