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26 Sep 2017
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Latin America: Dancing to a different beat

Aviation in the Latin American region is working hard to find its rhythm, but challenges remain, by Graham Newton.

Latin lady in witch hat

Latin American airlines are expected to post an $800 million profit in 2017, according to IATA. This is slightly improved from the $600 million earned in 2016 but typifies the “could do better” report that has been the region’s issue for the past few years.


Venezuela has long been a particular thorn in the airlines’ side, holding some $3.8 billion of carrier money. The political chaos in the country means any hopes of grabbing some of that money back in the foreseeable future is fast disappearing, and airline service is fading alongside those hopes. Colombian airline Avianca is the most recent to stop flights to the country, joining the likes of Lufthansa, United Airlines and Air Canada.


And then there’s Brazil, once lauded as a member of the emerging BRICS (Brazil, Russia, India, China and South Africa) powerhouses but now lampooned for its underperformance. There are signs it is finally coming out of recession, but the country has a number of aviation-related issues to overcome, including the high cost of jet fuel and onerous regulation.


“To begin with, air transport is vital to Latin America and is a significant enabler of regional economic growth, generating $167 billion in GDP and supporting 5.2 million jobs [including the Caribbean],” says Peter Cerda, IATA’s regional vice-president, the Americas. “And with passenger growth in Latin America expected to double by 2034, the air transport industry’s contribution to regional GDP could jump from $140 billion to $322 billion.


“Unfortunately, governments in the region are hindering sustainable growth with chronic infrastructure deficiencies and debilitating regulation,” he continues. “So, for example, insufficient capacity at Jorge Chávez International Airport in Lima is stifling expansion and the establishment of a regional hub. The airport is currently handling 17 million passengers per year with a terminal designed for 10 million passengers.”


Cerda insists that governments in Latin America need to adopt the principles of Smarter Regulation, which means achieving clearly defined measurable policy directives that can be adhered to in the least burdensome way possible.

 

But that mindset appears to be a rare thing in the region.


“In Brazil, government fuel policies add some $650 million in extra costs to airlines annually, while regulations around flight delays punish airlines even when they are not at fault,” Cerda says.


However, it is not all bad news for the region. Peru is finally embarking on plans to ease the capacity crisis at Jorge Chávez International Airport, for example. Lima Airport Partners (LAP) – majority-owned by Fraport – and the Peru government have signed an amendment to their Lima airport concession agreement, which basically provides the go-ahead for a $1.5 billion expansion programme.


Work is due to start next year and will include a new passenger terminal and plans for a second runway. The upgrades point to a brighter, and more spacious, future. During the first half of 2017, the airport served close to 10 million passengers – its annual capacity – an increase of 8.4% over the corresponding period in 2016.

 

What’s new? – Buenos Aires

What’s new? – Buenos Aires

Even Argentina, not previously known for its flourishing aviation industry, is attracting attention. Low-cost carrier (LCC) Norwegian will make Buenos Aires its first South American route, serving the Argentine capital from London Gatwick.


The new route will run four flights a week using a Boeing 787, starting in February 2018. “Buenos Aires is a cosmopolitan capital city with something to offer all travellers and Norwegian has fares to suit all budgets,” says Norwegian CEO Bjørn Kjos.


“From Europe, the US, Asia and now South America, our long-haul network is going global and the UK will continue to be at the heart of our ambitious plans for expansion. We also see huge potential in the Argentine market, so this is not only a major milestone as our first South American route, it is also a first step towards ambitious plans for international and domestic growth in Argentina.”


Those plans include Norwegian Air Argentina, which was established earlier this year.


The new Argentine government will certainly be supportive. Speaking at the announcement of the Buenos Aires service, Argentine Ambassador to the UK Carlos Sersale di Cerisano said: “Ever since the new government took office, the ministries of transport, tourism and foreign affairs started working to spike visits to Argentina. In 2016, visitors from the UK soared 7%. Our plan is to boost figures from 5.7 million to 9 million tourists by 2020 to promote our country, its culture, nature and products. This announcement by Norwegian is key to improving our country’s international air connectivity for a better integration to the world.”


Arguably, an even better turnaround story is Colombia, once infamous for its crime and instability. In 2016, more than five million tourists visited Colombia, 14% up on the year before. Close to 30 international airlines serve the country and there are about 80 international routes.


Bogota’s El Dorado International Airport is the biggest regional hub for cargo and the third busiest for passengers and is expanding to cope with air traffic increases. Development at the gateway will see the passenger terminal go from 173,000 m sq to 235,000 m sq, adding 19 contact gates as well as remote stands.

Airport modernisation

Airport modernisation

The government has also invested $1 billion in modernising and expanding 58 airports throughout the country.


Avianca is the major airline player in the country, holding more than 60% of the market, according to most estimates. It has announced a codeshare with Star Alliance partner Singapore Airlines and reports suggest its proposed commercial partnership with United Continental Holdings is making progress, although confirmation of the deal could be up to a year away.


Within the region, Avianca will launch non-stop service between Lima and Cordoba in November 2017 with a Bogota-Santa Cruz link awaiting regulatory approval. And there are reports that it wants to serve both Munich and Rome direct from Bogota by early 2018.


LATAM’s new business model for domestic operations has also come to Colombia. Mercado LATAM will offer passengers the opportunity for more onboard purchases to allow them to buy a ticket that suits their needs. The airline is also unbundling various elements of the journey, such as luggage and seat selection so that passengers pay only for what they need. The airline believes this will translate into fare decreases of up to 40% and generate significant increases in passenger volumes.


VivaColombia is small compared with Avianca and LATAM. The airline hasn’t followed the aggressive expansion strategy preferred by other LCCs. Colombian CAA data reveals a 14% share of domestic passenger traffic for the first five months of 2017 and a 2% share of international passenger traffic. Some domestic operations were suspended this year to allow the airline to consolidate and add frequencies to stronger routes.

Potential for start-ups

Potential for start-ups

Nevertheless, the outlook for the carrier and its sister airline Viva Air Peru – which only started operating in May 2017 – is extremely positive following an order for 15 Airbus A320ceos and 35 A320neos at the Paris Air Show in June. It is thought the aircraft will be used to replace old fleet, expand existing operations in Colombia and Peru and provide a platform for potential start-ups throughout Latin America.


VivaColombia CEO William Shaw believes Latin America is “a great opportunity for the low-cost model”.


He says: “Our biggest dream is to spread low airfares around Latin America, making travel more accessible to all people. We expect to see rapid market growth in our new market in Peru for the rest of this year as the “Viva Effect” begins to spread through the continent. We will continue to work with all government entities that are essential to the growth of the sector, freeing markets from bureaucracy and stimulating growth to everyone’s benefit.”


The LCC sector is certainly having an impact on Latin America. LCCs more than doubled their share of seats flown in South American countries between 2005 and 2016, from 13.7% to 32.2%, according to IATA data. The four main LCCs, Gol, Azul, Volaris and Interjet, are primarily responsible.


By the end of the second quarter 2017, Azul shares had gained 27% since its April IPO while shares in Gol Linhas Aereas Inteligentes SA went up 124% January-June 2017.


But new entrants are springing up regularly. Aside from the aforementioned Norwegian Air Argentina and Viva Air Peru, there is Santiago-based JetSMART. Backed by Indigo Partners, the airline will also have the stability of the Chilean aviation platform to assist its efforts to grow. It is reported to be already looking beyond the Chilean market, with Peru of special interest.


But Chile, known in the aviation community for its forward-thinking approach to air transport, is an exception rather than the rule in Latin America. LCC expansion in the region will generally have to counter regulatory complexity, high fuel costs, high airport costs and high taxes. On the face of it, it doesn’t seem like much of a pull. But the region is yet to mature. Trips per capita are a long way behind the rate seen in North America and Europe. A growing middle class, stimulated in their desire to travel through low fares, may well prove the kickstart that aviation in the region needs.


From “could do better”, that report card may well read “excellent work” in the future.

Quito’s evolving strategy

Quito International Airport’s network is key to promoting Ecuador as a destination.


“In America, we are focusing our goals on expanding the connectivity network of Quito to Canada, the US, Mexico, Costa Rica, Panama, Colombia, Peru, Chile, Brazil and Argentina,” says the airport’s CEO, Andrew O’Brian. “In Europe, we see opportunities in a slightly longer time period in countries like the UK and Germany especially.


“We are constantly following the evolution of markets and the industry to identify new opportunities in key destinations and we collaborate with other airports to provide incentives to airlines,” he adds. “I strongly believe the Latin America region has so much potential to continue growing and we are proud to be one of the leaders.”


When the airport began operations in February 2013, the strategy was geared towards capturing the backlogged market that remained unserved due to the old airport’s infrastructure limitations. This developed into harnessing new market segments and using off-peak hours, with a focus on low-cost carriers as a market-stimulating factor.


“To date, we have added four new airlines, seven new routes and five new cargo carriers in just four-and-a-half years,” O’Brian concludes.

Brazil is bouncing back

Despite hosting the Fifa soccer World Cup and the Olympics, it has been a difficult few years for Brazil as the country slipped into a long recession.


However, financial commentators are finally seeing a light at the end of the tunnel and the optimism is reflected in air traffic figures. A 5.5% decline in domestic traffic in 2016 has been turned around and government figures finally show an increase in domestic RPKs (Revenue Passenger Kilometres) after a long run of falling demand.


Airlines have at least been managing capacity with the result that 2016 saw the highest load factor on record for domestic services at 80.1%. Of the four main domestic carriers, LATAM Airlines Brasil and GOL both have more than 30% of the market. Azul Airlines’ has increased its share closer to 20% while Avianca Brasil has about 13%. LATAM Airlines is by far the dominant carrier when it comes to international RPKs.

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