While Latin American airline operating profits were largely left intact in the third quarter, the impact of depreciating currencies and slowing economies is weighing increasingly heavy on their fortunes.
And in response, carriers are trimming capacity plans for next year.
Operating profits covering six Latin American airline groups were only slightly down at $379 million for the three months ended 30 September. But with the region's largest two groups, Avianca and LATAM, reporting in US dollars, there was little impact on profits from the falling local currencies.
Net results at Gol of Brazil – one of the hardest-hit economies – illustrate the currency-exchange loss toll. In local currency, Gol's net loss jumped to R2.13 billion ($581 million) from R245 million – largely as a result of R1.44 billion in losses from foreign-exchange variations.
The currency impact, though, is evident for those Latin carriers reporting revenue in US dollars. Avianca revenues were down 8%, Copa 18% and LATAM 20% during the quarter – the latter particularly hard-hit given its exposure through TAM to a 55% depreciation of the Brazlian real. As a result, collective revenue stands 10% down at just under $6 billion.
All carriers in the region cited the currency and the weak macroeconomic development in the region during the recent third-quarter reporting season, while it also formed the backdrop to the debate during the recent ISTAT Latin America and ALTA Airline Leaders forums in Panama City and San Juan.
ALTA president – and chief executive of Aeromexico – Andres Conesa describes the year to come as a "wild card". He says: "There are risks that remain. We won't know what will happen with the currency movements. They might stay or they might get more pronounced."
He adds: "So much of our costs are in dollars, such as training, leases and GDSs."
However, Conesa believes Latin American airlines will continue to be flexible in adjusting to conditions when needed. "Every airline can speak for themselves. I've seen across the region changes in capacity plans, network. We all adjust to the conditions."
That renewed view on capacity its clear. Panama's Copa Airlines deferred the delivery of one Boeing 737-800 in the fourth quarter of 2016, and another one in the first quarter of 2017, to later years. It means the carrier will only take one 737-800 in 2016 next year.
"We are hardly growing next year," says chief executive Pedro Heilbron, adding that even the small growth planned for 2016 is largely due to upgauging instead of new markets. Copa will lift capacity only 3% in 2016 compared with around 5% this year.
LATAM, too, is deferring aircraft. It will defer deliveries in 2017 and 2018. It plans to phase out 20 aircraft in 2016 – including its remaining 10 Airbus A330s – and having earlier deferred four deliveries planned for 2016, it will now take 25 aircraft next year for a net growth of only five aircraft
Director of investor relations Gisela Escobar says: "This is in response to a weaker demand environment especially in the Brazil market."
Group capacity for 2016 is now planned in the flat-to-3% growth range, domestically. Escobar says domestic capacity growth in the airline's Spanish-speaking markets will mostly be in Peru and Chile.
The capacity growth comes despite falling unit revenue all over its network. Unit revenue in LATAM's Spanish-speaking domestic countries fell 12% in the third quarter, while the metric was down 17% in the international network.
Escobar says unit revenue in the Spanish-speaking countries is down as a result of the local currencies' devaluation against the US dollar, but is "relatively flat" in local-currency terms. "In general, there are different realities in the five different markets we operate in," she says.
Brazil continues to be the weakest spot in LATAM's network. Domestic capacity in the market is estimated to be down 8-10% in the fourth quarter, and will be be 6-9% lower next year. TAM chief Claudia Sender says: "We made the right decision in forecasting that the market is not going to recover in the short term."
Another Brazilian airline caught in the fire is Gol. It has warned it might now post a loss this year after the tough third quarter and has scaled back growth plans over the next two years. It will now take delivery of only four Boeing 737-800s in 2016 and 2017, instead of 15, it says. In addition, the carrier will sub-lease 12 aircraft in 2016 to foreign airlines.
It is revamping its network to more closely align with travel patterns of a Brazilian population now more inclined to stay home or travel within South America, as holidays to the USA become more expensive with the strong dollar.
"More leisure travellers are choosing to fly in South America and within Brazil than any other year before," says Gol chief executive Paulo Kakinoff. "This perfectly matches our network strategy."
In addition, corporate travel demand has slowed in the recent year, says Kakinoff. "Gol has built in the last three years the most attractive and comprehensive network for corporate travel in [Sao Paulo] Guarulhos and Congonhas," he says. "But that demand has been down 35%."
Brazil's Azul, meanwhile, is undeterred by the challenges as it presses ahead with new US services.
"Half of the time we make money, and the other half we don't," acknowledges Azul finance chief John Rodgerson of its US flights. But the airline believes that the US flights are strategic to its overall network, and has no plans to scale back on them. Having launched US flights a year ago, it is adding Orlando flights from Belo Horizonte and Guarulhos. Rodgerson believes the airline's relatively low ownership costs on the leased Airbus A330s that operate the flights will work in its favour.
But it is not just Brazilian carriers feeling the heat in the market. Chile's Sky Airline will end its service Guarulhos in March. Sky's chief executive Holger Paulmann says the airline has lost money on the route since flights began in March 2014.
Paulmann says Sky grew the market by about 50% and saw healthy growth initially, but the downturn in Brazil's economy has since made the flights unsustainable. "Brazil is like a huge bus driving backwards towards the wall," he says.
Copa, meanwhile, is withdrawing from Viracopos-Campinas in December after serving the airport for only a year, citing the continued economic weakness in Brazil.
The other two markets troubling Copa's earnings are Colombia and Venezuela. Copa operates a Colombian subsidiary, which saw yields down significantly in the third quarter, says Heilbron.
"This is due to the effect of the large Colombian peso depreciation and additional competitive capacity," he says.
For its part VivaColombia, on top of international expansion, is eyeing two or three new domestic destinations in Colombia in 2016. Chief executive Juan Emilio Posada notes that the domestic market is performing better than international flights for the airline currently. "The purchasing power of Colombians [abroad] has gone down," he says.
Airlines continue to struggle to repatriate revenues earned in local currency in Venezuela. As a result, international capacity to the country has been trimmed back over recent years. IATA now estimates around $3.8 billion of airline revenue trapped in Venezuela. Conesa indicates that there has been little improvement in the situation this year. "The situation has not been entirely dealt with," he says. "It is getting more difficult to convert those bolivares to dollars."
Meanwhile, IATA director general Tony Tyler is also getting worried about a similar problem developing in Argentina. He notes that the country recently raised limits on the amounts that companies can repatriate from the South American country. "More than half of the airlines in Argentina have accumulated revenue there," he says.
Tyler was not able to specify how much airline revenue is being held up in Argentina, but notes that the severity of the problem is nowhere close to the situation in Venezuela. IATA will be rapidly engaging with Argentina's new leadership after the country's general elections later this month.
Source: Cirium Dashboard