Latin market poised for revolution

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Consolidation in Latin America, which in February saw the completion of the historic Avianca-TACA joint venture, could take another big step forward as a 26% stake in the region's second biggest airline group is set to change hands.

LAN shareholder Sebastian Pinera, who in January was elected president of Chile, has promised to sell the 26% stake he controls in the carrier before his 11 March inauguration. The Cueto family, who already owns 28% of LAN, has the first option to purchase Pinera's 7% personal stake and the 19% stake being sold by Pinera-controlled publicly traded investment firm Axxion. If the Cuetos elect not to purchase all the shares, valued at over $1 billion, the remainder could be acquired by another Latin airline group such as Avianca-TACA, Copa or TAM.

Shortly after Pinera was elected it became clear TAM, Latin America's largest airline group, was preparing a potential bid for Axxion's stake. Brazil's TAM has the cash, having added almost $400 million to its war chest from an initial public offering of Multiplus, which in February became the first loyalty programme to be spun off by a Latin airline.

enrique cueto chief executive, lan 
 Read the Airline Business cover interview from October 2008 with LAN chief executive Enrique Cueto
The Cueto family could also use the Pinera sale as an opportunity to put together a joint venture with another Latin airline group. LAN for years has had its eyes on expanding into the Brazilian passenger market to complement its current passenger operations in Chile, Argentina, Ecuador and Peru. LAN chief executive Enrique Cueto has previously indicated that replicating the publicly traded company's formula of establishing new affiliates in other Latin American countries would be difficult in the Brazilian passenger market and that a merger or alliance would be the more likely route.

A Matter Of Scale

While Latin America's top seven airline groups now account for roughly three-quarters of the region's capacity, there seems to be room for more consolidation. These seven groups, which also include Gol, Mexicana and Aeromexico, combined are still smaller than the largest airline groups in Europe or the US. Even a TAM-LAN combination, with an annual revenue stream approaching $11 billion, would be smaller than six US airlines.

"We see more consolidation happening," says the executive director of Latin American airline association ALTA, Alex de Gunten. "There's definitely a lot of room to do a lot of things." He points out consolidation is particularly important in Latin America as the only way to grow beyond limited home markets given the region's regulatory restrictions.

For More on...
How the Latin American market has matured and continues to prosper, see the Airline Business comment from late last year

Latin carriers as a group have been outperforming all other regions, remaining well in the black in 2008 and 2009. LAN and Panama's Copa have already reported 2009 net profits of $231 million and $240 million respectively. TAM, Gol and Avianca are expected in March to also report healthy 2009 profits.

The region has also continued to chalk up healthy traffic growth, in contrast to most other regions. ALTA members collectively recorded a 4% increase in traffic last year, with double-digit increases in each of the last four months offsetting small declines during the first half of the year. "We weathered the storm nicely," de Gunten says. "Mexico was hard hit but the rest of the region is well positioned for growth."

Mexico's domestic market in 2009 shrunk 11% to 24.6 passengers while total international traffic dropped 12% to 22.5 million passengers. But signs of recovery are starting to emerge with smaller single-digit declines in recent months.

Copa chief executive Pedro Heilbron says the rest of Latin America started recovering in the third quarter of last year from what he calls a "short and mild recession". Heilbron expects "this recovery will continue in 2010" as GDP is projected to grow this year by 5% in South America and 3% in Central America.

"It appears the worst is behind us and the region is once again on a growth path," Heilbron says. "Business traffic is improving and we are currently seeing higher business class load factors and strong traffic trends."

Copa, which in 2008 had the fourth highest operating profit margin among the world's 150 largest carriers at 17.4%, ended 2009 with an even better 17.8% operating margin despite a 3% drop in revenues. With business traffic growing again, Heilbron is even more bullish on the carrier's 2010 outlook.

LAN saw its revenues drop 15%, including a 32% fall at its cargo business, but its operating margin remained impressive at 11.9%. LAN credits its four domestic operations and intra-Latin American network for its relatively strong 2009 performance. LAN vice-president Luis Eduardo Riquelme says it sees more opportunities to further grow its regional business, pointing out that "compared to similar markets in different parts of the world there is strong potential for growth in the future".

Colombia and Brazil in particular have been growing fast with low fares helping stimulate new demand. Colombia's domestic market grew 13% in 2009 to 12.1 million passengers with fast expansion at Aires driving big traffic gains in the second half of the year.

Brazil's domestic market grew even faster, recording 18% RPK growth in 2009 including a 38% spike in December. After growth of only 3% in the first half, the Brazilian market took off in the second half driven by fast expansion at the country's three low-cost carriers - Azul, Gol and Webjet.

ALTA's de Gunten credits Brazil's strong performance to a strong local economy and market stimulation. More fast growth is expected in 2010 as Brazil's GDP is projected to grow another 6% and more bus passengers are enticed to fly.

Read more about consolidation in Latin America following last year's link up between Avianca and TACA