Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Latin America's airline apocalypse signals a future with weak competition

Stock MarketsJun 29, 2020 06:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
3/3 © Reuters. FILE PHOTO: Avianca Airlines Airbus A321 plane is seen at the Alfonso Bonilla Aragon International Airport in Palmira 2/3

By Marcelo Rochabrun

SAO PAULO (Reuters) - Bankrupt LATAM Airlines (SN:LTM) and Avianca Holdings (CN:AVT_p) are dramatically retrenching their once grand ambitions amid the COVID-19 pandemic, reducing competition in Latin America as they mull once-unthinkable cooperation with rivals.

Since May, LATAM has exited Argentina, partnered with rival Azul SA (N:AZUL) in Brazil and cut back domestic operations in Chile, while Avianca has departed Peru.

LATAM is now open to a deeper alliance with Azul, even as the two airlines usually control a combined 60% of Brazil's domestic market.

The scaling back could reshape air travel in Latin America, weakening competition regionally and driving up ticket prices while also helping some carriers survive. The moves show how the industry is already shrinking through attrition, as airlines are too cash-strapped to consider buying the competition.

"More than consolidation, many airlines will disappear," said Eliseo Llamazares, an aviation consultant at KPMG.

Latin American governments increasingly recognize there is a new reality, and have shifted their priorities to keeping local airlines alive instead of attracting new players.

Attrition has also occurred in Ecuador, where TAME shut down, and in Mexico, where Interjet has scaled back.

"If this trend is allowed to continue, connectivity around the region will be affected," said Peter Cerda, vice president for the Americas at IATA, an airline industry group. "Less connectivity means less choice, and less choice usually translates into higher prices."

All airlines in Latin America face some risk of disappearing, analysts say.

Dominant LATAM and Avianca have filed for bankruptcy protection, while auditors for Brazil's Gol Linhas Aereas Inteligentes (SA:GOLL4) are seeking to include a formal warning in the airline's financial statements that the carrier risks disappearing.

Azul and Aeromexico (MX:AEROMEX) have hired restructuring advisers, while Panama's Copa Holdings (N:CPA) has not flown since late March, straining its finances.

One airline that could stand to benefit is Chile-based JetSMART, which is considering entering Brazil's domestic market.

JetSMART's expansion is backed by deep pockets at private equity firm Indigo Partners, which also holds stakes in Frontier, Wizz Air (L:WIZZ) and Mexico's Volaris.

Indigo Partners founder Bill Franke told Reuters he expects to look into helping finance Avianca's restructuring. That could bring Avianca closer to JetSMART, keeping the Colombian airline's markets safe from competition. Avianca declined to comment.

'DIVIDING THE MARKET'

If JetSMART expands to Brazil, it would arrive as competition is diminishing. Last year, LATAM and Gol fought to keep Azul from entering a key Sao Paulo airport.

"JetSMART in Brazil would wreak havoc on the current players," said an air industry executive.

But the coronavirus has turned competition into a secondary concern, evidenced by the lack of pushback against the LATAM-Azul code-share.

The code-share "would have been untenable before," said Carlos Ozores, an aviation consultant at ICF.

The current partnership applies only to non-overlapping routes, but LATAM said it is "open to evaluating the possibility of the eventual future expansion of this code-share" to overlapping routes.

"They are dividing the market for themselves," an executive at a rival airline said of LATAM and Azul.

Gol CEO Paulo Kakinoff said code-share agreements - in which two or more airlines publish and market the same flight sharing one aircraft - will reduce air-travel supply, "which will benefit all of us."

The LATAM-Azul partnership has led to speculation about the future.

"It could be the first step for deeper integration, even a merger," said Andre Castellini, an aviation consultant at Bain & Company.

LATAM and Azul deny merger talks, but a source familiar with the code-share talks said it is "possible."

More than mergers, so-called joint business agreements are in vogue. Recently, LATAM signed one with Delta Air Lines Inc (N:DAL), while Avianca, Copa and United (O:UAL) have announced a rival one.

The agreements allow for deep route integration, without all the expenses and red tape of an actual merger.

LATAM was born out of the difficult merger of Chile's LAN and Brazil's TAM, which saddled the new carrier with big expenses.

Not long ago, LATAM and Avianca had their planes in almost every corner in Latin America, controlling a combined 60% of the domestic markets in Colombia, Chile and Peru.

But Avianca pulled out of Peru in May, calling the domestic market unprofitable, surrendering to LATAM, which has dominated travel there since the 1990s.

LATAM, in turn, departed Argentina earlier this month after losing an accumulated $350 million since 2012.

What it shows is airlines willing to surrender market share that they fought hard in normal times to maintain.

"To talk about competition in this context makes no sense, this is a fight for survival," Bain's Castellini said. "Airlines are going to prioritize their survival over their market share."

Latin America's airline apocalypse signals a future with weak competition
 

Related Articles

Spirit Jumps As Upgrade Follows Positive EBITDA Forecast
Spirit Jumps As Upgrade Follows Positive EBITDA Forecast By Investing.com - Jun 15, 2021

By Dhirendra Tripathi Investing.com -- Shares of Spirit Airlines (NYSE:SAVE) were up in Tuesday’s premarket a day after the company guided for a “modestly positive” EBITDA in the...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email