For LATAM Airlines Group, the end of 2016 marked a financial turning point. The Santiago-based carrier turned in an annual net profit, its first in the four years since its creation from a merger between Chile's LAN and Brazil's TAM.
The performance was a hard-won victory for Latin America's biggest airline after weathering the years-long financial recession in Brazil and other economic uncertainty in its region.
Oliver Llaneza
LATAM chief executive Enrique Cueto makes no attempt at airbrushing the difficult macroeconomic conditions LATAM faced shortly after the merger closed in 2012.
"That was very, very tough for us," he tells FlightGlobal in his office at LATAM's headquarters in Santiago. The difficulties forced LATAM to cut back on expansion plans that it had earlier laid out from the merger.
"We were prepared at that time to grow around 5% to 6% in the region," says Cueto. "But in the end, we ended up having a reduction."
LATAM has spent the past few years slashing capacity growth and deferring aircraft orders to reduce its fleet expenditure. The airline is planning to end 2017 with a total fleet of 314 aircraft, 14 fewer than it had at the end of 2012.
Although Brazil is finally emerging from its long downturn, Latin America's airline chiefs are far from declaring that the region's biggest economy is back to normal, and Cueto is no exception.
"Brazil is now starting to move in the right direction," he says. But LATAM plans to raise its 2017 systemwide capacity by just a touch, with ASKs growing 1-3%. Domestic Brazilian capacity will decline by 1-3%, falling more steeply from LATAM's initial guidance of flat to down 2%.
As LATAM awaits further positive turns to its region's economies, it also has to contend with a new competitive dynamic in Latin America's airline industry – the emergence of new low-cost carriers, which has prompted LATAM to escalate changes to its domestic operations.
LOW-COST EVOLUTION
Cueto, who has more than 30 years' experience leading airlines, knew that it was only a matter of time before LATAM encountered head-on competition from low-cost carriers. Following years of minimal budget carrier penetration, South America's airline industry is set for disruption as several discount players enter the field.
With affiliates in seven countries, LATAM is now facing new or imminent competition in at least three of its territories: Chile, Peru and Argentina. Earlier this year, Viva Air Peru began flights, followed months later by Santiago-based JetSMART, backed by airline investor Indigo. On LATAM's home turf of Chile, the second-biggest domestic player, Sky Airline, has completed a transition into a low-cost carrier and is increasingly expanding its network at home and abroad.
In Argentina, Norwegian is progressing on launching a local subsidiary, while start-ups such as FlyBondi are preparing to begin service.
"This is not different from what happened in Europe and the US probably 10 years ago," Cueto says of the rise of low-cost airlines in LATAM's backyard. "We understand that any developments there will arrive here."
Oliver Llaneza
The growing competition from discounters has forced LATAM to accelerate cost-cutting efforts so it can defend its turf from the new rivals. The airline debuted unbundled fares earlier this year, and began charging for food and baggage. LATAM plans to roll out the new fare structure to its regional flights by year-end, offering it on most flights that are less than 3h long.
Cueto acknowledges that the move from complimentary meals to a buy-on-board menu has not gone down well with some passengers. "At the beginning, obviously people were upset at having to pay," he says. But he believes that unhappy travellers will eventually come around to the idea, and that cheaper fares will soothe any displeasure.
LATAM says unbundling could lower fares by 20-40%, allowing it to capture price-sensitive passengers who might otherwise choose a low-cost airline.
More than 85% of LATAM's passengers fly short-haul, says Cueto. "If those LCCs are going to compete with us for that segment of passengers, we would like to be the leaders," he says. "We have been working for many years on the cost side, not to be a low-cost carrier, but to be more competitive with a low-cost carrier in our short-haul operations."
Cueto estimates that LATAM has 20% higher costs than a low-cost carrier, but the airline is working to reduce this to a 10-15% gap by year-end as it continues to implement its new fare structure on more routes in the region.
At the same time, LATAM still sees value in offering a full-service product to premium passengers on longer-haul flights.
"We have a lot of advantages with our frequent-flyer programme, with our network, our brand, and with our business travellers. We want to maintain our itineraries for our business passengers," he says.
On the back of stronger economies in Latin America, LATAM has dialled up network growth in 2017, with international flights driving the expansion. The airline has so far announced two new international points – Melbourne and Costa Rican capital San Jose – and has unveiled plans for more than two dozen international routes.
The improving Brazilian economy and the strengthening of its currency are a tailwind for LATAM's outlook for international growth.
"Brazil's international flights are doing very well this year, because the [Brazilian] real has appreciated," says Cueto. "Most of the passengers we had in that market three years ago were Brazilian, so when we had the recession the industry was very aggressive in reducing capacity."
LATAM is also eyeing a new destination in Europe – likely to come on board in 2018 – as well as additional frequencies to the USA.
The carrier plans to increase international capacity in 2017 by 3-5%, up from flat-to-2% growth initially. In comparison, LATAM has cut capacity growth for its Brazil and Spanish-speaking domestic operations for the year.
The airline is keeping an eye on Argentina, which is struggling with inflation, although Cueto believes the carrier will see a better economy in the country next year.
While airlines including LATAM have welcomed Argentina's moves in the past year to liberalise its aviation sector, they are still calling on the country to abolish a regulation that sets a minimum for airfares, limiting airlines' capabilities to offer low prices.
The minimum fare band is a barrier to low-cost growth in the country, Cueto believes. "For any LCC to have a minimum fare, that would be a first," he says.
GROWING ALLIANCES
When LATAM was created in 2012, it outlined its vision to be Latin America's strongest carrier. This ambition has not changed, and Cueto believes that the airline still offers the best network in its region to its partners abroad.
A longtime supporter of partnerships among airlines, Cueto more than welcomed an approach by fellow Oneworld carrier Qatar Airways, which in December 2016 completed a 10% investment in LATAM for $613 million.
"We asked them why. [They said] this is a financial investment, that they believe in Latin America and they think they had a good opportunity at that moment," says Cueto. "They would like to grow in the world, and they need partnerships in many regions. In Latin America, they felt that we were the best partner."
The investment by Qatar Airways was a rejuvenating validation of LATAM's strategy, during a time when the airline was still grappling with the demoralising downturn in Brazil.
"Many people said to us [after the merger with TAM]: 'No, you made a big mistake. What are you doing in Brazil? That was a stupid move...' et cetera," says Cueto. Qatar's investment in LATAM was a solid endorsement of its strategy, he believes.
"For us, it was very important that they showed to the market that what we had been doing, even with the recession in Brazil, was right," he says.
To LATAM's detractors, Cueto reiterates that a merger between LAN and TAM was essential in creating a powerhouse in the region.
"We don't have anything behind us to feed us traffic," says Cueto. "We are at the Pacific Ocean. We need to be one big mass of traffic to create a network to compete, so here we created that... They [Qatar] believe we will be useful for them, and we will feed their flights to the Middle East in the future."
Qatar and LATAM have signed an agreement for the Doha-based airline to codeshare on LATAM's domestic Brazilian routes, and Cueto does not rule out the two airlines stepping up co-operation, including the possibility of Qatar taking a bigger stake in the future.
Chile has some of the most liberal ownership rules, and an airline could be wholly owned by foreigners, Cueto points out. "We are going to see what's the best [arrangement] but we don't have any position [on the matter today]," he adds.
Qatar Airways is not the only Oneworld carrier to which LATAM is drawing closer. In January 2016, LATAM announced plans to launch joint ventures with American Airlines and IAG, and the airlines are awaiting regulatory approvals from governments in the USA, Europe and Chile.
Cueto is hopeful that progress with the approvals will be made by year-end, and says LATAM is prepared to accede to conditions if needed to secure the regulatory green light. "It's part of [the process], and we understand that," he says.
A delay to the ratification of US-Brazilian open skies could potentially delay part of the proposed joint venture between LATAM and American, although Cueto appears optimistic that this could take place soon, despite several delays in the past.
"For many years, we had zero movement," he says. But a change of government in Brazil in 2016 has led to some progress on the matter in the nation's congress, says Cueto.
SHIFTING MINDSET
LATAM's joint ventures with American and IAG, if approved, will be the second and third such business arrangements involving a Latin American airline. Earlier this year, Aeromexico and Delta Air Lines implemented a long-anticipated joint venture after agreeing to slot divestitures and other conditions imposed by US and Mexican authorities.
Cueto, a vocal proponent of airline joint ventures, believes that some Latin American governments are increasingly more accepting of such proposals. In particular, Brazil's government has been "very open", he says.
"In Chile, we needed to have more discussions, to talk about what's a JV."
Pointing to Latin America's geographic location, he emphasises that an airline joint venture is an important tool in growing connectivity to the region.
"This gives us an opportunity to create more markets, more passengers; offer lower fares; and transport more to this part of the world," he says. "This would be impossible to do separately by each airline."
Known in airlines circles as a low-profile executive (this interview with FlightGlobal is only his second media interview of 2017), Cueto is not one to court attention at industry events. But bring up the issue of aviation regulations and policies in Latin America, and his eyes light up.
He has long called for business-friendly policies and regulations in Latin America, and reiterates that the region still has a long way to go. High taxation and heavy-handed consumer protection regulations have led to unreasonable costs for airlines, he says.
"Governments are continuing to think that those who travel by air are very rich people," says Cueto. "You have a country like Brazil, where sometimes the only transport option is air travel, but it has one of the highest fuel prices in the world because of taxes."
In other countries, passenger fees collected by the government can sometimes be as much as 50% of the airfare, while consumer protection rules unfairly penalise airlines for situations that might not necessarily be their fault, says Cueto.
"Let's say we offer a $1 fare. But you will eventually need to charge $8, $10, $15," he adds. "When you try to create new traffic with very low fares, you end up paying a lot."
Governments impose such policies with a misguided view that the airline industry is a cash cow to boost government revenue, instead of seeing aviation as a lever for economic growth, says Cueto.
With a lack of viable road and rail infrastructure in some Latin American countries, the need for air connectivity is even more pressing, he adds.
"Many countries don't have the money to make those investments," he says. "If you think about how to connect cities with small towns, you will soon understand that the only way to do that is by air. You create that airfield, you fly there and you connect two cities. When you fly into a small town, you change the lives of the people in those places. It's incredible."
Source: Cirium Dashboard
