With their regional economies performing well, Latin America's leading carriers, meeting in Cancun in November for their annual assembly, were in an optimistic mood. How can other Latin players emulate their success?
The latest annual gathering of Latin and Caribbean carriers at the Latin American Airline Leaders Forum, organised by the region's airline association ALTA, gave ample proof that the gulf between the "haves" and the "have nots" in the region is widening.
The list of "haves" remains short and familiar, containing the names of profitable carriers with strong and stable management teams and robust balance sheets: Panama's Copa Airlines, Brazil's Gol and TAM, Chile's LAN and El Salvador's TACA. Colombia's Avianca is edging its way into this premier grouping as it continues restructuring after emerging from bankruptcy protection in late 2004 under the ownership of Brazil's Synergy Group.
The challenge of the "have nots", which is more or less everybody else, is how to emulate their more successful Latin peers. In many ways the economic climate has been at its most favourable in the past year or two to make the transition. While regulatory hurdles and government interference remain constant themes in the region, ALTA president and Copa chief Pedro Heilbron sounded a positive note: "Great things are happening with the region today."
Economies expanded by over 5% in 2006 and are on track to achieve their fourth consecutive year of GDP growth. "GDP per capita has risen by 12% since 2003 and inflation is at a 40-year low," added Heilbron. After a dip in overall traffic last year with the collapse of Varig, the region has outpaced all others in the last few months and is forecast to grow at 6.6% per annum, second only to China, he said.
Heilbron's carrier Copa has been one of the few able to capitalise on this vibrant situation, and like LAN and TACA, is growing outside its natural home market by the creative use of ownership structures, acquisitions and partnerships. But the region's governments must also create more liberal air transport markets and lift ownership restrictions, many argue.
"Bilateral agreements cannot keep pace with market developments and they prevent the consolidation needed to build strong global competitors," said Giovanni Bisignani, director general of IATA. It "makes absolutely no sense" that Latin America represents 5% of global traffic yet is divided into 39 markets, he said.
"Maintaining the status quo is a one-way ticket to remain regional players in a global industry," said Bisignani. "The European approach could be a model with a staged approach to a single market that has made consolidation possible, starting with Air France-KLM followed by Swiss and Lufthansa and SN Brussels with Virgin Express."
Consolidation moves
In Brazil, market consolidation has taken place this year with the acquisition of the Varig brand by Gol. However, Mexico's flag carriers Aeromexico and Mexicana have been kept apart by the authorities in a move that Mexicana chairman Gaston Azcarraga called a "big disappointment".
Mexicana, which was sold to Mexican hotel chain operator Grupo Posadas in late 2005, wanted to buy Aeromexico. But Mexico's competition authority prevented it from entering a bidding war which Banamex eventually won. "In Mexico this industry is going to need consolidation," said Azcarraga. "There are 14 airlines in Mexico and anyone can set up a new one - the entry barriers are so low. So consolidating the two legacy carriers would have been good for everyone."
In the Caribbean, consolidation has begun with the recent merger of Liat and Caribbean Star. Elsewhere among the island-based carriers Caribbean Airlines has taken over Tobago Express. These are modest but significant moves, although calls for faster integration might be premature.
"We should not force the pace too quickly," said Philip Saunders, the chief executive of Caribbean Airlines. For Saunders, and Liat chief Mark Darby, consolidation will return to the agenda, but areas of co-operation like frequent flyer programmes and improving inter-island connectivity are more important for now.
Views also differ on approaches to liberalisation. Bisignani said that the "building blocks for liberalisation" already exist in Latin America, with carriers like LAN having developed "cross-border clone operations" as a way of getting around bilateral rules. "Now governments must catch-up with commercial reality, defining a staged approach to full liberalisation with transparent and challenging targets," he said.
A call for "intra Latin American-Caribbean Open Skies" was among the pleas made by Heilbron in his wish list of measures that would boost the region's carriers. However, many look north when greater market freedoms are discussed, for North American carriers have been aggressively targeting Latin America for years, with great success. This has led some states to shelter their carriers from this threat by holding out against greater liberalisation for the time being.
Sleeping elephant
The interest of US carriers in the Latin American market continues to grow, and as former Air Canada chief executive Pierre Jeanniot warned: "Being close to the USA is like sleeping next to an elephant - if it rolls over, you're likely to get crushed."
Continental Airlines, for instance, decided to use its Houston hub to expand forcefully into the Latin American market. "People in Miami laughed at us when we said we would make Houston our Latin American hub, but today we have 1,300 flights a week from Houston into Latin America," said Continental vice-president Latin America, Pete Garcia. He added that Continental plans to "capitalise on the free trade agreements" between the USA and Colombia, Peru and Central America.
Those carriers in the "have" category are more than holding their own in the competition with the US players. The "have nots" that are unable to join them risk joining the long list of "has-beens" or failures from the Latin airline scene.
Latin carriers to form their own distribution system?
The formation of a Latin airline Global Distribution System is one of the options under examination as the region's carriers work out how to tackle their soaring distribution costs.
"This is a big deal for us as these costs for Latin carriers are higher than anywhere else," said Santiago Ontañón, Mexicana's chief information officer, during the ALTA Forum. "One alternative that pops out every time is forming our own GDS, or funding some other form of GDS," he added. "It mainly comes from the inability of some Latin carriers to bypass the GDSs."
A group of carriers has been working with ALTA for the last two years to analyse and benchmark distribution and credit card costs for the region's carriers. After the next phase of this work, in about six months' time, the working group should "have an idea if it makes sense of not", said Ontañón. For the time being, he has "not seen a compelling business case" for such a move.
During a panel on distribution at the Forum, Ontañón asked the region's dominant GDS players Amadeus and Sabre what they thought about the "feeling that you are squeezing Latin carriers to compensate for the loss of business with big carriers [in other regions]." Between them these two have a market share of over 80% in Latin America.
That feeling is "unfortunate", said Sabre's Kamal Qatato. "We are not doing deals where we are subsidising other parts of the world. We are going for a value-based approach." Amadeus executive Arnaud Debuchy said his company "does not incentivise one customer over another".
Stepping into the debate, Eustacio Fabrega, president of governmental body the Commission for Latin American Civil Aviation, said he has often heard airlines complaining of GDS fees that are 10-20% more in this region than those US and European carriers pay.
To a round of applause from the audience, he said CLAC would step in to help regulate the GDS market if this was something the industry desired.
Source: Airline Business
