April 26, 2008
Latin America’s major airlines are still going strong despite rising fuel prices, buoyed by growing passenger traffic as the region’s economies expand at a healthy rate.
From Chile to Mexico, air travel is surging as economic gains trickle down to the masses, allowing millions to fly for the first time. Thanks to the jump in demand, fierce cost-cutting and often steep fares, Latin America’s top carriers are either making money or moving closer to profitability while the rest of the industry is bleeding losses.
In Brazil, where two deadly plane crashes and an air traffic control crisis in the last year and a half have done little to cool the aviation market, foreign carriers and new players are lining up to get a piece of the pie.
In recent months, Germany’s Lufthansa, LAN Peru and TAP Portugal have all signed code-share agreements with TAM Linhas Aereas, Brazil’s leading airline. KLM Royal Dutch Airlines and Air France, teaming up with TAM’s rival, Gol Linhas Aereas.
And last month, JetBlue Airways founder David Neeleman unveiled plans to start a new low-cost, discount carrier in Brazil that will take to the skies in 2009.
“Brazil is Latin America’s most important aviation market, and if it did not have attractive long-term fundamentals, I don’t see why these international airlines would be hammering down the door to get in,” said Stephen Trent, an aerospace analyst at Citicorp in New York.
Still, Brazil is not immune to the woes plaguing the industry in the United States, where airlines are under pressure to merge as a way to cut costs and boost revenue.
Last November, local carrier BRA collapsed after it couldn’t come up with the revenue to cover rising costs. This month, OceanAir suspended flights to Mexico, and Virago — the debt-ridden carrier Gol bought last year — canceled all routes to Europe and Mexico. Both blamed soaring fuel costs.
TAM and Gol, which command more than 90 percent of Brazil’s aviation market, have also seen their earnings shrink in recent quarters. But both remain profitable despite the jump in fuel prices, with TAM earning USD$264.5 million in 2007 and Gol pocketing USD$52.6 million.
That contrasts sharply with the United States, where Delta Air Lines and Northwest Airlines just posted a combined USD$10.5 billion in losses for the first quarter because of record-high fuel costs.
Chile’s LAN Airlines and Panama’s Copa Airlines are also making money, and lots of it. LAN’s net profit surged 28 percent last year to USD$308.3 million while Copa Holdings, the parent company of Copa and Colombian carrier Aero Republica, made a record USD$160.4 million.
LAN, whose cargo business helps it offset downswings in passenger traffic, has stimulated demand by reducing short-haul fares and kept a lid on costs by adopting more fuel-efficient planes and cutting out frills such as free meals and newspapers.
It has also cushioned the impact of rising oil prices by passing on a fuel surcharge to cargo customers.
In Mexico, the aviation market is more crowded. About a dozen airlines operate, half of them low-cost carriers born in the last two years, and most would likely already be profitable if it were not for steep fuel costs and a saturated market.
Traditionally, Mexico’s skies were dominated by Aeromexico and Mexicana, formerly government-owned airlines that were privatized in recent years. They are still the top two airlines but others like Volaris and Alma are hot on their heels.
Like their Brazilian counterparts, Mexican carriers are benefiting from surging passenger traffic as more people fly instead of traveling by bus. Passenger traffic is growing in double digits, both at home and between Mexico and the United States, boosted by new travelers and a tourism boom.
“Mexico is a model country with the low-cost carriers and the two legacy carriers all expanding the market and growing their traffic with new travelers,” said Bob Booth, an aviation specialist and chairman of Miami-based AvGroup.
An indication of the growing market is the fast pace that Mexican airlines are adding routes.
Mexicana will add flights from Monterey to New York in May and from Mexico City to Edmonton, Canada, in June. Aeromexico is launching service to China next year and the low-cost carriers are adding domestic routes and flights to the United States.
But the crowded market also means that consolidation may be on the horizon.
“We will see some form of consolidation taking place, with mergers and or acquisitions,” said Booth.
(Reuters)