Latin air transport still faces plenty of tough challenges but the outlook is better than it has been for years
Latin American and Caribbean carriers continue to wrestle with problems that have dogged them for years, including government interference, regulatory hurdles, lack of capital and excessively high charges for fuel, air traffic control services and facilities.
But an undeniable theme running through the third annual ALTA Latin American Airline Leaders Forum was one of optimism: that the region is ripe for growth that increased competition, especially from low-cost newcomers, has attracted new travellers that visionary airline executives are carving out strategies for success that solidly run airlines with "transparent" balance sheets have begun to attract equity investment through public share offerings and that ALTA's focus on safety and cost reduction is resulting in tangible benefits for members. ALTA, the Latin American Airline Association, now counts 33 Latin American and Caribbean airlines among its members.
"I think we're on the right track," says Pedro Heilbron, ALTA president and the chief executive of Copa Airlines. Traffic has been growing at a steady pace, more than 12% in both 2004 and 2005, and at a reduced rate in 2006 only because of Varig's contraction, he says, and there is ample opportunity for growth. The Latin America-Caribbean region represents 9.2% of the world's total population, but generates just 4.9% of worldwide passenger traffic, he says. "There is no reason why this traffic should not double."
But size does not guarantee profits and four Latin carriers are among the most profitable airlines in the world, says Michael Linenberg of Merrill Lynch Global Securities. Panama's Copa and Brazil's Gol and TAM all had double-digit operating margins in the third-quarter ahead of all US airlines, and Chile's LAN was not far behind. "The market has recognised opportunities in Latin America," Linenberg says. All four have successfully raised considerable equity in stock offerings in the USA, he notes, and Copa's shares are up 100% since it went public.
Linenberg draws a parallel between the situation in Latin America today and the US airline industry in the 1960s, when it experienced strong growth and profitability. Previously only a fraction of US citizens had flown, a situation similar today in Latin America. Now, 80% of US citizens have flown in the past 12 months. Passenger air traffic is forecast to grow at 6.9% a year in Latin America, second only to China, and well ahead of the world average of 4.9%. Gross domestic product growth for the region is expected to run slightly ahead of the world growth rate.
Each of the four publicly traded Latin carriers have different operating strategies, but they face similar problems. Heilbron says Latin and Caribbean carriers pay on average 15% more in taxes and fuel than others. High airport and air navigation charges services came under attack repeatedly in Cancun. "We've some of the most expensive airports in the world," he complains.
In a number of countries, airports have been privatised or large companies given long-term contracts, sometimes to run many or most of a country's airports, along with carte-blanche authority to fix fees. Airline executives complain that airport operators are allowed to charge excessive fees and, as a result, are experiencing high profits and stock prices while the airlines lose money.
The Latin airport battle
ALTA has been active in opposing rising airport costs, particularly in Argentina, Costa Rica, Ecuador and Mexico, and focused special attention on Argentina (see related story on page 17). The raw nerves between airlines and airports were obvious after a presentation by Hector Navarrete, president of Airports Council International Latin America, in which he said airlines and airports were "partners" in a marriage. It drew a torrent of criticism from carriers. "Sir, I am not your partner I am your customer, a captive customer of your monopoly," Nelson Ramiz, executive president of Venezuela's Aeropostal, responded, with strong applause from many of the 450 attendees. Instead of airlines paying such high charges, Ramiz says, airports should be paying airlines a commission on the sales it gets from customers it brings to airport shops. "Airport privatisation by governments in our region is a licence to steal," he says.
Ramiz says government does have a critical role to play in aviation. "Their role in safety, security, regulation of monopolies where markets don't work, and liberalisation where markets work, is unchallenged." But government involvement in other areas, such as currency restrictions, regulations regarding employees and fixing fees for travel agency bookings, he says, strips carriers of commercial freedom. Currency controls in his country, says Ramiz, make it "easier to obtain dollars from the government to import an 18-year-old bottle of Scotch than to import spare parts."
Despite the problems they face, carriers are developing individual operating strategies and showing better results. "As we see growth, we also see a number of success stories," Heilbron says. His relatively small airline, partly owned by Continental Airlines, has built a successful "hub of the Americas" operation at Panama City.
Gol has grown more recently into neighbouring countries offering low fares. TAM, now Brazil's leading carrier, has a strong business traveller base and expanding intercontinental network, but also competes for low-fare passengers against Gol. TAM codeshares with Air France and American Airlines, but has no intention of joining an alliance, says TAM's Paulo Castello Branco, vice-president alliances. "Everyone wants to marry TAM," he says, "and at this point, we just want a date."
LAN, the first Latin carrier to go public, has grown to include LAN Argentina, LAN Ecuador and LAN Peru. Chief executive Enrique Cueto says its membership of the oneworld alliance has strengthened operations and created possibilities for a small carrier, including daily flights to Sydney, codeshared with Qantas. "We would never have dreamed of it before," he says.
TACA early on saw the benefits of bringing together Central American carriers and developed a strategic alliance with the flag carriers of Costa Rica (LACSA), Guatemala (Aviateca) and Nicaragua (NICA). It then consolidated operations under the name of Grupo TACA. Other also are restructuring and developing new models.
Colombia's Avianca, which emerged from bankruptcy in 2004, is controlled by Synergy Group. It has restructured its route system, added frequencies, retrained its workforce and acquired 29 Fokker 100s, says Synergy chairman German Efromovich. The group, which owns Brazil's OceanAir, is close to placing a $2.5 billion order for new aircraft to replace its current fleet by 2014.
Caribbean co-operation
Caribbean carriers, like their Latin cousins, have often struggled. But there are changes afoot, with British West Indies Airways closing to be replaced by Caribbean Airlines in January while Liat and Caribbean Star are discussing a closer partnership. Importantly, governments need to stop propping up their local carriers, says Peter Davies, chief executive of Caribbean Airlines. "These subsidies create a sense of complacency," he says. "The attitude becomes, 'Who cares? The government will bail us out', instead of focusing on making the core product the best it can be."
Mike Conway, the chief executive of Air Jamaica, agrees that state aid is not the answer, but doubts whether the political landscape is changing fast enough to allow consolidation in the near-term. "The opportunity is in marketing agreements," he says.
There have been radical changes in Mexico where a new US-Mexico bilateral agreement has allowed carriers to open new routes, many between secondary cities in both countries. Mexico also has seen an influx of six new low-fare carriers. Aeromexico chief executive Andres Conesa says load factors for most of the new players are too low to sustain operations for all. "It's hard to imagine all six will survive."
Enrique Beltranena, chief executive of new entrant Volaris, says it has had load factors above 80% since starting in March and is already profitable. "Volaris has stimulated traffic," he says, undercutting high fares that had slowed air-transport growth in Mexico. "The market was ready for low-cost carriers."
According to Doug Abbey of the Velocity Group consultancy, five of the 10 largest Latin American air markets involved Mexico and four included Brazil. Both countries have surface transportation that makes travel between cities difficult and lengthy. "That's where the travellers are coming from - the ground," Abbey says.
Source: Airline Business
