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The Trump presidency casts a long shadow over a tentative recovery in Latin America
After battling dismal economic conditions for the past two years, Latin America is poised to begin pulling itself out of fiscal decay in 2017. Near the end of 2016, forecasts tilted toward a return of modest GDP growth between 1.5% and 2% for 2017 after the region endured an economic recession for the prior two years.
But the emerging optimism was significantly clouded when the US selected Donald Trump as its next president in Nov-2016. An already weak Mexican peso (MXN) plunged against the US dollar (USD) on fears of a Trump Administration abolishing NAFTA, engaging in mass deportation and following through on plans to erect a wall on the US-Mexico border. Economists have already issued revisions to Mexico’s projected economic growth for 2017, and the benefits of a new liberalised bilateral between the two countries are in jeopardy as airlines have to adjust their growth prospects to reflect a potential new era of protectionism.
Broader implications of Mr Trump’s presidency on Latin America will emerge over time; hopefully they will not be as sombre as the politicking noises might suggest.
But even so the current cloud of continuing uncertainty ushered in by his election could become an impediment to recovering economies and air traffic flows within, and to and from the region – just as demand was starting a tepid recovery near the end of 2016. Any downward revision to Latin America’s economic forecast for 2017 places airlines operating in the region in a precarious position.
LATAM and GOL: Excess capacity could threaten arrival of crucial recovery in Brazil domestic market
After two years of weak demand and pricing, some signs of stabilisation are emerging in Brazil; however the country’s two largest airlines are adopting an understandably cautious tone in their assessment of the operating environment. Although both LATAM Airlines Brazil and Gol have significantly reduced their domestic capacity during the last year and a half, both airlines have concluded that some excess supply remains in the market place. Fast-growing Azul has opted to slow its capacity growth in 2016, but Brazil’s fourth largest airline Avianca Brazil has continued growth in order to build its market share within the country.
LATAM Airlines Brazil also believes its performance on routes between the US and Brazil is improving, which is a similar conclusion drawn by US airlines operating between the two countries. For LATAM, the improved performance is offsetting some weakness on other long haul routes from its Spanish-speaking countries.
Neither airline has offered specific capacity guidance for 2017, but LATAM Airlines Brazil and Gol are likely to keep their supply restraint intact. Pricing in the domestic market has yet to stabilise, and competitive capacity actions will result in those airlines keeping their own ASK increases at bay in order to sustain a favourable supply/demand balance.