Latin rivals battle for power in Peru

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Peru has emerged as a key battleground for leading Latin American airline groups LAN and Avianca-TACA, with the two giants stepping up competition against each other as well as small, local players.

In Peru's relatively small but fast-growing domestic market, TACA is making its first significant moves after 12 years of predominately serving only international routes from its Lima hub. In February, the TACA Peru unit launched a service on three domestic routes, after taking its first Embraer 190 to supplement its Airbus A319/A320s.

The induction of the E-190, which became the first E-jet in the Peruvian market, was so significant for Peru that president Alan Garcia Perez attended the unveiling ceremony. Perez applauded TACA's domestic expansion, saying it will help the economy and proclaimed: "We need more competition in the market."

TACA is planning a second phase of its Peruvian domestic expansion project with more routes and a possible second E-190 to be added later this year. TACA last year captured only 3% of Peru's domestic market as until now it served only the country's largest domestic route, Lima-Cuzco, where the carrier has just added capacity.

TACA's domestic expansion puts pressure on market leader LAN as well as Star Peru and Peruvian Airlines. Both local carriers have been expanding faster than LAN and saw their market shares increase in 2010 even as the total market grew by 28% to 5.5 million passengers.

Star Peru has been operating in the market for longer than LAN or TACA, which owner and general manager Roman Kasianov thinks will help it withstand TACA's push. "We'll see what passengers move to which company. LAN has a lot of the market. We hope TACA will capture some of LAN's passengers, not our passengers," he says. "We have our niche."

Kasianov points out that while Star Peru competes with LAN and now TACA on trunk routes, five of its 15 domestic destinations are exclusive and cannot be served by LAN, TACA or Peruvian Airlines due to airport restrictions. Star operates nine BAe 146s, allowing it to access smaller airfields and operate a profitable charter business, which is predominately for oil companies and accounts for 30% of Star's total traffic.

Star is diversifying by launching niche international routes. It began with a service to Rio Blanco in Brazil last September. Kasianov says the carrier plans to add Cuenca in Ecuador as its second international destination in July and is also aiming to serve Leticia in Colombia.

Peruvian Airlines, which launched services in late 2009 with some of the Boeing 737-200s Star Peru operated before switching to BAe 146s, has already captured 11% of the market. But Peruvian is seen as the most likely potential casualty as its low fares may not be sustainable.

GROWTH SPIKE

So far, Peru's domestic market has been able to absorb a tremendous spike in capacity as traffic has grown for eight consecutive years and by 154% since 2002.

Peru's international market has also grown for eight successive years, increasing by 152% since 2002, including a 5% increase in 2010 to 5 million passengers.

On international routes, TACA Peru has stepped up competition with LAN by launching three routes since December - Antofagasta, Brasilia and Mendoza. But market leader LAN, which has grown its share of the international Peruvian market in recent years at the expense of TACA, continues to grow even faster.

In the second half of last year, LAN Peru also launched services to Brasilia, as well as Brazil's Foz do Iguacu and Chile's Easter Island. LAN Peru says it will add another six A319s and two 767s this year, growing its fleet to 25 A319s and nine 767s.

LAN Peru says the eight additional aircraft, which alone will provide more capacity than TACA Peru's current fleet, will be used mainly to increase capacity on existing routes. But the carrier will also launch a Montevideo service in April.

So far oneworld carrier LAN, which like TACA launched its Peruvian operation in 1999 but did not take over as the largest carrier in the international market until 2004, has clearly won the battle of Peru. In 2010, LAN Peru captured 30% of Peru's international market and as a group LAN had a 44% share. This compares with only 12% for TACA Peru and 17% for the Avianca-TACA group as a whole.

However, TACA's merger with Avianca is expected to lead to increasing competition across South America with oneworld's LAN, which is trying to overcome a new Chilean anti-trust investigation that at least temporarily is delaying its planned merger with Brazil's TAM.

The two groups already compete fiercely in Ecuador, where LAN's local unit has started competing in a domestic market previously dominated by new Avianca-TACA subsidiary Aerogal and government-owned TAME. The next battle is expected to be in Colombia, where Avianca is the leader and LAN is the new number two following its acquisition late last year of Aires.