ROUTES AMERICAS STRATEGY SUMMIT: The Consolidators: In Search of Stability and Continuity

Which airlines are leading the consolidation of the industry and who are seeking, through that, a measure of stability and rationality. How do these airlines see the landscape evolving and will there be more consolidation? If so, in what shape will it come? How do these airlines plan to deal with the smaller category killers like the ultra-low-fare LCCs? These were the main discussion points in the first group session at this year’s Routes Americas Strategy Summit in San Salvador, El Salvador.

The session, moderated by Michael Bell, a partner at Stuart Pearce, included three senior airline delegates: Peter McGlade - Senior Strategic Advisor to US low-cost carrier Southwest Airlines; Todd Scott - Director Network Planning at freight specialist UPS Airlines and Estuardo Ortiz, executive vice president and chief revenue officer, Avianca.

Peter McGlade highlighted how the industry has changed during his 37 years in the business, noting how it has become very expensive to operate and how airlines are continually searching for the holy grail of a business model and product that is financially viable. “The margin for error is minimal,” said McGlade and he said he has often seen carriers make irrational decision. Nowadays, he said, carriers are showing an “increasing responsibility” when verifying the viability of air service.

Southwest Airlines continues to work on its amalgamation with AirTran Airways, a process that has given it experience of the international market for the first time. “This was a good match as they are both very similar in being entrepreneurial firms so it has been a true joining, not just a PR thing,” said McGlade.

The carrier has now revealed plans to introduce its own Southwest Airlines branded flights between the US and the Caribbean later this year. “Demand on many short-haul markets in the US has declined dramatically. The international market now provides us an opportunity to grow,” said McGlade. But, where will the airline fly next? McGlade wasn’t giving the game away. “Who knows,” he said.

The merger of Avianca and TACA has also been a relatively long exercise showing the complexities of such mergers, even though the two carriers only overlapped on one per cent of their network. Estuardo Ortiz believes we haven’t seen the last of airline consolidation across the Americas but expects this to occur through a mixture of airline failures and mergers.

Avianca itself could be interested in a few smaller carriers in Latin America and Ortiz questions how sustainable it is for those carriers to continue without consolidation. However, he said, there are no plans to make any acquisitions in Europe, despite rumours of possible interest in Alitalia, LOT Polish Airlines and TAP Portugal in the past. He also noted that airlines can learn a lot from one another. “We have used Southwest Airlines in our own strategy meetings as a model of consistency,” he said.

For Todd Scott, things have been a little different. Although UPS Airlines had previously played an important role in the consolidation of the cargo business in the Americas following its purchase of Challenge Air Cargo in the late 1990s, it recently failed in a planned acquisition of European operator TNT Airways after regulators put a block on the deal. He acknowledged that the carrier has learnt a lot from these experiences. “We are probably a little more cautious now with airline acquisitions,” he said.

In hindsight, Scott even acknowledged that although purchase of Challenge Air Cargo provided UPS with air traffic rights and slots into Latin America, the company “possibly could have got there organically in a few years rather than buying the carrier”. This is a market that is very different from other parts of the Americas, according to Scott. "The need to have small packages delivered next day just doesn't appear to be a requirement in Latin America," he explained.

UPS put a lot of work was into its proposed purchase of TNT Airways but its experience now means the logistics specialist is mainly looking towards smaller acquisitions for any future expansion. “It would have been a good deal and a big play in Europe for us if it had succeeded,” explained Scott.