The Quickly Changing Landscape Of Latin American Aviation

More than half of the people in the Western Hemisphere live in Latin America and the Caribbean. Whether islands like in the Caribbean, or mountains in Colombia and Chile, or deserts like in coastal Peru, the topography is varied and challenging for road travel. The rail networks in the regions are not well developed beyond what is needed for mining operations. This all results in an environment that needs viable airlines to deliver goods and people around the region and the world. The Latin American airlines historically have been high-cost, and with local networks but not much global reach. U.S. airlines like American and Delta have exploited this and serve a lot of the traffic through often circuitous hubs in Miami and Atlanta.

This is all changing, as the Latin aviation environment has seen the fast growth of low-cost carriers, the shuttering of the most inefficient companies, and the use of bankruptcy restructuring to make even the highest-cost airlines much more efficient. In addition, both local hookups among airlines and alignment with worldwide alliance groups have clearly put Latin aviation into the big time.

Growth Of Low-Cost Carriers

Like the rest of the world, Latin America has benefitted from the fast growth of low-cost airlines. Mexico, a country that was once dominated by two expensive and high-cost airlines, Mexicana and AeroMexico, now is led by Volaris. This carrier follows principles used by carriers like RyanAir in Europe or Spirit in the U.S. As a result, travel within Mexico has grown and trips between the U.S. and Mexico have also increased. Colombia has seen this with Viva, Chile with Sky and JetSmart, Brazil with Azul, and these are only some the low-cost airlines that have started in the last 15 years. Like the U.S. and Europe, this growth has made travel accessible to many more people, and has put pressure on the existing “legacy” airlines in the region.

Impact of Bankruptcy Restructuring

Post 9/11 traffic reductions forced most U.S. airlines, notably excluding Southwest, to file for bankruptcy protection. These restructurings adjusted debt levels and terms, resolved inefficient fleet issues, and pushed retiree expenses from defined benefit to defined contribution plans. This led to a wave of consolidations that created four huge airlines from eight large ones, and set up the industry for unprecedented growth and financial strength until the pandemic hit.

Latin carriers did not go through this evolution prompted by 9/11, but the pandemic forced it. Three of the largest carriers in the region, the LATAM group, Avianca, and Aeromexico all filed for bankruptcy protection. U.S. laws allow this because they each have property in, and operate in, the U.S. as part of their business. They have, or are still, using this opportunity to rethink their business models, shed employees and lower other expenses to emerge with stronger balance sheets. These newly gained efficiencies not only make them more competitive with the new low-cost airlines, but also with their bigger competitors from the U.S. and Europe.

Alliance Realignment

Each of LATAM, Avianca, GOL of Brazil, and Copa are members of global alliances. Delta shook up the Latin world when they wrested LATAM away from American and OneWorld with a $1.9M investment. American reacted to the loss by investing in new low-cost, Chile-based JetSmart. This links a full-service, global airline with a Frontier-styled ULCC, strange bed partners for sure. But is shows how much American lost and how they have to search for partners to fill the gaps.

The three major worldwide alliances — SkyTeam, One World, and Star — all have Latin partners today. The central mass of seats has shifted, however, from One World to SkyTeam with the LATAM switch. Not be be outdone, the Star Alliance has had Avianca and Copa as partners. Since Avianca’s emergence from bankruptcy, they have been aggressive in creating a new pan-Latin American network that is a boon for Star. There are still unaligned carriers in region but they are getting sparse.

Consolidation

The LATAM group is a clever name, created when Lan Chile and TAM of Brazil first merged. This group includes other country airlines also acquired or started from scratch in Colombia and Peru. The new Abra Group includes the linking of Avianca with Brazil’s GOL. This also includes Viva Colombia, acquired by Avianca before the created on this new super group. Sky Airline in Chile has no financial relationship with the others in Abra, but is linked commercially.

Setting up this move happened years ago when Avianca and Taca airlines, of Central America, merged. Teams associated with Taca had earlier created Volaris in Mexico, and Volaris’ long-time CEO is Taca-alum Enrique Beltranena. Colombia now has a single, highly dominant airline and Brazil has shaken out, creating growth opportunity for David Neelman’s Azul airlines. Liberal ownership rules and less focus on anti-trust has created opportunities for partners to merge or collaborate in ways not possible in the U.S. or Europe.

Rising Standards And High Growth Potential

Latin American aviation is projected to grow at a healthy 5% annual growth rate, making it among the fastest growing regions in the world. Its population doesn’t make it, or anywhere else, a match for China and India for aviation growth. But excluding those, growth in Latin America is where a lot of new aviation activity is being created. With a great mix of now two truly global, pan-regional networks, combined with exciting growth of low-cost airlines all through the region, the need for airplanes, crews, and all related support services is huge.

Many of the economies in this region are also growing quickly. The stereo-typed narratives of dictators and drug production have their reasons for existing, but do not define the region as a whole. Tourism in the Caribbean, Mexico, and many countries in Latin America continues to grow. Economies in Chile, Colombia, and Brazil are complex and broad, and create business travel growth opportunities as well. This is an exciting region with good airlines providing service within the region but also to global markets. Since catching up with up with the U.S. airlines in terms of operating efficiency and with a well defined labor cost advantage, this a formidable aviation sector that will continue to surprise people.