Competition among Latin America's Airlines is Tough, and Just Getting Started

May 3, 2007

In 2006, air traffic among Latin American countries rose 6.9% compared with a year earlier, making the region the second-fastest market in the world, trailing only China, which grew 8.8%.

This torrid growth is expected to continue at this pace for years to come due to lower rates, which have made the market more competitive. Latin America's regionalizing airlines each are looking for a slice of the pie in the sky.

LAN, Chile's largest airline, was the pioneer in the regionalization of Latin American air transportation, establishing companies in Chile, Argentina, Ecuador and Peru over the past few years. However, competitors, fighting to reduce costs and win over new clients, are catching up when it comes to the bottom line. While LAN's operating profit margin hit 9% during the third quarter of 2006, Gol Linhas Aereas Inteligentes. a Brazilian low-cost carrier, reported 22%.

"Our goal is to mass-market air transportation to Latin America in2010 by flying to all Latin American countries," says Tarcisio Gargioni, Gol's vice president for marketing and services. He says that fully 10% of Gol's passengers previously traveled only by bus or car. Only five years after its maiden flight, Gol now controls 36% of the domestic market and 13% of Brazil's international market.

Gargioni says that the company's goal is to become Latin America's regional airline of choice over the next four years. Gol now flies to seven destinations in five South American countries and, at press time, was opening a route between Silo Paulo and Lima, from where it plans to connect to Santiago and Mexico City.

To continue gaining market share in the region, Gol will stick to its current business model of becoming Brazil's second-largest airline, based on a business plan that relies on a fleet of new aircraft, one type of market service and lots of sales to Latin over the Internet. The company plans to take delivery of 121 new planes by 2012.

In a time when other international airlines are fighting just to survive high fuel costs, Gol posted US$240 million in gross revenue in2005, 33.4% more than the year before. During the third quarter of last year, that figure came to $87.6 million and the outlook was positive.

Before the rise of low-cost airlines, companies like Panama's Copa Airlines were crafting aggressive strategies to deal with a changing industry. "The competition from low-cost [airlines] is a reality, and so the key to competing in the future with them is to be a low-cost company," says Jorge Garcia Icaza, Copa's commercial vice president."You have to be two things: low cost and offer a differentiated product, specializing in a business niche you really want to get into."

With the majority of flights arriving and departing from Tocumen International Airport in Panama City, Copa executives make the case that it is geographically poised to become the hub of the hemisphere and take the crown of the regional airline for Latin America in the coming years, Garcia says. In 2006, the airline added six new non-stop destinations to its previous 30.

"To be in Panama, geographically, is to have a big advantage because you can fly to Buenos Aires in six hours, Mexico City in three and a half and New York City in five," Garcia says. To handle growth, the company has ordered seven Boeing Next-Generation 737 air-planes, scheduled to be delivered this year.

Left behind. Traditional airlines don't want to be left behind. American Airlines which will celebrate its 66th anniversary flying in Latin America this year and its rep says the U.S. carrier will not be altering its strategy in the market. "We are the U.S. airline with the most presence in Latin America. We not only offer competitive prices, but we have the largest frequent-flier program in the world, which is something that attracts people to fly," says Martha Pantin, director of communications for American Airlines's Latin American region. "We don't worry about the competition every day and everywhere we fly, but we compete every day and everywhere; it's part of the business."

Over the next 20 years, Brazil and Mexico will account for most of Latin America's growth in terms of air traffic. Airlines in the region will need 1,679 new planes to meet the demand, according to a market study conducted by Boeing Commercial Airplanes, a U.S. aircraft manufacturer.

"Economic growth and the movement of raw materials [in Latin America] will be two factors that will drive this increase," says John Wojick, Boeing's vice president of sales for Latin America and the Caribbean. Economic growth will lead to an increase in frequencies for flights and open up new markets, Wojick says. "Many governments on the American continent have opened up to allow for more flights to other countries, for example, between Mexico and the United States."

Latin American airlines have certainly kept aircraft makers busy. In the past few months several had made or added to large orders to service rising demand. Brazil's TAM signed a contract with Airbus, a European aircraft manufacturer, to acquire 37 new planes along with options for 12 more. The new order brought TAM's fleet directly acquired from Airbus to 115 aircraft. Boeing said that Mexican airline Aeromexico ordered two 787-8 Dreamliners, adding to three prior orders, and 10 Next-Generation 737-700s. Meanwhile, Gol Linhas Aereas Inteligentes boosted an order for Boeing 737-800 aircraft to 87 from 67.

Analysts agree that travelers will be the big winners and will be able to take more vacations under new these new, tougher market conditions. "The arrival of airlines like Gol and [Mexican low-cost carrier] Volaris is going to really open the vacation market because they will increase competition and with that, raise the possibilities that will make people want to fly," says Marcio Stewart, transportation and logistics practice director at Infoamericas, a market research firm.

According to Stewart, the biggest growth in the tourism sector will take place at the domestic level--provided regulators act with flexibility and open markets. Governments are at a crossroads of keeping control over domestic markets and political interests or enjoying the economic benefits that come with a greater number of flights in the sky, he says. "They have to lead with these types of restrictions, but it will depend on the country if positive pressure will gain ground," says Stewart.

High Fliers

Latin America traits only China in terms of market growth.

Regional traffic growth rates

China: 8.8%

Latin America: 6.9%

Asia Pacific: 6.4%

Middle East-Asia Pacific: 6.0%

Transpacific: 5.8%

Europe-Asia Pacific: 5.5%

Europe-Latin America: 5.1%

Africa-Europe: 5.0%

North America-Latin America: 4.9%

North Atlantic: 4.5%

North America: 3.6%

Europe: 3.4%

SOURCE: Boeing

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