As Latin America's airline presidents gathered for their annual conference in Miami, there was precious little good news on the agenda
The list of challenges facing Latin American and Caribbean airlines seems only to grow. Frustratingly, many of them are the result of forces outside their control, include struggling and deficit-ridden domestic economies, limited home markets and continued weakness of the important US economy. This was the thrust of every conversation at the International Airline CEO Conference held by AvNews in Miami in May.
Add to this list worsening exchange rates, higher fuel costs, skyrocketing insurance rates, new US government assistance to competing carriers and costly US security requirements, and it is clear that these are not the best of times.
In the case of Venezuela's Aeropostal, add political unrest to the list. "2002 was a tough year for us," says Nelson Ramiz, Aeropostal's chief executive. "We had 31% inflation, 37% interest rates, 85% devaluation, three general strikes and a coup. When we look back, we say that those were the good days."
The carrier, which operates a fleet of 21 McDonnell Douglas DC-9s, more recently has faced a government law barring layoffs and a ban on all foreign exchange. "For four months, no dollars," Ramiz says. The controls make it difficult to gain access to foreign currencies - such as that necessary to pay dollar-denominated bills - except through the black market at a 40% mark-up. Aeropostal, profitable in 2001, is maintaining the same level of passenger service and seeking to stay the course through careful cost controls. "We don't anticipate any fast recovery in the Venezuelan market," Ramiz adds.
Enemies and predators
Steven Udvar-Hazy, chairman and chief executive officer of leasing giant ILFC, told the conference that "we live in a dangerous jungle", and he wasn't just referring to the sprawling land mass along the Amazon in South America.
Among the jungle "enemies and predators" he listed were large US and European airlines with distribution, pricing and network power; overtaxation and excessive fees; outmoded government regulations which form a "noose around the industry"; foreign exchange controls and restrictions; corruption; undercapitalised balance sheets; low employee productivity and ageing fleets.
While the carriers cannot clear away all these obstacles on their own, Hazy says they could help insure their survival by doing such things as streamlining their fleets to reduce training, spares, maintenance and overhead costs. With the airline industry as a whole going through difficult times, Hazy says, there is a good supply of new and late model Chapter 3 aircraft at attractive conditions. Low lease and interest rates are available even for carriers that are not the most creditworthy, he says.
Hazy notes that the region's most successful carriers have standardised their fleets: Central America's Grupo TACA on the A320 family; Panama's Copa concentrating on Boeing 737-700/800s and LanChile with four types. Brazil's Varig, which he calls "one of the financially largest basket cases", has nine aircraft types plus regional jets.
Flying more efficient aircraft would also reduce fuel costs, higher in Latin America than elsewhere. Jonathan Leak, senior vice-president risk management of World Fuel Services, told the gathering that jet fuel costs represent 10-30% of total operating expense for most airlines, with volatility directly impacting the bottom line. For a Latin carrier, 1¢ a gallon equals $3.6 million a year.
To improve productivity and simplify their operations, Hazy advises carriers to focus on core markets and city pairs where they could be the number one or two carrier - not number six or seven - and to optimise scheduling and connectivity. On many routes, carriers operate too few frequencies, resulting in overstaffing at outstations, under-utilised facilities and inefficient aircraft operations, he says.
Contrasting productivity, Hazy points out that JetBlue has 83 employees for every aircraft operated and Southwest Airlines 94. By contrast, LanChile has 140, Bolivia's LAB 175, BWIA West Indies Airways 211 and Varig 213 employees per aircraft.
Stringent cost controls are also needed, especially in purchasing and out-of-country offices. Emphasis on direct online bookings and e-ticketing also could cut hefty distribution costs. "If you look at commission expense as a percentage of airline passenger revenue, it is way out of line in Latin America," he says, noting that 10-20% commissions are common.
Hazy also recommends increased regional co-operation and codesharing to minimise what he calls self-destructive competition. "In Latin America, the weakest airlines set the fares - the lowest fares - because they're in a hunt for cash and everybody has to match them."
Jeffrey Shane, undersecretary for policy with the US Department of Transportation, also advocates regional co-operation as a way of advancing a more liberal aviation environment for the Americas. Although the USA has signed some liberal agreements in Latin America - and they have directly benefited the successful LanChile and Grupo TACA - these pacts are the exceptions.
It is clear, Shane says, the approach to international aviation taken in the Americas has failed to provide consumers with benefits available in other markets or even to ensure the ultimate survival of national carriers that restrictive agreements are meant to protect.
"We need to consider alternatives," he says. "There may be new markets and new sources of growth for Latin American airlines in a more liberal environment if government policymakers in the region begin to approach the issue in a fresh way, and if we are prepared to explore new frameworks for services in this hemisphere - even frameworks that go beyond bilateralism."
The USA has separate bilateral aviation relationships with most nations in Latin America and each nation has separate agreements with each other, creating "a crazy-quilt" of hundreds of bilaterals, he explains. The result is excessive fragmentation of air services, inhibiting growth and access to new markets.
A new model for aviation services in this region could consist of two major pillars, Shane says. The first would encourage Latin American governments to replace the existing patchwork of agreements with a single aviation market, and the second would link a newly invigorated Latin American aviation marketplace with the USA.
Models that could work for establishing an internal market include the European Union's single aviation market; or the agreement of Denmark, Norway and Sweden to work as one to conduct international aviation relations. The third model is the Asia Pacific Economic Cooperation forum, which created one large open aviation market between the USA and six other nations.
The subject of alliances was also prominent at the conference. Although only a few Latin carriers - Aeromexico, LanChile, Mexicana and Varig - are members of the big three global alliances, some unaligned airlines are beginning to link with each other in what is being called "virtual alliances" or to take advantage of "virtual interlining".
This is particularly true at Fort Lauderdale, where international passengers are beginning to connect to domestic flights operated by US low-fare carriers, using the Internet to make bookings. "By inaugurating service into Fort Lauderdale, Cayman Airways has opened up a wide array of connecting possibilities with a number of today's most successful airline operations - Spirit, AirTran, Southwest and JetBlue," says Richard Blake, Cayman's vice-president marketing and sales.
Traditional codesharing and interlining are not necessary, he says. The traveller gets a low fare and does not need to check baggage through to the final destination since bags have to clear customs at the port of entry anyway. "The hunger for frequent flyer miles can now be satisfied by sending flowers, choosing a different long-distance carrier or taking out a mortgage, so that is no longer a prime requisite in carrier selection," Blake adds.
Adding market share
Colombia's Alianza Summa started daily service to Fort Lauderdale from Bogota and carried close to 10,000 passengers in the first six months, according to Juan Arbelaez, Alianza Summa's general director for North America and Mexico. The airline, which kept three daily Miami-Bogota flights, has already picked up three market share points in the USA-Bogota market. Because Fort Lauderdale has become the second largest destination from Colombia, Arbelaez says, Alianza Summa is considering splitting its Bogota service evenly between Fort Lauderdale and Miami later this year.
Service offered at Fort Lauderdale by the low-cost carriers is definitely a plus. "We are the first carrier in Latin America to join forces with JetBlue," Arbelaez adds. Alianza Summa's website has a hyperlink directly to JetBlue's.
For Spirit Airlines, which operates 22 flights at Fort Lauderdale, selective interlining and "virtual interlining" with international carriers could bring an estimated 150,000 or 2-4% additional passengers a year, says Marc Cavaliere, Spirit's vice-president sales & distribution. "The focus is on end-to-end feed rather than overlap," he says. Spirit also has a Spanish language page on its website.
Although Miami is considered the key US gateway to Latin America, nearby Fort Lauderdale airport may attract other new business from Latin America. It is uncongested and costs airlines significantly less to operate, Cavaliere says. Its per-passenger costs are almost 75% less than at Miami, where Latin carriers also have to compete head on with dominant American Airlines.
CAROLE SHIFRIN MIAMI
Source: Airline Business