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American Airlines and Delta: the worst is over for Latin America’s weak revenue performance

Latin America has been a weak spot for airlines for more than a year; Brazil’s economy has crumbled and currency fluctuations have driven weakness in demand in some of the region’s other countries. But two of the US’ large global airlines, American and Delta, believe that Brazil in particular has reached an inflection point, and they sense a slow improvement occurring on routes to Brazil due to a rationalisation of capacity in those markets.

After steep revenue declines in its Brazilian markets, American expects it could post positive unit revenue results in those markets during 3Q2016, while Delta is citing positive trends for its Latin American entity that should continue into 2017.

Of course, it will take some time for airlines to reach the levels of revenue performance they enjoyed before Latin America’s economy began to contract, but the start of the slow climb out of the revenue doldrums is a welcome sign for a region that remains one of the most promising over the long term.

American welcomes a bottoming-out of tough revenue conditions in Brazil

Latin America in 2016 faces its second consecutive year of economic contraction driven by Brazil’s recession. Brazil’s own economy is also poised to contract for a second year in a row, and the ripple effects of the country’s economic and political turmoil have resulted in crumbling demand for air travel to and from the country, and within it.

GDP Growth of Brazil (Percent change): 2010 to 2020

American has historically been the largest US airline operating between the US and Brazil and it still holds the leading position between the two countries based on seat deployment, with a 37% share for the week of 19-Sep-2016.

United States of America to Brazil (seats per week, one way): 21-Sep-2015 and 19-Sep-2016

Airline Week of 21-Sep-2015 seats Week of 21-Sep-2015 percentage share Week of 19-Sep-2016 seats Week of 19-Sep-2016 percentage share
American Airlines 22,114 seats 35.59% 16,714 seats (-24.42%) 37.09%
Azul 3,500 seats 5.63% 3,502 seats (0.06%) 7.77%
Delta Air Lines 7,512 seats 12.09% 6,230 seats (-17.07%) 13.83%
Korean Air 654 seats 1.05% 654 seats (0%) 1.45%
LAN Ecuador 1,260 seats 2.03% N/A N/A
TAM Airlines 18,794 seats 30.25% 10,842 seats (-42.31%) 24.06%
United Airlines 8,302 seats 13.36% 7,116 seats (-14.29%) 15.79%
Total 62,136 seats 100% 45,058 seats (-27.48%) 100%

The airline has cut its capacity to Brazil by between 35% and 40% since 2014, and that includes the elimination of five markets – Salvador, Recife, Porto Alegre, Campinas and Curitiba.

American’s Latin American unit revenues and yields fell sharply year-on-year from 4Q2015 through 2Q2016, but did show some sequential improvement from 1Q2016 to 2Q2016.

American Airlines yield, PRASM and ASM increase/decrease in Latin American markets: 4Q2015 to 2Q2016

Quarter Yield decrease/increase PRASM decrease/increase ASM decrease/increase
4Q2016 17.8% decrease 16.9% decrease 0.5% decrease
1Q2016 16.7% decrease 17.1% decrease 1.1% decrease
2Q2016 12.3% decrease 10.2% decrease 4.3% decrease

Recently American management stated that during 2015 the airline was surprised that some airlines operating between Brazil and the United States had increased capacity by double digits in 2015, but during 2Q2016 industry capacity in the market actually started to decline. The company projects deeper industry capacity decreases from the US to Brazil in 3Q2016 and 4Q2016.

As a result of the industry right-sizing capacity to Brazil, American stated that its passenger unit revenues (PRASM) on routes to Brazil had declined 13% in 2Q2016, versus an average of 35% while industry capacity was higher. Due to a boost from the Olympics held in Rio in Aug-2016, American expects to post a positive PRASM performance on routes to Brazil in 3Q2016 and the company stated that it could possibly achieve a positive result in 4Q2016. Obviously American’s PRASM has a long trajectory before it reaches pre-recession levels, but the company’s executives are encouraged by the fact that the deteriorating conditions have bottomed out.

The BRL has also been gaining some ground against the USD, which is also helping to improve conditions in the US-Brazil market. At the end of 2Q2016 Brazil’s BRL had fallen 14% against the USD, which is a marked improvement from the 37% depreciation that occurred in 2015.

Delta's revenue slide in Brazil is moderating as its Brazilian capacity falls

Delta has the smallest seat share among the large three US global network airlines between the US and Brazil, and during 1Q2016 the airline estimated that its capacity to Brazil had fallen by 30% from peak levels.

The airline calculated that 5% of its 9% PRASM decline on Latin American routes in 1Q2016 was driven by currency fluctuations. Colombia, which is Latin America’s third largest aviation market, has also faced currency depreciation against the USD, but the COP has also been gaining some ground against the USD. The COP depreciated 17% against the USD at the end of 2Q2016, versus 35% depreciation in mid-Aug-2015.

Delta posted a sequential improvement in its Latin American PRASM from 1Q2016 to 2Q2016, and the company noted that Jun-2016 marked the first time it had posted a positive PRASM for the region in 26 months.

Delta Air Lines yield, PRASM and ASM increase/decrease in Latin American markets: 1Q2016 to 2Q2016

Quarter Yield decrease/increase PRASM decrease/increase ASM decrease/increase
1Q2016 10.8% decrease 9.2% decrease 4.8% increase
2Q2016 7.8% decrease 4.9% decrease 0.9% increase

Delta stated that the positive unit revenue result for the last month of 2Q2016 had occurred as its unit revenue declines in Brazil moderated to 4%, driven by moderating currency depreciation and capacity reductions.

Strength in Mexico drives Delta's bullish outlook for Latin America in 1H2016

Throughout 2016 Mexico has been a strong performer for Delta, and in 2Q2016 the airline recorded a four point increase on unit revenues for its Mexican routes. Delta has also cited solid demand to the Caribbean, and expects favourable unit revenues in that region in 3Q2016 as the company starts to lap its own capacity increases, which occurred in the period year ago.

At the end of 2Q2016 Delta forecast that its Latin capacity would decline two to three points, and “we expect this entity to inflect in RASM [revenue per available seat mile] as early as the September quarter on reduced currency pressures, strengthening demand and reduced capacity offering”, stated Delta president Glen Hauenstein.

Delta CFO Paul Jacobson recently stated that Delta expects the positive revenue trends to continue into 4Q2016 and into 2017. Much of Delta’s revenue strength in Latin America is driven by Mexico, where it has been working more closely with its fellow SkyTeam partner Aeromexico ahead of the two establishing a cross-border joint venture.

The two airlines expect US government approval for the tie-up in 4Q2016 after gaining approval from the Mexican government – contingent on the airlines relinquishing eight slot pairs at Mexico City Juarez international airport.

Mr Hauenstein said in Jul-2016 that the strength of Delta and Aeromexico in the US transborder market was resulting in Delta gaining a higher share of corporate travel to and from Mexico than the airline historically retained.

Combined, Aeromexico and Delta represent a 26% seat share between the US and Mexico for the week of 19-Sep-2016.

If the joint venture is approved the two airlines can cooperate on pricing and scheduling, and operate nearly as a single entity in the Mexican transborder market. Once the US government approves the joint venture, Delta plans to up its stake in Aeromexico to 49%, which will result in Delta having more influence in directing Aeromexico’s strategy.

United States of America to Mexico (seats per week, one way): 21-Sep-2015 and 19-Sep-2016

Airline Week of 21-Sep-2015 seats Week of 21-Sep-2015 percentage share Week of 19-Sep-2016 seats Week of 19-Sep-2016 percentage share
Aeromar 255 seats 0.11% 306 seats (20%) 0.12%
Aeromexico 42,222 seats 18.42% 43,365 seats (2.71%) 17.31%
Alaska Airlines 11,713 seats 5.11% 13,794 seats (17.77%) 5.51%
American Airlines 43,923 seats 19.17% 49,839 seats (13.47%) 19.9%
Branson Air Express 840 seats 0.37% N/A N/A
Delta Air Lines 22,616 seats 9.87% 22,603 seats (-0.06%) 9.02%
Frontier Airlines 3,211 seats 1.4% 3,626 seats (12.92%) 1.45%
Interjet 11,055 seats 4.82% 17,400 seats (57.39%) 6.95%
Southwest Airlines 8,772 seats 3.83% 14,872 seats (69.54%) 5.94%
Spirit Airlines 1,971 seats 0.86% 3,739 seats (89.7%) 1.49%
Sun Country 776 seats 0.34% 780 seats (0.52%) 0.31%
Sunwing Airlines 187 seats 0.08% N/A N/A
US Airways 9,380 seats 4.09% N/A N/A
United Airlines 41,534 seats 18.12% 41,676 seats (0.34%) 16.64%
Virgin America 1,332 seats 0.58% 1,332 seats (0%) 0.53%
VivaAerobus 1,242 seats 0.54% 540 seats (-56.52%) 0.22%
Volaris 23,868 seats 10.42% 29,904 seats (25.29%) 11.94%
jetBlue Airways 4,261 seats 1.86% 6,700 seats (57.24%) 2.67%
Total 229,158 seats 100% 250,476 seats (9.3%) 100%

In order to gain final approval from the US government Aeromexico and Delta may have to relinquish additional slots at Juarez International. jetBlue and the Mexican ULCC Volaris have spoken out about the disproportionate number of slots that Aeromexico and Delta will hold at Mexico’s largest airport and gateway.

JetBlue is urging regulators evaluating Aeromexico and Delta’s ATI request to require the divestment of 30 slot pairs at Juarez in order to ensure that smaller airlines can compete effectively against the larger airlines dominating the Mexican transborder market.

See related report: Mexico-US transborder airline market Part 2: Controversy surrounds the proposed Aeromexico-Delta JV

Delta and American carve out their positions in the still-strategic Latin American market

It is an encouraging sign that the largest airline operating between the US and Brazil – American – is beginning to see some positive revenue trends. American faced the delicate balance of adjusting capacity to demand while maintaining its leading position between the US and Brazil.

Despite its recession Brazil remains a key market in Latin America, and American remains well-positioned to capitalise on a true rebound in demand – whenever that occurs.

Delta’s rebound in the Latin American market is underpinned by its performance in Mexico, which could strengthen once it creates a joint venture with Aeromexico. But before that occurs Delta and Aeromexico could be required to make more concessions to ensure a level playing field in the US-Mexico market.

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