Amends last paragraph to reflect operating margin guidance for 2016, instead of 2017
LATAM Airlines Group is hoping a new basic economy fare category will help it capture more price-sensitive leisure passengers, as it continues to face uncertainty in soft macroeconomic conditions in Latin America.
The region's biggest airline group recently announced plans to introduce a no-frills fare category for domestic passengers travelling on its affiliates in six countries, and will gradually roll out the offering from early 2017.
The new fare category will allow LATAM to charge for ancillary services, like checked bags, food and beverage on board and other services. It will be offered on domestic flights in Brazil, Chile, Colombia, Peru, Argentina and Ecuador.
LATAM's senior vice-president for Spanish-speaking countries Enrique Elsaca says the new fare category will cater to growing demand from the region's leisure passengers, which he says are growing at about double to triple the rate of business passengers.
Leisure passengers make up about 50% to 70% of LATAM's domestic passengers, said Elsaca on a 11 November earnings call.
"They are very price-sensitive and require low fares," he adds.
Despite a slowdown that is still felt in Latin American economies, LATAM sees "significant" growth in its domestic passenger markets. Elsaca points to the airline's stronghold of Chile, where it holds a 78% share of the domestic market. In the last decade, passenger numbers in Chile have grown from about three million to 10 million annually.
Besides growing demand from leisure passengers, LATAM's new fare category is also a response to growth from low-cost carriers in the region, says Elsaca.
In LATAM's own backyard of Chile, Sky Airline is transitioning to a low-cost carrier model. While Sky holds a much smaller share of the Chilean domestic market, it is the the country's second biggest airline and is gradually expanding its network.
In LATAM's other domestic markets, low-cost carriers are expanding or setting up shop. In Brazil, Gol and Azul are significant players. In Colombia, VivaColombia is growing its domestic route network and Panama's Copa Airlines is converting its local subsidiary into a low-cost brand, Wingo.
In Peru, Irelandia Aviation is launching a new low-cost carrier in 2017. Meanwhile, Argentina's aviation market is opening up to new entrants and Flybondi is aspiring to become the country's first low-cost carrier next year.
LATAM's Elsaca reiterates the new fare category will not see the airline making changes to its aircraft cabins or seat pitch. "LATAM will not become a low-cost carrier," he says. "We will compete with low-cost carriers but maintain our heritage for business clients. We will continue to prioritise elements valuable to business passengers."
The new low fare category will take different forms depending on the regulations in each country, points out Elsaca. In Brazil, for example, airlines are prohibited from charging for bags although Brazilian regulators have said they might eliminate this regulation. In Argentina, a fare band restriction mandates a minimum fare for airlines.
NOT OUT OF THE TUNNEL
LATAM's plans to attract low-fare passengers come as the airline sees improvements in its region, but continues to face soft unit revenues and yields.
Systemwide unit revenue fell 0.7% in the third quarter to 6.1 cents. Unit revenue in LATAM's Spanish-speaking countries declined 18.3% to 6.6 cents, due to weaker economic growth.
Brazil, which has been a significant strain on Latin American airlines' finances, has shown some upside with the appreciation of the Brazilian real. Domestic Brazil unit revenue grew 8.6% in the third quarter to 6.2 cents. When measured in Brazilian reais, unit revenue was up 1.8%.
LATAM Airlines Brazil chief executive Claudia Sender, however, says it is still too early to say there is a sustained recovery.
"After 14 months of consistent traffic decline, this drop is decelerating but we still don't see a pick-up in demand... we will maintain our capacity stance going forward," she says.
In terms of pricing, Senders says there have been "some good weeks, some bad weeks". "It's hard to say there's a consolidated trend from a pricing perspective."
LATAM slashed domestic Brazil capacity 13.2% in the third quarter. On a full-year basis, it plans to reduce capacity in the market by 10% to 12%.
The airline continues to make progress with its plan to reduce fleet assets to cut down on fleet expenditure. It has deferred two additional Airbus A350-900s from 2017 to to 2018, reducing its 2017 fleet commitments to $482 million, all of which will be spent on operating leases.
LATAM has so far achieved about $1.1 billion of a planned $2 billion to $3 billion fleet assets reduction by 2018.
The A350s deferral for 2017 means that it will take no A350s in the year, an updated fleet plan shows. In 2018, it will add four A350s. It still expects to take delivery of two Boeing 787-9s in 2017.
LATAM expects an operating margin of 5.5% to 6.5% for 2016, narrowing from the 4.5% to 6.5% range it guided to earlier.
For our coverage of the ALTA Airline Leaders Forum taking place in Mexico City on 13-15 November, visit www.flightglobal.com/alta
Source: Cirium Dashboard
