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Routes News

27 Oct 2016

BY Rob Gill

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Special report: Latin America's hotspots

Brazil may still be basking in the afterglow of hosting the Olympic Games but the event has proved to be a brief ray of sunshine in an otherwise bleak year for Latin America’s biggest economy.

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The country has been mired in a nasty recession - the economy shrank by 5.4% in the first quarter of 2016 - and an ongoing political crisis, which has had an inevitable impact on air traffic in and around Brazil.

 

The country’s political instability has also led to a delay in the ratification of an open skies agreement with the US. Figures from Iata show that the domestic Brazilian air market has been the worst performing major region in the world with traffic (as measured by revenue passenger kilometres) falling by 6.8% during the first six months of 2016.

 

However, other parts of Latin America are faring much better. Across the region, total passenger traffic rose by 3.7% and average load factors edged up by 0.2 percentage points to 80% for the first half of 2016. The continent’s international travel fared even better, with a 7.5% increase in traffic and load factors up 0.9 points to 80.6%.

 

But Brazil’s woes are casting a considerable shadow over the region’s recent success stories, which include Chile, Peru and Colombia, plus Central America and Mexico to the north. The continent’s largest airline, Latam, has reacted by continuing to cut capacity within Brazil – current plans by the carrier will see a reduction of between 10% and 12% in domestic seats this year compared with 2015.

 

There also seems very little light at the end of the tunnel, with Latam’s chief executive Enrique Cueto admitting the Brazilian market is “expected to remain challenged for at least the next two years”. The airline has been quick to point out that other areas have “experienced demand growth and healthy profitability on international and domestic operations”, including Chile, Argentina, Peru, Colombia and Ecuador.

 

Meanwhile, Brazilian low-cost carrier Gol has responded to the country’s economic woes by implementing a major cost-cutting programme. This has included suspending flights to eight destinations and plans to reduce its fleet by around 15% by the end of this year. Another competitor, Azul, has also had to cut costs and capacity as well as defer expansion plans.

 

John Grant, senior analyst at aviation data specialist OAG, says: “The bubble has burst in Brazil. The economic environment is dragging down consumer demand quite considerably at the same time as capacity growth has been put into the market. It’s going to continue to be soft for the foreseeable future. “On the other side of South America it’s a more positive story with Chile, Peru and Colombia all performing very well. All three are stable with strong market and economic confidence, which has translated into new air services and capacity.”

 

Western expansion

Colombia, once thought of as a “no-go” zone dominated by drug lords and civil war, has transformed itself as a destination and started to reap the benefits. National airline Avianca, based in Bogota, made an operating profit of $72.2 million in the first quarter of 2016 – a 21.4% increase on the profit it made for the same period last year.

 

Avianca is continuing to step up capacity, which rose by 9% year-on-year, and has been primarily fuelled by international expansion, such as new routes from Bogota to Los Angeles, and adding extra frequencies to London and Madrid.

 

Capacity to Europe has risen by 20.3% this year while traffic has increased by 24.7% pushing transatlantic factors to 82.7% - above the airline’s average of 78.8%. chief executive Hernan Rincon said that the airline’s plan was to “selectively grow in specific markets”, such as adding capacity from its Bogota hub to other major regional cities including Santiago and Buenos Aires. Colombia is also benefiting from the growth in low-cost carriers in the region, a development that had previously been concentrated in the major markets of Brazil and Mexico. VivaColombia, which is based in Medellín, has built up a 13.4% market share domestically.

 

The country should be set for more growth with the Colombian government’s plans to further expand Bogota’s El Dorado International Airport, which only opened a new international terminal in 2012. This could see passenger numbers increase from just under 30 million last year to around 40 million by 2021. Bogota is already Latin America’s third busiest airport after São Paulo Guarulhos and Mexico City’s Benito Juárez. Further south in Peru, the plans for expanding Lima’s Jorge Chavez airport have not been going so smoothly.

 

The project to add a second runway has already been delayed by more than 10 years and the latest obstacle has been a contract dispute between Peru’s government and the private company licensed to build the runway, Lima Airport Partners. Better news for the Peruvian capital has been the announcement of new forthcoming European routes, such as Air Europa’s daily flights from July 2017, and LATAM Peru planning to fly from Lima to Barcelona from December 2016.

 

Latam has already launched a Lima-Washington Dulles route this year, while British Airways (BA) restarted its services from London Gatwick to Lima in May 2016. BA has been slowly building up its network to South America in the past couple of years – the UK airline has also added San José in Costa Rica during 2016.

 

The Chilean capital Santiago will follow as a new route from London Heathrow from January 3, 2017. “The Chilean economy has been steadily growing, with increasing trade links to Europe, so this new direct route will respond to the need for travel between the two capital cities to do business face-to-face,” said BA chief executive Alex Cruz when the route to Santiago was announced.

 

BA’s links with Latin America are set to be strengthened further with its parent company International Airlines Group’s proposed joint business with Latam. This would see the companies, both part of the Oneworld alliance, being able to coordinate schedules and share revenues – as long as the arrangement is given clearance by competition authorities.Latam has also signed a similar deal with American Airlines.

 

One part of Latin America where the prospects are even gloomier than in Brazil is Venezuela, which has seen its economy take a savage hit from the collapse in the price of oil in the past couple of years. Venezuela has also been incurring the wrath of airlines by refusing to let them take their money out of the country – the Venezuelan government is currently blocking the repatriation of $3.8 billion in revenue owed to 24 airlines, according to IATA. US-based airlines have been reducing their flights to Caracas due to this impasse and the weakening Venezuelan economy.

 

American Airlines, for example, stopped its New York-Caracas flights in April having only revived the route a few months earlier, although the carrier still flies from Miami to Caracas.Latam, Aeromexico and Lufthansa are among the airlines to have ended services to Venezuela earlier this year, blaming weak demand. Mexico and Central America If the fortunes of South America could be divided roughly into east and west by the Andes mountain range, then Mexico, Central America and the Spanish-speaking Caribbean to the north is a distinctive third area of Latin America.

 

Mexico is benefiting from the continued economic strength of the US, which should improve further with the planned implementation of an amended “open skies” agreement between the two countries. “There is optimism in Mexico and Central America – Mexico has been growing really strongly in the last two-and-a-half years,” says OAG’s Grant.

 

“There’s a revised open skies agreement between the US and Mexico that allows more flexibility in air services. There are expansion opportunities – you have to be confident about Mexico and Central America and they should be able to grow by 5-6% per year.” Mexico’s success can be seen in the fact that Mexico City airport last year overtook Sao Paulo as the airport with the most available seats with an annual capacity of more than 49 million.

 

Elsewhere, Cancun is currently Mexico’s fastest growing airport for international flights, with a rise of 15.4% in services during 2015. The country’s largest airline group, Aeromexico, has been using its fleet of Boeing 787 Dreamliners to grow international routes – particularly to Europe and Asia.

 

Aeromexico will add frequencies to Amsterdam, London, Madrid and Santiago in summer 2017. It will also increase flights to Shanghai by 65% next year. The biggest development in this part of Latin America is the “normalisation” of economic and diplomatic links between the US and Cuba after more than 50 years. Up to eight US-based carriers have won the “tentative” rights to fly to Havana, while six airlines have been granted permission to fly from five US cities to nine other Cuban cities.

 

This article first appeared in Routes News

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