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. 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 International Air Transport Association (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 CEO 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.”
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%.
CEO Hernán Rincón 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 Chávez 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 CEO 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.
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 recent 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 São Paulo as the airport with the most available seats with an annual capacity of more than 49 million. Elsewhere, Cancún 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.
Airline passenger traffic within Latin America is set to grow by an average of 5.8% per year up to 2035, according to the latest forecast by aircraft manufacturer Boeing. The fastest growth is likely to come for travel within the region with Boeing predicting that passenger traffic within South America will increase by around 6% per year.
Although some countries, notably Brazil and Venezuela, are currently going through tough economic times, longer-term trends should drive aviation growth - such as rising middle class populations, higher income levels and the continent’s strength in commodities and natural resources. Both Boeing and Airbus predict that the number of commercial aircraft in service in the region will have to more than double in the next two decades from the current level of 1,550 aircraft to more than 3,600 by 2035.
Rafael Alonso, president of Airbus for Latin American and the Caribbean, added: “Latin America’s long-haul route expansion is imminent and we are already seeing airlines respond by opting for larger, longer-range and more efficient aircraft such as the A350 XWB and the A380, which both began operating in the region in 2016. We are also seeing the region’s top airlines modernising their fleets with the A320neo family, allowing them to achieve efficiency gains even in a less-than-favourable economic environment.”
LATAM has been leading the way in bringing these new types of aircraft to the continent. South America’s biggest carrier is set to start operating the first Airbus A320neo in Brazil soon. It also began operating its first Airbus A350 XWB aircraft earlier in 2016, which is now operating from São Paulo to Miami and Orlando, as well as Madrid. The biggest challenge may not be acquiring the necessary aircraft but finding solutions for the capacity constraints at key airports in Argentina, Colombia, Ecuador, Mexico and Peru, as passenger numbers are set to double to a predicted 525 million by the middle of the 2030s.
Ask what is holding back aviation around Latin America and there are some very clear unanimous answers: high levels of taxation, inadequate government investment in airport infrastructure and excessive bureaucracy.
International Airline Transport Association (IATA) has identified 130 different ticket taxes that are being applied across the region, including the Caribbean, and has called on governments to cut this tax burden, which is “undermining the region’s prospects for connectivity growth”.
Peter Cerda, IATA regional VP for the Americas, says: “Most of the region’s countries, with the exception of Panama and Chile, have not created the conditions for air transport to flourish. Onerous regulations, which are out of sync with global standards, coupled with excessive taxes, charges and fuel policies that are misaligned with global best practices are commonplace across the region.”
The Venezuelan government’s decision to hold on to $3.8 billion of foreign airlines’ money does not help improve the continent’s image, although this is an extreme example. Bureaucracy has also held back the growth of low-cost carriers in some parts of the region. This has been the case in Argentina where the government has imposed pricing limits on airline tickets since 2002. However, this policy is starting to change, which could open the door to low-cost carriers entering the Argentinean market in the near future.
There are other positive signs that attitudes are shifting around Latin America, such as the Colombian government’s decision to slash airport fees at Cartagena from $92 to $38 for international flights last year. This move helped boost international passenger traffic by 32% in a year.
Eduardo Iglesias, executive director of the Latin American and Caribbean Air Transport Association, has called on governments to work together to help the aviation sector to grow more effectively. “Governments must agree on common global rules to secure a sustained growth of air transport in the region while preserving its competitiveness in relation to the rest of the world,” he says.
Air traffic may be growing in the region but the industry is still being “hampered by fragmented airspace, varying standards and protocols, and not enough sharing of data between states”, according to the Civil Air Navigation Services Organisation (CANSO).
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This article is modified from an original feature that appeared in... ROUTES NEWS - ISSUE 6, 2016 PLEASE CLICK HERE to view the magazine. |
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