ANALYSIS: LATAM to cut Brazil capacity further in tough time for market

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LATAM Airlines Group will make further cuts to domestic capacity in Brazil this year, even as it works to reduce its exposure to the depreciation of the Brazilian real in a market that has recently grown more challenging for airlines.

LATAM's subsidiary TAM will slash domestic capacity by 7% to 9% in 2013, says the carrier. This is deeper than the 5% to 7% reduction it forecasted in May.

TAM pulled down domestic capacity by 1% in 2012. For the first half of 2013, the carrier has slashed capacity by about 10% to 11%, says LATAM's vice-president for the Brazil domestic business Claudia Sender, during the airline's second quarter earnings call on 20 August. It expects to reduce domestic available seat kilometres (ASKs) in the 5% to 6% range for each of the third and fourth quarters of 2013.

Brazil domestic capacity represents about 34% of LATAM's total passenger capacity. LATAM says its domestic capacity reduction strategy has worked to boost load factors.

The domestic Brazil load factor grew nine percentage points to 77.8% during the second quarter, and revenue per available seat kilometre (RASK) grew more than 14% year-on-year when measured in Brazilian reals.

LATAM says RASK grew as well in US dollar terms, although it does not specify a figure. It notes, however, that RASK in the US dollar grew despite a 5.3% average depreciation of the Brazilian currency in the second quarter.

LATAM is working to minimise its exposure to the depreciation of the currency, which it says contributed to its second quarter net loss of $330 million.

"The company is advancing in its plan to reduce its balance sheet exposure to the volatility in the foreign exchange rate fluctuations of the Brazilian currency, and expects to reduce this exposure completely by mid-2014," says LATAM.

The airline's vice-president of investor relations and research Gisela Escobar says the carrier is trying to increase its sales in US dollars and increase the percentage of costs that are made in Brazilian reals. So far, the airline has succeeded in reducing this exposure to the currency's depreciation by about $100 million a year, says Escobar during the airline's earnings call.

Managing domestic capacity and the depreciation of the Brazilian currency have been forefront concerns this year on the minds of airlines operating in Brazil's domestic market.

Brazilian low-cost carrier Gol warned earlier this month that the second half of 2013 would pose significant challenges as it grapples with record jet fuel prices and added costs due to the currency depreciation.

Weaker than expected macroeconomic conditions in the South American country are not helping. In June, Gol said it would slash domestic capacity further than it previously forecasted due to slower growth in Brazil's domestic gross product. Gol will now reduce domestic ASKs by 9% instead of 7%. In the first half of 2013, Gol cut domestic capacity by 11%.

Low-cost carrier Azul, in comparison, is still rapidly adding capacity as it continues to grow and add new destinations to its expanding network of mostly second and third tier cities in Brazil. For the first half of 2013, it grew capacity by 20% year-on-year, figures from Brazil's civil aviation authority ANAC show.

Azul, however, scrapped its plan to launch an initial public offering earlier this week, citing adverse macroeconomic conditions in Brazil.