The history of Latin American aviation is rich, with nearly a dozen of its carriers among the world's oldest. Indeed, Colombia's Avianca, established in 1919, is believed to be the world's first airline. Back in the early days of aviation the region was rife with entrepreneurial spirit and the region's carriers were among those that helped to pioneer intercontinental flying. That is in stark contrast to the heavy losses and inefficiencies that have characterised the industry of late. Yet there have also been signs of a new dynamism coming out of the region, that could finally begin to unlock Latin America's untapped growth potential.
The need to advance aviation in the region took centre stage as an impressive array of the region's airline leaders (pictured above) gathered in Miami last November for the Latin American Airline Leaders Forum. The level of support for this event, organised by Latin American airline association AITAL and backed by this magazine, is itself perhaps a sign of the industry's new sense of determination to address some of the handicaps that have helped to hold it back.
Quite apart from the usual global economic downturn Latin American aviation has faced some daunting obstacles all of its own, ranging from political unrest, shaky economies and fluctuating exchange rates, through to high fees and taxes as well as a patchwork of bilateral agreements and regulatory regimes that hamper cross-border air services.
There are also several competition issues that Latin American carriers feel undercut their ability to operate on "a level playing field" with US and European competitors that continue to gain market share in the region. These include the ongoing financial assistance given to competitors from richer nations to help them cope with skyrocketing security and insurance costs following 11 September. In addition, the controversial US International Aviation Safety Assessment (IASA) programme limits operations of many Latin airlines to the USA because the FAA has determined their countries do not comply with ICAO safety oversight standards. This controls a carrier's ability to operate to the USA, regardless of its safety and operating record.
The realities are grim. With $2.7 billion in losses between 2001 and 2003, Alex de Gunten, executive director of AITAL, says the region is "still going through a very difficult period". While Latin America represents about 5% of worldwide traffic, it accounts for 10% of industry losses. "We seem to be more efficient at losing money," he quips, alluding to the legendary inefficiency of the region's airlines. About 30% of its carriers are "technically bankrupt", he says, and more than 70% of the carriers continue to chalk up losses.
Untapped potential
Despite this, however, de Gunten told the the Forum, that "the future is positive", noting the region's huge untapped air transport market potential, growing collaboration within the continent and the strong performances being turned in by some carriers.
For all its troubles, the region has spawned a growing number of successful, forward-thinking, profitable airlines that are serving as models for others. Among them are Panama's Copa Airlines, TACA, LAN Airlines and Brazil's new market leader TAM as well as its enormously successful low-cost carrier Gol, one of the world's most profitable airlines.
TACA, a strategic alliance that brought together the principal Central American airlines of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, and now includes a Peruvian carrier, has been profitable for several years, but it was in "deep trouble" in 2001, says chairman and chief executive Roberto Kriete.
TACA survived because it implemented a turnaround programme, refocusing on markets it could dominate, settling on an all-Airbus A319/A320 fleet, quitting the cargo business and taking other steps to streamline its business. Now the carrier's on-time performance, schedule reliability and aircraft utilisation rank among the world's best, Kriete says. His carrier also now has one of the youngest fleets.
LAN - Latin American Networks - is another success story, and reported record profits of $83.6 million last year. The brainchild of Enrique Cueto of LanChile, the alliance brought together entities in Chile, Ecuador and Peru and continues to expand. Luis Ernesto Videla, LAN's president and chief operating officer, says a key element in its success has been its participation in the oneworld alliance. Entry in 2000 allowed LAN to develop new markets through codeshares with partners; provided better distribution and presence in markets where it does not operate, boosting interline revenues 30% in the first year alone; improved services to LAN customers; and helped LAN reduce costs and gain efficiencies through multilateral co-operation.
Copa also continues on a solid path, according to executive president Pedro Heilbron. "We've kept our growth steady, measured, mainly by increasing frequencies in our core market," he says. The carrier, 49% owned by Continental Airlines, began a daily nonstop service between Panama City and New York JFK during the summer after the FAA upgraded Panama's safety rating to Category 1 under the IASA programme. LAN operates an international network from its hub at Panama City, serving 31 destinations in 20 countries. Heilbron was upbeat, noting that its traffic has grown and the region is growing also. "There are some challenges, but we're also confident," he says.
Copa operates an all-Boeing 737 fleet, but recently became the first Latin American carrier to order the new Embraer 190. From late 2005, it will operate the aircraft, configured to seat 94 in two classes, in markets where it currently flies twice or four times a week, and on thinner tag markets it can make nonstop. "We don't see them as regional jets," Heilbron says. "We see them as smaller jet aircraft and that's how we plan to operate them."
In Brazil, which represents about 35% of the total Latin American market, long-suffering flag carrier Varig's once-dominant market share has been stripped away by TAM and Gol. TAM has emerged as the leading domestic Brazilian airline with a 39.1% market share, as of October, compared with Varig's 32%, and low-cost Gol has taken a 22.6% share in less than four years in operation.
TAM's modern, primarily Airbus, fleet and emphasis on service made it a major player in the late 1990s, but it was caught out by the deteriorating Brazilian market in 2001. Demand fell, fuel costs were rising, and the Brazilian real was devalued just as it was planning new aircraft deliveries to expand domestic and international services. In addition, Gol was granted route authority on some of its and Varig's key routes. "TAM had to rethink its strategy and business model, and rapidly implement a restructuring plan," says chief executive Marco Antonio Bologna.
Financial turnaround
Among other things, TAM restructured its network, dropping unprofitable routes, eliminated business class on domestic routes, increased aircraft utilisation, improved yield management and put tight controls on spending. The measures paid off, with unit revenues raised and unit costs lowered significantly, generating what Bologna called "an impressive financial turnaround". After losing 606 million reals ($222 million) in 2002, TAM had net profits of 174 million reals in 2003 and, for the first nine months of 2004, was 294 million reals in the black.
He acknowledges, however, the role played by the Brazilian government. It put controls on aircraft capacity increases and new routes, and allowed TAM and rival Varig to codeshare on the all-important route between São Paulo and Rio de Janeiro. With a more stable economy in Brazil and the government's regulation of "disciplined capacity increases", Bologna says the market is now promising for Brazilian airlines.
Gol, which began low-fare domestic operations from São Paulo with Boeing 737 Next Generation aircraft in the start of 2001, has grown quickly and profitably. Today it flies to 36 destinations in Brazil and last month began its first international route with flights between São Paulo and Buenos Aires. With 29 737s at the beginning of 2005, Gol was able to go public on both the Brazilian and New York stock exchanges last summer.
Other Latin carriers too are making substantial progress in turning themselves around. Ernesto Asbun, president of Lloyd Aero Boliviano, hopes LAB will be profitable by mid-year, three-and-a-half years after he gained control and instituted a major restructuring. Asbun was especially grateful to aircraft lessor Pegasus Aviation for not "pulling the plug". LAB's remaining hurdle is expected settlement of a three-year dispute over taxes with the Bolivian government, he told the Forum. "We see a total recuperation of Latin American markets and the survivors ... the ones that are still alive and kicking have a future."
Reversing the cash drain
Colombia's Avianca, suffering mounting losses since 1998, formed the Summa alliance with ACES in 2002 and implemented a major operational overhaul by shedding unprofitable routes and implementing cost-cutting programmes. That was not enough, says Gerardo Grajeles, Avianca's chief financial officer. It needed a financial restructuring as well. ACES evenutally ceased operations in August 2003, while US-listed Avianca had filed for US Chapter 11 bankruptcy protection in March 2003. "People said you should have 30-45 days' cash to file for Chapter 11," Grajeles jokes. "We had more like 30 minutes' cash. We did it anyway."
The operational changes made at Avianca resulted in increased load factors, improved employee productivity, a growing spread between higher unit revenues and reduced unit costs, and a reversal of its the cash drain. In December, Avianca won approval for its financial restructuring and emerged from bankruptcy with a new majority shareholder in the shape of Brazilian petroleum conglomerate, the Sinergy Group.
Things also are looking up at Venezuela's Aeropostal, says Nelson Ramiz, the carrier's executive president, after two terrible years when political unrest, a poor economy and exchange controls caused a market fall-off of close to 40%. "Now we are seeing signs of rapid recovery," he says, primarily due to the economy recovery in Venezuela. Aeropostal is doing well domestically, where it has a 70% share, and also on international routes within South America, where it recently introduced Boeing MD-80s. The carrier hopes to replace all of its Boeing 727-200s and McDonnell Douglas DC-9s with MD-80s by the end of 2007. Early this year, Aeropostal will introduce MD-80s on its Caracas-Miami route with an all-business class seating configuration, but it will charge tourist fares for the service, Ramiz added.
Also helping reduce costs is its increasing co-operation with alliance and codeshare partner Aero Republica of Colombia. "Overall, we are doing well; at leastwe have survived, but in order to survive we have taken drastic actions," he adds. Ramiz also credited IATA for helping Aeropostal simplify its airline processes. "E-ticketing is now a reality at Aeropostal," he adds.
Like other airline executives at the AITAL meeting, Ramiz insists that airports and air traffic service providers must become more efficient and that fees should be reinvested in aviation. "Our states must use collected aviation fees to improve infrastructure, not for salaries and social projects not related to our industry."
Daniel Ratti, chief executive of TACA Peru, complains that the airlines in Latin America continue to suffer from "the monopoly abuse" by the oil companies. He notes that the price of fuel in Lima is the highest in the region, possibly the world, even though Lima Airport is just 3km (1.9 miles) from an oil refinery. Having tried to get different companies to reduce their prices to no avail, Ratti says the 23 airlines operating at Lima are looking at importing their own fuel, with an expected savings of $3 million a month.
TACA's Kriete notes that some privatised airports charge fees that provide them with 30-40% returns, instead of "ordinary monopoly" returns in the single digits. "We need the help of AITAL, of IATA, of our suppliers, to persuade the governments and even the suppliers, that this gouging is something that is not in their best interests, or in our best interest," he says. "They need to understand that there has to be a partnership."
Juan Emilio Posada, Avianca chief executive and also AITAL chairman feels equally aggrieved. "Governments see us as cash cows," he says. Generally in Latin America, taxes represent 25.6% of an airline ticket, compared with 18.2% for cigarettes, 11% for heavy firearms and 10.7% for alcohol. "In Latin American, flying seems to be a sin," he adds.
Besides the external forces, however, Posada emphasises the need for carriers to continue to restructure so that they can take advantage of the huge potential air transport market the region offers. US and European airlines take 40% of the total revenue generated in the region, he complains. "We are not exploiting our own markets because we are not competitive."
AITAL revitalised
The AITAL meeting in Miami marks a public debut of sorts for a revitalised association of Latin carriers bent on uniting to tackle some of the issues the airlines face in their home countries. Just over a year ago, AITAL brought in de Gunten with the view to raising the group's profile and making it a clear industry voice for presenting the views of airlines to their governments. He joined AITAL from Orbitz, but had held senior management positions at LanChile and Canadian Airlines. He has brought in a dozen affiliate members, including Airbus, Amadeus, ARINC, Boeing and Lufthansa Systems, and has set up working groups to focus on such areas as operations, distribution and training.
During the meeting, the AITAL carriers agreed to work to get governments to reduce taxes and charges to prevailing international levels, and eliminate those that discriminate against Latin American aviation; to ensure aviation fees are reinvested in aviation infrastructure and services; to create a region-wide mechanism to provide a government guarantee for insurance against third parties and terrorist acts; and to provide more homogeneous operating rules across the region.
Now that they all seem to be singing from the same hymn sheet, who knows what Latin America's airlines could achieve?
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Source: Airline Business
