Latin America's Alliances
Tackling Growth In Latin America
While Brazil-based airlines continue to struggle in the domestic market, international travel becomes leaner yet stronger through the power of alliances.
As one of the world’s largest domestic markets, Brazil usually sees up to half a million passengers travelling within its borders every day. Yet, this vast number has been shrinking as the Brazilian economy plummets in the face of continuing political uncertainty.
Preliminary data for 2016 showed a year-over-year decline of up to 10 percent of daily passengers, despite significant preventative efforts by the country’s local carriers. Fares have been slashed to half of their average price compared to this time two years ago, and large reductions in capacity have been made to maintain a decent yield. Yet some airlines whose core business relies on the domestic market can do little to remedy the situation.
Newly consolidated LATAM has become a key member of the oneworld alliance as its founding members seek low-risk growth in the region. From left: oneworld CEO Bruce Ashby; oneworld President Tom Horton; LAN Airlines CEO Ignacio Cueto; and LATAM International CEO Damián Scokin, pictured in 2013 at the announcement of LATAM joining the alliance.
GOL’s ticket revenue has seen a negative compound annual growth rate (CAGR) of -9 percent during the last five years, with TAM’s performance at a similar level at the time it was absorbed into the newly formed LATAM group.
One of the first things to consider is how isolated these woes are within the Latin American region. The sheer size of Brazil has meant that the downturn’s effects are not just restricted to a small collection of local carriers, but instead have been reflected in figures for South American traffic overall.
As a result, the Latin American and Caribbean Air Transport Association (ALTA) has begun reporting its figures in two separate versions, one of which does not include its Brazilian member airlines to better reflect the performance for the rest of the region.
Taking Intra-LatAm traffic as an example, growth for the region, excluding Brazil, from June 2015 to June 2016 stands at 8.5 percent. Include the domestic market and the figure drops to -0.2 percent. What this means is that Brazil is an anomaly within the region and that performance elsewhere has been resilient to any spill-over effects.
Although total passenger numbers have continued to rise in the Latin American region – albeit at a slower rate – revenue growth has dropped significantly to an overall decrease year-over-year, indicating significantly diluted yields and lower fares to attract passengers.
It is clear that disciplined capacity management by the local carriers has mitigated at least some of the financial impact that has come with the decline in domestic travel. ALTAs figures show that Brazilian airlines could be withdrawing capacity quicker than they already are. Overall, Latin America’s revenue per kilometres (RPKs), without Brazil, have grown 4.2 percent faster than the available seat kilometres (ASKs), compared to just 2.8 percent when adding Brazil to the mix. Yet, growth in the international market has also ground to a halt, and future schedules are set to see a drop off in international capacity.
Recent industry analysis has highlighted the 2016 northern winter season as the beginning of this trend, when traditional airlines from the United States, Europe and Asia removed a considerable number of seats from their Latin America schedules. Aside from the usual practices of downsizing aircraft and reducing frequencies, some changes are far more drastic.
For example, American Airlines has withdrawn from half of the 10 cities it serves in Brazil, removing a third of its ASKs. Although decreased demand is the primary reason for this withdrawal, a strategic partnership with newly consolidated oneworld member LATAM will enable American Airlines’ customers to continue travelling to these cities once they are taken offline.
Brazilian low-cost carrier Azul launched its wide-body Airbus A330 service to Fort Lauderdale and Orlando in December 2014. The fleet has since grown to seven aircraft with an additional five new Airbus A350s on lease from AerCap this year.
This strategy is an indicator of how international Brazilian traffic will develop when the market eventually returns to growth. Traditional carriers wary of dedicating large portions of their fleet to serving unprofitable routes seek to codeshare and make joint-venture agreements with regional airlines desperate to fill their seats.
American Airlines is not LATAM’s only new partner. An extensive deal with the International Airline Group’s largest carrier, oneworld member British Airways, is in the works as European airlines look for ways to sustainably tap into what is ultimately still a developing market.
Azul, which has bucked the trend for Brazilian airlines with a strong compound annual growth rate (CAGR) of 25 percent, has partnered with JetBlue Airways in Florida to offer connections across the United States, fed by its new medium-haul offering. These agreements will allow local airlines to carry the burden of operating out of a continuingly unstable Brazil while remaining poised to leverage on this capacity when an upturn eventually sets in.
For North American carriers, any growth in the years following the capacity glut in late 2016 will be tentative. American Airlines likely withdrew from points such as Curitiba due to the long, thin nature of the route, despite operating the service with a relatively small Boeing 767-300ER.
International traffic in and out of South America has seen a mild increase during the last few years, with a steady upward trend. Yet, following a period of uncertainty, the domestic market saw a drastic drop in passenger numbers at the beginning of 2016, largely due to poor performance in Brazil.
According to Bloomberg, the long-range version of Airbus’ A321neo — the next size down from the Boeing 767 — will enable east-coast airlines such as JetBlue to start flying trans-Atlantic routes, but not much deeper into South America than already possible. When Boeing’s middle-of-the-market (MoM) aircraft comes into play in the next decade, secondary Brazilian cities can hope to see direct routes to U.S. hubs return as their operation becomes viable again with what will effectively be a smaller, more efficient Boeing 767 replacement.
What is most remarkable about the breadth and severity of these changes to the Brazilian market is the courage exhibited by airlines in adapting their route network and schedules. In the past, traditional network airlines, in particular, have continued to fly unprofitably to countries where demand is declining, preferring to keep their extensive networks intact in the face of opportunities to streamline operations.
With Brazil, these carriers are instead no longer afraid to pull their metal from the country and leverage the power of alliances and joint ventures in maintaining passenger flow, enabled by two key oneworld and Star Alliance members (LATAM and Avianca, respectively).
While JAL and Singapore Airlines pull out of Brazil entirely, the cost benefits of directing passengers through partners in the Americas become obvious, and with many other network carriers following suit, overall profitability becomes far more realistic as the market matures.
Brazil: A Challenging Market
- Mexico City has overtaken Sao Paulo Guarulhos’ annual capacity with 49 million available seats
- The average fare for a domestic Brazilian ticket has almost halved in two years from a high of US$175 in August 2014 to US$89 in June 2016.
- Singapore Airlines must schedule more than 52 block hours for one of its Boeing 777s to complete a round trip to Sao Paulo via Barcelona.
- American Airlines has taken five Brazilian cities offline this winter, reducing its capacity by more than a third.
International Airline Group Chief Executive Officer Willie Walsh has indicated that if approved, the joint venture with LATAM could curb the group’s heavy reliance on the northern summer season for its South American travel. Moreover, American Airlines stated that its partnership with LATAM will add an additional 100 destinations in the region to American Airlines’ offline network. If other oneworld airlines follow suit, opening up Latin America to travellers from underserved destinations in Asia becomes a real possibility, and Star Alliance carriers, including United Airlines, are on the verge of implementing similar initiatives.
Further integration will also have the benefit of enabling local carriers to fill lower-yielding domestic flights with revenue-boosting connecting passengers. Moreover, fluctuating numbers of international travellers can be more easily managed through a number of strategies compared to a far less flexible domestic market. Internal flights are so susceptible to socio-political issues that major improvements will only be seen when Brazil’s situation changes, and a stronger international market will at least provide a minor boost to passenger numbers.
On the surface, the changes occurring in Brazil and beyond seem like drastic moves away from the current strategy these airlines have in place. What will become clear in the coming years is that the market will eventually level out into a leaner, more sustainable operation that spreads liabilities across several parties so when the time comes to grow again, capacity can be steadily reintroduced.