WORLD AVIATION Yearbook 2013 LATIN AMERICA
PROFILES Latin America TOP 10 AIRLINES
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | Week starting 31-MAR-2013
Ranking CARRIER NAME
Latin America Outlook
L
atin America has been a market characterised over the last decade by rapid growth, consolidation and significantly improved profitability. 2012 saw more healthy growth in every major market and a key milestone with the completion of the LAN-TAM merger, which puts about onethird of the region’s capacity in the hands of one very powerful airline group ...
SEATS
1
VARIG-Gol Airlines/vrg Linhas Aereas Sa
156,124
2
TAM Linhas Aereas
141,140
3
Lan Airlines
90,886
4
Azul Airlines
77,560
5
Avianca
57,786
6
Aeromexico
55,899
7
Copa Airlines
41,387
8
Interjet
31,500
9
Volaris
27,918
10
Aerolineas Argentinas
26,354
Latin America TOP 10 Airports
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | Week starting 31-MAR-2013
Ranking CARRIER NAME
SEATS
1
Sao Paulo Guarulhos International Airport
879,636
2
Mexico City Juarez International Airport
762,866
3
Bogota Eldorado International Airport
589,330
4
Sao Paulo Congonhas Airport
517,256
5
Rio De Janeiro-Galeão International Airport
442,544
6
Brasilia International Airport
432,410
7
Lima J Chavez International Airport
380,816
8
Cancun Airport
375,026
9
Rio De Janeiro Santos Dumont Airport
304,426
10
Belo Horizonte Tancredo Neves International Airport
297,274
Latin America capacity SEATS per week
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | Week starting 31-MAR-2013 1,089,278
Gol
965,854
TAM Airlines
673,546
LAN Airlines Azul
474,202
American Airlines
435,840
AVIANCA
402,806
Aeromexico
380,655
COPA
291,874
United Airlines
265,996 3,379,250
Other
0M
2 AIRLINE LEADER | MAR-APR 2012
1M
2M
3M
4M
Latin America fleet
Latin America projected delivery dates for aircraft on order
SOURCE: CAPA - CENTRE FOR AVIATION | Week starting 31-MAR-2013
SOURCE: CAPA - CENTRE FOR AVIATION | Week starting 31-MAR-2013 100
2,500 75 1,983
2,000
50
1,500 25
1,000
In service
Latin America breakdown for aircraft in service SOURCE: CAPA - CENTRE FOR AVIATION | Week starting 31-MAR-2013
7.7%
8
9
20 1
20 1
767 A320
737
777
787
A330
A350
SSJ
Latin America most popular aircraft types in service SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA
0.2% 0.1%
13.1%
48.4%
Narrowbody Jet
22.0%
33.0%
A320 737
Small Commercial Turboprop
ERJ170
Regional Jet
ATR
Turboprop
DC9
Widebody Jet
13.9%
Military Transport Business Jet
767
19.9%
3.1% 3.6% 8.1%
6.5%
Latin America capacity SEATS share by alliance
SOURCE: CAPA - CENTRE FOR AVIATION AND INNOVATA | Week starting 31-MAR-2013
CARAVAN Others
3.7%
16.8%
11.6%
20 24
7 20 1
ATR
20 23
6 20 1
On order
20 22
5 20 1
ERJ170
In storage
20 21
4 20 1
136
0
20 20
3
500
20 1
0
635
IATA Latin America PREMIUM TRAFFIC: 2009-2013 SOURCE: CAPA - CENTRE FOR AVIATION AND IATA
60
0.7%
50
44.5% Unaligned Star oneworld SkyTeam oneworld (affiliate)
Premium Traffic Growth%
40
14.8%
30 20 10 0 -10
-20
28.4%
-30 Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
3
LCC CAPACITY SHARE (%) OF TOTAL SEATS: 2001-2013
Source: CAPA - Centre for Aviation with data provided by OAG
50 40.8% 41.5%
40 31.0%
30
43.3% 42.6% 43.3%
32.8% 28.3%
26.2%
29.9%
31.8% 31.6% 32.6%
21.7%
20
18.3% 14.2%
15.6%
10.6%
10
6.4%
5.7%
17.6%
7.2% 7.8%
14.3% 9.6%
3.2%
0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 JanMar Within Central & South America Within lower South America 2013
Latin America traffic: 2008-2013
SOURCE: CAPA - CENTRE FOR AVIATION AND IATA
30 25 Revenue Passenger Kilometres %
20 15 10 5 0 -5
-10 -15
2008
2009
2010
2011
2012
2013
The establishment of new LAN and TAM parent LATAM Airlines Group is the biggest component of a massive consolidation trend...
4
... The establishment of new LAN and TAM parent LATAM Airlines Group is the biggest component of a massive consolidation trend which has also included the mergers of Avianca and TACA, Gol and Webjet, and Azul and TRIP. In addition, consolidation has come in the form of casualties as several Latin American carriers of all sizes have suspended operations in recent years, with Uruguay flag carrier Pluna and Bolivia’s largest carrier Aerosur joining the list in 2012. The result of the consolidation has been the emergence of a healthier industry with the leading six airline groups accounting for about 75% of total capacity among Latin American carriers and having generally positive outlooks for 2013 and beyond. The success of cross-border models has contributed to the consolidation and overall profitability of Latin America’s aviation industry. Unlike in Asia, where the cross-border model has been used to accelerate low-cost carrier growth, in Latin America the model has been primarily used among full-service carriers. LATAM and Avianca-TACA represent the world’s best examples of successful crossborder models in the full-service carrier sector. LATAM now includes passenger airline subsidiaries in seven countries while AviancaTACA has passenger airline subsidiaries in eight countries, plus a sister carrier in a ninth country. 2013 will see further integration at Avianca-TACA as all the carriers in the group take on the Avianca brand, representing a final step in a merger which was completed in early 2011. LATAM, meanwhile, will continue to pursue synergies made possible by the completion of their merger in mid-2012. The Viva Group, backed by Ryanair founders Irelandia Aviation, has begun the first attempt at testing out the cross-border model in Latin America’s emerging LCC sector. VivaColombia launched services in May-2012, joining Mexican sister carrier VivaAerobus. The Viva Group is now looking at potential markets for a third affiliate, with a selection likely in 2013. Chile has emerged as the most likely market. Chile has the fourth largest and fastest growing domestic market in Latin America. But not a single LCC currently serves Chile
– domestically or from other countries. Chile is the largest aviation market in the world that is still not touched by an LCC. But LAN’s domination of its original home market will make it challenging for any new entrant. In 2012 LATAM handled 76% of Chile’s domestic passengers and 67% of the country’s international passengers.
30%
proportion of total Latin American carrier capacity held by leading 6 airline groups
LCCs have so far successfully only penetrated Latin America’s two largest domestic markets – Brazil and Mexico. LCCs now account for over 50% of passenger traffic in both countries. VivaColombia is just starting to scratch the surface in Colombia, where it captured only 3% of domestic passenger traffic in 2012. But VivaColombia is planning rapid expansion, entirely in the domestic market for at least the medium-term, which will drive up Colombia’s LCC penetration rate and overall growth. Colombia’s domestic market expanded by 15% in 2012 to 18.8 million passengers and will likely again see double-digit growth in 2012, led by VivaColombia and to a lesser extent Avianca and LAN Colombia. LCCs have not yet entered any other Latin American domestic market and are only operating a very small number of international services within Latin America. The intraLatin America market has been one of the fastest growing markets in the world, driven by the region’s rapidly expanding economy and growing economic ties between Latin American countries as reliance on the US gradually reduces. Full-service carriers are capturing nearly all of this growth and will continue to do so in 2013 as the region’s LCCs at least for now remain domestic-focused. Panama’s Copa has been the biggest beneficiary of the boom in intra-Latin America travel. Copa is significantly smaller than LATAM and Avianca-TACA but has the largest intra-Latin America network, which
connects over 50 destinations in the region. Copa has consistently been one of the most profitable airlines in the world, with annual operating profit margins of at least 17% since it went public in 2005. Its consistent track record of double-digit growth and high profitability will almost certainly continue in 2013 given its strong position in a fast-growing segment of the market that has virtually zero LCC penetration. LATAM and Avianca-TACA also have benefitted from the rapid growth in the intra-Latin America international market but also have domestic operations in several countries and long-haul operations to Europe. Copa only has a small domestic operation in one market, Colombia, and doesn’t operate a single widebody aircraft. All of Latin America’s main domestic markets recorded rapid growth in 2012. But in most cases the profitability of domestic operations is not nearly as high as regional international operations as competition is much more intense domestically. Brazil recorded 7% domestic passenger growth in 2012, representing a major slowdown from the 16% growth from 2011 and 24% growth from 2010. Brazil’s domestic market will likely again see only singledigit growth in 2013 as the market’s two largest carriers, TAM and Gol, continue to cut capacity in an attempt to improve profitability. Azul and TRIP, which are expected to complete their merger in 2013, will continue to expand at the expense of TAM and Gol. More modest expansion will come from Avianca Brazil. While Brazil’s domestic market has been impacted by over-capacity and irrational competition, particularly on trunk routes, the medium to long-term outlook is bright, given that 99% of the market is now controlled by just four airline groups (two LCCs and two FSCs). Brazil, which has the world’s sixth largest economy and fourth largest domestic airline market, is still an emerging market with huge growth potential. Foreign carriers also continue to add capacity to Brazil, led by the US carriers. The US-Brazil market saw an increase in capacity of about 30% in 2012. The capacity was in response to growing demand although in some cases the capacity added was too much and has impacted yields. Mexico’s domestic market grew 10% in 2012 to 28 million passengers, marking the first time the market has seen double-digit growth since 2007. Mexico’s aviation industry in recent years has under-performed the rest of Latin America as Mexico’s economy, which is heavily dependent on the US, has been relatively weak. But the Mexican economy has now recovered with healthier growth expected in 2013. The profitability and long-term outlook of Mexico’s aviation industry has also significantly improved as a result of consolidation. Six Mexican airlines or airline groups ceased operations between 2006 and 2010,
LCCs have so far successfully only penetrated Latin America’s two largest domestic markets – Brazil and Mexico.
5
... rapid and successful expansion in the US by some Latin American carriers – particularly LAN, TAM and Copa – has levelled the playing field.
concluding with the Aug-2010 demise of Grupo Mexicana. About 95% of the market is now controlled by Grupo Aeromexico and three LCCs – Interjet, Volaris and VivaAerobus. Aeromexico had a successful IPO in 2010 while all three LCCs are now considering IPOs, with VivaAerobus seeking a possible listing in 2013. Mexico’s trio of LCCs are planning further expansion in 2013 with a focus on the domestic market as the Mexico-US transborder market is highly competitive and challenging for Mexican carriers. US carriers accounted for 71% of passenger traffic between the US and Mexico in 2012 and continue to dominate some other US-Latin American markets. But rapid and successful expansion in the US by some Latin American carriers – particularly LAN, TAM and Copa – has levelled the playing field. Chile, somewhat surprisingly, saw the fastest growth of all Latin American markets in 2012, with domestic growth of 19% to 8.3 million passengers and international growth of 16% to 6.9 million passengers. Chile is a relatively mature and small market. As its 17 million citizens are already relatively affluent, Chile also doesn’t have the middle class growth seen in the region’s larger markets such as Brazil. But Chile has a strong and growing economy, a geography that is favourable for aviation and a population that has the income to travel frequently. Chile has seen steady and rapid
Brazil’s domestic market will likely again see only single-digit growth in 2013 6
Aerolineas continues to be the exception in an otherwise profitable and healthy Latin American airline industry. growth since 2009 and will likely see more double-digit growth in 2013. Latin America’s other two major markets, Argentina and Peru, also saw double-digit growth in 2012. Growth in Peru was particularly impressive and second only to Chile. Peru’s domestic market grew by 17% to 7.2 million passengers while its international market grew 18% to 6.8 million passengers. Peru has seen rapid expansion from the Peruvian subsidiaries of LATAM and Avianca-TACA, both of which use Lima as an intra-Latin America international hub. More rapid growth is expected in 2013 as Peru continues to be a battleground between Latin America’s two largest airline groups. But further growth in Argentina is limited as the government continues to protect flag carrier Aerolineas Argentinas with policies that make it nearly impossible for new domestic carriers including potential LCCs to enter, for LAN Argentina to expand, and for foreign carriers to enter markets other than Buenos Aires. Aerolineas continues to be the exception in an otherwise profitable and healthy Latin American airline industry. But the carrier is still working on a restructuring which began when it was renationalised at the end of 2008. Aerolineas entered the SkyTeam alliance in 2012, a major component of its new strategy, and hopes to finally progress in 2013 in fixing its highly unprofitable long-haul operation. Venezuela’s market is also impacted by protectionist policies. As the sixth most populous county in the region, Venezuela has potential should it open up in future. But for now it remains the only medium or large size Latin American market without a local carrier that is part of Latin America’s top six airline groups. 2013 will see more passenger growth across Latin America, following 8% average growth in 2012 as reported by Latin American airline association ALTA. The big six groups along with a few medium size carriers (primarily LCCs) will continue to be the main beneficiaries. While there are potential opportunities for new LCCs to enter, most of the growth will continue to be captured by the leading cross-border full-service groups and the region’s five existing LCCs. The strong will get stronger and more consolidation among the smaller carriers is likely.
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CAPA’s 2013 knowledge forums include:
3
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Latin America: Selected airlines Aeromexico GROUP......................................................pp.10 “Aeromexico plans more capacity growth in 2013 as delayed 787s are deployed to Europe and New York” First published on www.centreforaviation on 16th February, 2013
Avianca-TACA GROUP....................................................pp.22 “Avianca-TACA primes for re-branding and intensifying competition with LATAM” First published on www.centreforaviation on 13th March, 2013
COPA HOLDINGS..............................................................pp.31 “Panama’s Copa on course for more industry-leading profits and double-digit growth in 2013” First published on www.centreforaviation on 15th February, 2013
gol..................................................................................pp.42 “Gol pledges a financial turnaround as it records a second consecutive annual loss, of USD745 million” First published on www.centreforaviation on 28th March, 2013
LATAM GROUP.................................................................pp.52 “LATAM’s 4Q2012 yields are damaged by aggressive competitive expansion in the US-Brazil market” First published on www.centreforaviation on 29th March, 2013
viva group....................................................................pp.61 “VivaAerobus and VivaColombia focus on domestic expansion as Irelandia ponders third Viva franchise” First published on www.centreforaviation on 11th January, 2013
8
Selected countries BRAZIL OVERVIEW..........................................................pp.73 “Brazil domestic growth slows in 2012 as Azul-TRIP continues to take market share from Gol” First published on www.centreforaviation on 24th January, 2013
CHILE OVERVIEW.............................................................pp.84 “Chile emerges as Latin America’s fastest growing market despite domination from LAN” First published on www.centreforaviation on 29th January, 2013
COLOMBIA OVERVIEW.....................................................pp.99 “Colombia’s aviation market poised for more rapid growth in 2013, led by VivaColombia, Avianca & LAN” First published on www.centreforaviation on 18th March, 2013
MEXICO OVERVIEW..........................................................pp.107 “Mexico returns to double-digit domestic growth in 2012, boosting outlook for Aeromexico and LCCs” First published on www.centreforaviation on 6th February, 2013
9
Aeromexico
Key Data Fleet and Orders Aeromexico Fleet Summary: as at 10-Apr-2013 Aircraft In Service In Storage On Order Total: 114 1 75 Boeing 737-700 28 0 0 Boeing 737-8 0 0 60 Boeing 737-800 14 0 7 Boeing 737-800(ETOPS) 2 0 0 Boeing 767-200ER 5 0 0 Source: CAPA Fleet Database
Aeromexico projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
10
Route area pie chart Aeromexico international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Top routes table Aeromexico top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
11
Premium/Economy profile Aeromexico schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Share price 2012/2013
Source: CAPA - Centre for Aviation and Yahoo! Financial
12
Aeromexico plans more capacity growth in 2013 as delayed 787s are deployed to Europe and New York Aeromexico saw its profits drop for the second consecutive year in 2012 as it was only able to grow passenger traffic by 3% despite double-digit growth for the overall Mexican market. But Mexico’s only surviving legacy airline group remains in the black and its outlook remains relatively bright given its strong position in the Mexican market and the resurgence of the country’s economy. Grupo Aeromexico is planning to grow capacity (ASKs) by a further 6% in 2013, matching the 6% capacity increase from 2012. But the group is targeting higher RPK growth and load factors, which it hopes will allow it to regain the share of the domestic market it lost in 2012. Internationally, Aeromexico is planning to grow capacity by up-gauging routes, including replacing 767-200s with new 787-8s to London and Paris. Aeromexico also plans to deploy its first batch of 787s to New York, which it currently only serves with 737s. Aeromexico now expects it will receive three 787-8s in 4Q2013, representing a delay of about three months due to the current grounding of the global 787 fleet.
Aeromexico reports drop in profits and load factors for 2012 Aeromexico recorded a net profit of MXP1.32 billion (USD104 million) in 2012, representing a 25% drop compared to 2011. In 2011 a weak second half resulted in its profits dropping by 11% compared to 2010, which was a landmark year for Aeromexico as the suspension of services at rival Grupo Mexicana paved the way for a return to profitability after several years in the red. The group recorded an 11% increase in revenues for 2012 to MXP39.6 billion (USD3.1 billion) but operating expenses increased 15% to MXP32.8 billion (USD2.6 billion). Aeromexico’s operating profit dropped 32% to MXP2.53 billion (USD200 million) and its operating profit margin dropped 4ppts from 10.4% in 2011 to 6.4% in 2012. In 2011, Aeromexico grew ASKs by 20% and revenues by 28% as it moved, along with Mexico’s three low-cost carriers, to quickly fill the void left by Mexicana. Aeromexico didn’t have any problems filling the capacity added in 2011 as RPKs grew by 21% and its load factor improved to 78.4%. But in 2012 Aeromexico struggled to fill the seats it added to the market as its load factor fell by 1.8ppts to 76.6% (see background information). In discussing 4Q2012 results with analysts on 14-Feb-2013, Aeromexico CEO Andres Conesa said the focus for 2013 will be on adding capacity in existing markets and improving the performance of the 18 routes added in 2012. “On the network side it will be a year of consolidation,” Mr Conesa said. As most of the capacity expansion in 2012 was directed to the domestic market with seven new domestic destinations opened, Aeromexico plans to focus more on the international market in 13
2013. Grupo Aeromexico currently allocates 73% of its seats and 40% of its ASKs to the domestic market, according to Innovata data. On a revenue basis, domestic flights generated 48% of Aeromexico’s revenues in 2012 while international flights generated 42% with charters, cargo and other revenues accounting for the remaining 10%. The international expansion in 2013 will be driven by the up-gauging of existing international flights to Europe and the US. Aeromexico plans to replace three 767-200s with larger 787-8s and two 737-700s with four 737-800s, leaving two 737-800s for growth on medium-haul international routes.
Aeromexico now expects to receive first batch of 787s in 4Q2013 The 6% increase in ASKs for 2013, which includes about a 5% increase in 1H2013 followed by a 7% to 8% increase in 2H2013, is based on the current fleet plan which envisions the first 787-8 being placed into service in Aug-2013. But Mr Conesa acknowledged the carrier’s first batch of three 787s will now most likely be delivered in 4Q2013, which will have a slight impact on its capacity production for the full year. Boeing has halted all deliveries of 787s since the global inservice fleet was grounded in mid-Jan-2013 and it is unclear when the grounding will be lifted and how long it will take for the delivery schedule to be recovered. “Certainly it will be delayed [but] we expect the plane to be delivered this year for sure,” Mr Conesa explained. “Officially we haven’t received from Boeing any new date. The planes will fly but probably instead of flying in the third quarter they will be flying in the fourth quarter. And that will mean less ASK production in the international market because of the delay.” Mr Conesa said the plan is to have the 787s operate from Mexico City to London Heathrow, Paris CDG and New York JFK starting from Aug/Sep-2013. If there are delivery delays as expected, Aeromexico will slightly extend the leases on three 767-200s and postpone the training of 100 pilots which have been selected to transition from the 767 to 787.
Aeromexico to use 787 to increase capacity to New York New York JFK is currently served with four daily 737-800 flights but Mr Conesa said they had determined that the 787, unlike the 767, can be “competitive” on the Mexico City-New York route. Aeromexico already has a leading 47% share of capacity between Mexico City and New York (includes all New York area airports), which it will expand on after it up-gauges some of its Mexico City-New York frequencies to the 787. Mexico City-New York JFK is now also served by SkyTeam partner Delta Air Lines and Mexican LCC Interjet while Mexico City-Newark is served by United. Delta, which has a hub at JFK, acquired a 4% stake in Aeromexico in 2012, cementing a partnership which now includes codeshares on over 200 flights. Cancun to New York JFK and Mexico City to Delta’s fortress hub in Atlanta were two of 11 international routes Aeromexico added in 2012 as it looked to exploit synergies from the newly expanded partnership with Delta.
14
Mexico City to New York* capacity by carrier (one-way seats per week): 19-Sep-2011 to 04Aug-2013
Source: CAPA – Centre for Aviation & Innovata Note: *includes JFK and Newark airports
Aeromexico currently operates a daily flight to Paris using a mix of 767-200s and 767-300s, according to Innovata. The carrier launched in Dec-2012 three weekly 767-200 flights to London, using slots acquired from SkyTeam partner Air France. Aeromexico competes on the Mexico City-London Heathrow route with British Airways, which operates three weekly 747400 frequencies to Mexico City, while Air France operates alongside Aeromexico on Mexico City-Paris with a daily 747-400 flight. See related article: Aeromexico faces formidable challenges in making new London Heathrow flights viable Aeromexico currently has a fleet of seven 767s which it uses to serve Buenos Aires, Tokyo Narita and Santiago as well as London Heathrow and Paris CDG. It also has a fleet of four 777200ERs which are currently used to serve Madrid, Sao Paulo, Shanghai Pudong as well as some frequencies to Buenos Aires.
Aeromexico plans to begin deploying 787s on Asian routes in early 2014
15
Mr Conesa said Aeromexico intends to use its second batch of 787-8s, which are slated to be delivered in early 2014, on the Tokyo and Shanghai routes. He said Aeromexico is not using its first batch of three 787s for its Asia routes because the second batch will be the first aircraft with higher thrust engines, allowing “probably under certain conditions non-stop flights from Mexico City to Narita”. Aeromexico currently serves Tokyo with three weekly 767 flights that operate via Tijuana on the outbound sector and non-stop on the return leg. Shanghai is served with two weekly 777 flights with stops in Tijuana on both the outbound and return sectors. The 767-200/300 and 777200ER is unable to operate non-stop to Asia from Mexico City due to the city’s high altitude. The 787 represents a game changer for Aeromexico’s Asia operation, which has suffered over the years although Mr Conesa said it performed better and contributed positively in 2012. The 787 will significantly improve the economics and product of the carrier's trans-Pacific offering. Mr Conesa said Aeromexico expects to add frequencies to both Tokyo and Shanghai “as more 787s kick in”. Aeromexico is now committed to acquiring nine 787-8s, including two aircraft purchased directly from Boeing in 2006 and seven leased aircraft. In 2012 the group added an order for six 787-9s with purchase rights for four additional 787-9s (at the same time it also placed an order for 60 737 MAX aircraft plus 30 purchase rights). The new widebody fleet of at least 13 787s allows for modest growth as well as the replacement of the current fleet of seven 767s and four 777s. The decision to use the 787 to New York indicates that Aeromexico may not opt to expand its long-haul network but instead use the additional capacity to up-gauge some medium-haul routes now operated with 737s as well as add frequency to its two Asian routes. Los Angeles could be a potential second US route for Aeromexico's 787s. Aeromexico currently serves Los Angeles from Mexico City with 33 weekly flights. Mexico City-Los Angeles is the carrier's largest international route based on seats while Mexico City-New York is the second largest. Based on ASKs, Mexico City-New York is the carrier's biggest US route and its fourth biggest international route overall as it is a longer flight (over five hours compared to under four hours for Mexico City-Los Angeles). Aeromexico top 10 international routes based on capacity (ASKs): 10-Feb-2013 to 17-Feb2013 Source: CAPA – Centre for Aviation & Innovata
Aeromexico plans to wait for its 787-9s before placing the 787 on Madrid and Sao Paulo, its two biggest long-haul routes, while the nine 787-8s will be used for Buenos Aires, London, Paris, New York, Tokyo, Santiago and Shanghai. Buenos Aires and Santiago are the last of the current 767 routes that are slated to be up-gauged to the 787-8. 16
Aeromexico plans slight increase in domestic capacity as ERJs are replaced with EJets Aeromexico also plans to up-gauge some domestic flights during 2013 as six ERJ-145s are replaced with five E170/175s, giving regional subsidiary Aeromexico Connect a year-end fleet of 32 ERJ-145s, eight E170/175s and 19 E190s. But the ASK impact from these changes are relatively small compared to the increase in international ASKs brought about by the introduction of 787-8s and 737-800s. In 2012 Aeromexico Connect significantly increased domestic capacity as three second-hand E170s and eight new E190s were added to the fleet while only one ERJ145 was returned. Aeromexico mainline also took delivery of three new 737-800s in 2012 while an older 737-800 was returned. Aeromexico mainline currently operates a fleet of 45 737-700/800s along with its 11 widebodies while Aeromexico Connect currently operates a fleet of 60 regional jets. Aeromexico fleet: 4Q2012 vs 4Q2011 Source: Grupo Aeromexico
Aeromexico Connect recorded a 7% increase in scheduled domestic traffic in 2012 to 5.5 million passengers, according to Mexican DGAC data. Aeromexico mainline saw only a 1% increase in scheduled domestic traffic to 5.0 million passengers. Aeromexico Connect also recorded a 61% increase in scheduled international traffic in 2012 to 653,000 passengers while Aeromexico mainline recorded a 3% increase in scheduled international traffic to 3.3 million passengers. As a result the total Grupo Aeromexico scheduled domestic traffic only grew by 4% in 2012 from 10.2 to 10.6 million passengers while the group's scheduled international traffic grew at a 10% clip to 3.9 million passengers. Aeromexico was able to grow its share of Mexico's international market as the total international market expanded by 7% in 2012 to 27.1 million passengers (including 21.2 million passengers carried by foreign carriers). Aeromexico, however, saw its domestic market share shrink in 2012. Mexico’s total domestic market grew by 10% to 28.1 million passengers, leaving Grupo Aeromexico with a 38% share of the market compared to a 40% share in 2011.
17
Mexico domestic market share (% of scheduled passengers) by carrier: 2012
Source: Mexico’s DGAC
Mr Conesa said the group aims to recapture a 40% share of Mexico’s domestic market in 2013. He is confident this can be achieved despite only a marginal increase in domestic capacity from Aeromexico and despite the fact the overall market is expected to grow in the high single digits. Mr Conesa explained the group will focus more on load factors and lower fares if necessary to drive up domestic traffic. He said there is particularly room for higher loads on flights to the seven domestic stations Aeromexico added in 2012. “We will change the strategy a little bit and be more aggressive with yields to have better load factors,” he added. Such a strategy could result in more intense competition, particularly as Mexico’s three LCCs will almost certainly expand faster domestically than Aeromexico in 2013. For example, Volaris, which grew its domestic traffic by 25% in 2012, is planning to again grow capacity by about 20% in 2013 with a focus on the domestic market.
Aeromexico is bullish on Mexico’s economy The ultimate success of Aeromexico’s more aggressive domestic strategy could hinge on how the Mexican economy performs in 2013. Mexico’s economy, which grew by about 4% in 2012, is expected to grow by another 4% in 2013. If the economic growth figures hold up and inflation stays low, domestic demand should increase sufficiently to support higher load factors from Aeromexico as well as significant capacity increases from Mexico’s three LCCs – Volaris, Interjet and VivaAerobus. Mr Conesa is bullish on Mexico’s economic outlook and pointed out that the new policies being implemented by the country’s new president is expected to lead to a higher growth rate in the medium-term. “GDP growth did de-accelerate slightly in the fourth quarter however Mexico’s outlook remains strong,” he said. Aeromexico has the flexibility to accelerate expansion in 2013 should economic conditions be even better than expected as it has several aircraft with leases expiring. The group also has the
18
flexibility to cut capacity should market conditions deteriorate and shrink its fleet below the current level of 116 aircraft.
Change in ownership structure should have positive impact Mr Conesa is also optimistic the recent changes in Aeromexico’s ownership structure and board will have a positive impact on the group. Aeromexico announced on 12-Feb-2013 that an affiliate of Mexican bank Banamex had sold an additional 20% stake in Aeromexico to a group of Mexican investors led by Eduardo Tricio. Banamex acquired Aeromexico in 2007, when the airline group was privatised, and had earlier sold a portion of its stake as part of the group’s Apr2011 initial public offering. Banamex is now left with only a 16% stake in Aeromexico. Mr Tricio, who has been a shareholder in Aeromexico alongside Banamex since 2007, has been appointed Aeromexico’s new chairman. Mr Conesa pointed out that Mr Tricio has in-depth knowledge of Aeromexico and his investor group also has extensive experience with Mexican business and industry, which Aeromexico can now benefit from. “The new ownership, which has a longer term view, will provide additional dynamism to complete important projects, adding more value to our company,” Mr Conesa said. Mr Conesa would not elaborate on which projects or initiatives will come up for board approval in 2013. But the group should now be better positioned to respond to changes in Mexico’s dynamic market. “Certainly some things will happen. We expect them to be on the positive side. As we now have an investor with a longer term view, the projects we have in the pipeline will be implemented faster,” Mr Conesa explained. “There is no change in terms of strategy but certainly there will be changes regarding certain projects we are looking for.”
Aeromexico should be able to extend recent string of profits Aeromexico enters 2013 with a bright outlook. While the group has seen its profits drop since the peak in 2010 and early 2011, it has been in the black for three consecutive years – a noteworthy achievement for the historically unstable Mexican airline industry. Aeromexico should be able to continue to generate profits and cash in on its leading position in Mexico’s domestic and international markets. The upcoming arrival of the 787, and later the 737 MAX, will improve operating economics and help cement Aeromexico’s leading position in the Mexican market. There will be challenges, including from fast-expanding LCCs. But Aeromexico has the strategy and initiatives in place to pursue modest and profitable growth.
19
Currency conversion used: USD1=MXP12.68 BACKGROUND INFORMATION Grupo Aeromexico financial and operational highlights: 2012 vs 2011 and 4Q2012 vs 4Q2011
Source: Grupo Aeromexico
Grupo Aeromexico financials: 2012 vs 2011
20
Source: Group Aeromexico
21
AviancaTACA
Key Data Fleet and Orders AviancaTACA Fleet Summary: as at 10-Apr-2013 Aircraft Total: Airbus A318-100 Airbus A319-100 Airbus A320-200 Airbus A321-200 Airbus A330-200 Airbus A330-200F ATR 42-300 ATR 42-320 ATR 72-212A(72-600) Beech Aircraft Corporation BEECHA90KINGAIR Boeing 767-200ER(F) Boeing 767-300ER Boeing 767-300F Boeing 787-8 Cessna Aircraft Company CESSNA208B Dornier DO328-110 Embraer ERJ190-100IGW(AR) Fokker F-27-050-300 Fokker F-28-0100 Short Brothers SD3-60-100 Short Brothers SD3-60-200
In Service 158 10 29 53 5 10 2 1 4 0
In Storage 4 0 0 0 0 0 0 1 0 0
On Order 49 0 6 5 6 0 2 0 0 15
1 4
0 0
0 0
1 1
0 0
0 11
0 0
2 12
0 0 15 0
0 0
10 1 1 0
0 0
0 0 1 2
0 0 0 0
Source: CAPA Fleet DatabaseSource: CAPA Fleet Database
AviancaTACA projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
22
Route area pie chart AviancaTACA international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Top routes table AviancaTACA top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
23
Premium/Economy profile Avianca schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Share price 2012/2013
Source: CAPA - Centre for Aviation and Yahoo! Financial
24
Avianca-TACA primes for re-branding and intensifying competition with LATAM Avianca-TACA will come full circle during 2H2013 as its various airlines unify under the Avianca brand more than three years after the Avianca-TACA merger kickstarted consolidation in Latin America and drove the decision by LAN and TAM to form what is now the region’s powerhouse LATAM Airlines Group. During 2013 the competition between the two largest airline groups in Latin American will only intensify in the markets where they already compete fiercely – Colombia, Ecuador and Peru. With Avianca-TACA completing its merger more than two years ahead of LATAM, AviancaTACA has the benefit of harvesting a combined network whereas LATAM is just beginning to ferret out the benefits of its newly combined network resources. In addition to continued competitive pressure from LATAM during 2013 Avianca-TACA will also encounter some new competition on international flights from Ecuador and some pressure from startup VivaColombia in its largest market Colombia. At the same time Avianca-TACA continues to battle infrastructure constraints at its largest hub Bogota, which could result in further expansion at its Lima and San Salvador hubs.
Solid financial performances supply Avianca-TACA with a robust foundation Avianca-TACA began 2013 on strong footing after recording for 2012 its second annual profit as a combined entity. Avianca-TACA Holding reported on 08-Mar-2013 a nearly 74% increase in net profit to COP352 billion (USD195 million). Operating revenues increased 8% to COP7.6 trillion (USD4.2 billion) while Avianca-TACA’s operating profits reached COP507 trillion (USD281 million). The company’s traffic and capacity each grew at a 10.3% clip, which produced a healthy 80% load factor. The combined entity transported 23 million passengers during 2012, which is a 27% increase from the 18 million passengers Avianca-TACA carried in 2010, the year the two airline groups completed their merger. The figures include Colombia-based Avianca, El Salvador-based TACA and subsidiaries in Central America, Ecuador and Peru but exclude Avianca Brazil, which is not part of Avianca-TACA Holding but is entirely owned by Avianca-TACA's largest shareholder, Synergy Aerospace. Avianca-TACA annual passenger growth: 2010 to 2012
Note: includes airlines under AviancaTACA Holding Source: CAPA – Centre for Aviation and company reports
25
Unifying all the carriers under the more recognisable Avianca brand during 2H2013 will also drive benefits for the combined entity as TACA-branded carriers in Costa Rica, El Salvador and Peru are rebranded. The group’s Ecuadorean subsidiary AeroGal will also transition to the Avianca brand. Once the rebranding is complete the combined entity will have a much easier time marketing and highlighting its network strength under a single name, which will eliminate any confusion passengers might currently experience when travelling on the numerous subsidiaries presently operating in the Avianca-TACA Group.
Competitive pressure in Colombia will intensify Avianca-TACA holds positions of strength in Latin America’s third, sixth and ninth largest markets of Colombia, Peru and Ecuador. The company also feeds into the largest market Brazil through sister carrier Avianca Brazil. Avianca’s status as Colombia’s flag carrier results in the carrier commanding a leading status in the market. According to Colombian CAA data, Avianca captured 61% of Colombia's domestic passenger market in 2012 and 41% of the country's international market. The Avianca subsidiary transported 11.5 million domestic and 3.5 million international passengers in 2012, representing increases of 18% and 15% respectively over 2011, according to Colombian CAA data. Avianca recorded 82% load factors for both its domestic and international operations. When including its sister carriers, Avianca-TACA captured 51% of Colombia's international passenger market in 2012. The group's subsidiaries from Costa Rica, Ecuador, El Salvador and Peru all serve Colombia along with Bogota-based Avianca. Avianca currently accounts for about 55% of total seat capacity in Colombia, according to Innovata data. This excludes capacity from other carriers in the Avianca-TACA Group. Colombia systemwide capacity share (% of seats) by carrier: 11-Mar-2013 to 17-Mar-2013
Note: LAN Airlines capacity includes capacity from LAN Colombia and other LAN subsidiaries Source: CAPA – Centre for Aviation and Innovata
26
But during 2013 Avianca-TACA will see increasing pressure from LAN Colombia now that it has completed the restructuring of Aires, which LAN purchased in late 2010 and rebranded as LAN Colombia in late 2011. LAN Colombia has since focused primarily on the Colombian domestic market and transported less than 100,000 international passengers in 2012. But LAN Colombia is focusing on international expansion in 2013 and recently placed into service its first widebody aircraft, a 767, which will be used from 01-Apr-2013 to replace A320s on the Bogota to Sao Paulo and Miami routes. Avianca actually benefitted from the Aires overhaul as LAN wiped out Aires’ junk pricing and levelled some rationality in the Colombian domestic market. Both Avianca and LAN Colombia also benefitted from Copa Colombia turning its focus onto international routes, thereby reducing capacity in the Colombian domestic space.
Avianca faces new competitor in VivaColombia The May-2012 launch of low-cost carrier VivaColombia, who has professed to “ridiculously low fares”, could upset some of the rationality of the Colombian domestic market. Unlike Aires, VivaColombia does not have a large presence at Bogota or on trunk routes. But Avianca has responded to VivaColombia’s market entry by operating some of the secondary markets opened by VivaColombia and matching the LCC’s fares. While Avianca can absorb offering unsustainable fares for a period of time, it will need a better long-term strategy to compete with Colombia’s first low-cost carrier, which is backed by investment firm Irelandia who is also an owner of Mexican low-cost carrier VivaAerobus. Irelandia is now examining replicating the low-cost Viva model elsewhere in Latin America, which could result in new competitive pressures for Avianca-TACA. Further competition from LAN Colombia is also expected as LAN Colombia is now looking at using its 767 fleet to launch New York, a market served by Avianca, or Los Angeles, which would re-open a market abandoned by Avianca some years ago. It will be interesting to watch Avianca’s reaction to LAN’s potential opening of a market from Colombia to the US west coast given all of Avianca’s US flights are operated to the US east coast. TACA operates service from its San Jose, Costa Rica and San Salvador hubs to Los Angeles, giving the Avianca-TACA Group US west coast links to two of its hubs for onward connectivity to the company’s combined network, including Bogota. Avianca and all carriers serving Bogota continue to face operational constraints at the airport, which has resulted in Avianca-TACA looking at ways it can leverage its other large hubs in Lima, San Jose and San Salvador.
Lima emerges as a key hub for Avianca-TACA Avianca-TACA has already moved to bolster its international service from Lima by positioning in late 2012 two Airbus A330 widebodies for operation by TACA Peru to up-gauge flights to Bogota, Buenos Aires and Miami. It is the first time Avianca-TACA has positioned widebodies outside of Bogota, and shows the company is working to leverage the combined network, with Lima emerging as a strategic north-south hub for intra-Latin America routes.
27
TACA Peru is now the second largest carrier in Peru’s international and domestic market, following rapid domestic expansion during the last couple of years. Since 2010 the carrier has introduced service to nine domestic markets in Peru, taking advantage of the country’s rapid growth. In 2012, TACA Peru captured 13% of Peru's domestic market and 12% of the country's international market, according to Peruvian DGAC data. The carrier flew 900,000 domestic passengers and 800,000 international passengers, representing increases of 107% and 50% over 2011. LAN Peru remains the dominant carrier in the Peruvian market, accounting for 62% of domestic and 33% of international passengers in 2012. Based on current capacity data from Innovata, LAN accounts for 53% of total capacity in Peru compared to 19% for TACA. (Both sets of data exclude sister carriers in the Avianca-TACA and LATAM groups.) Lima serves as a highly strategic point for both airline groups as it has become a focus for LATAM in connecting north-south traffic flows from North America and helps AviancaTACA penetrate some markets deeper into South America than those it offers from Bogota and San Salvador. Peru systemwide capacity share (% of seats) by carrier: 11-Mar-2013 to 17-Mar-2013
Source: CAPA – Centre for Aviation and Innovata
New competition in Ecuador Avianca-TACA has a presence in Ecuador through Ecuadorean subsidiary AeroGal along with service operated by Avianca and TACA. But the country’s largest domestic carrier TAME is injecting new competition for Avianca-TACA on service from Quito to Bogota, breaking a monopoly held by Avianca, and on Quito-Lima, which is served by Avianca-TACA and LAN.
28
While government-owned TAME is not a traditional low-cost carrier, it entered those markets in 2012 specifically to capitalise on their profitability and an opportunity to undercut fares. During 2013 it will be interesting to see how those particular markets evolve as TAME is Ecuador’s largest domestic carrier but both LATAM and Avianca-TACA also serve the domestic market through their respective subsidiaries LAN Ecuador and AeroGal. AeroGal currently accounts for 11% of total capacity in Ecuador, making it the third largest carrier behind TAME and LAN Ecuador, according to Innovata data. TAME accounts for a leading 33% of capacity while LAN accounts for 23%. (The AeroGal and LAN Ecuador figures exclude capacity provided by sister carriers in the Avianca-TACA and LATAM groups.) Ecuador systemwide capacity share (% of seats) by carrier: 11-Mar-2013 to 17-Mar-2013
Source: CAPA - Centre for Aviation & Innovata
While TAME holds a strong position in point of origin in Ecuador, it has little exposure in Bogota or Lima as it is just dipping its toes in international service. Even with government backing TAME faces a tough time competing with the network scale consolidation has afforded LATAM and Avianca-TACA. TAME is competing with both groups on service to their strategic hubs, which offer connections throughout Latin America, something TAME lacks as it just resumed offering international service in 2010.
Copa challenges Avianca-TACA’s strength in Central America Given LATAM’s subsidiaries in Argentina and Chile, the company naturally has an advantage in southern South America. But Avianca-TACA’s hubs in San Salvador and San Jose give it an advantage over LATAM in Central America. However, Avianca-TACA faces a formidable competitor in Central America as Copa has leveraged the geographical position of Panama’s Tocumen Airport as an optimal transit point for north-south traffic flows. Unlike the challenges Avianca-TACA faces in Colombia and to a lesser extent San Salvador, the Panamanian government has backed expansion at Tocumen. A new 12-gate concourse opened in 2012 and this year a new project is scheduled to commence that will eventually supply 20 additional gates. 29
Avianca-TACA capacity by region (% of seats): 11-Mar-2013 to 17-Mar-2013
Source: CAPA – Centre for Aviation and Innovata
Avianca-TACA also faces capacity constraints at San Salvador, which could further extend Copa’s advantage in Central America. But Avianca-TACA management has previously stated that it is optimistic there could be positive developments at San Salvador in the future.
Some holes exist in Avianca-TACA’s combined network As the history of Latin American aviation evolves, Avianca and TACA through their 2010 landmark merger will be credited for ushering in consolidation into the relatively young market. But while consolidation drives a certain level of rationality, like other global regions Latin America has its own nuances that drive a different set of competitive dynamics. The combined Avianca-TACA is a formidable competitor to the might created by LAN and TAM morphing into LATAM, but Avianca-TACA’s relative weakness in the Southern Cone to LATAM could create challenges in the future, as Argentina and Chile are the fourth and fifth largest markets in the region. Avianca-TACA does not have a measurable presence in that region, and its stature in the largest Latin American domestic market Brazil is somewhat limited. Sister carrier Avianca Brazil, while rapidly growing, still only accounts for a 5% share of the domestic market while TAM has a majority 41%. Despite some geographical weaknesses Avianca-TACA does have strategic coverage in Central and South America and also has the advantage of completing its merger 30 months ahead of LATAM, whose larger scope required closer scrutiny from regulators. After finally gaining approval in 2012 after a 21-month process to get the proper endorsement for their merger, LAN and TAM have just started studying how to maximise their combined network. While LATAM is the new powerhouse in Latin America, the combination of Avianca-TACA provides a formidable competitor if the company continues to sustain profitability and successfully leverages the key points in its network.
30
COPA HOLDINGS
Key Data Fleet and Orders COPA Fleet Summary: as at 10-Apr-2013 Aircraft
In Service
In Storage
On Order
Total: 69
0
27
Boeing 737-700
15
0
0
Boeing 737-800
42
0
27
Embraer ERJ190-100IGW(AR)
12
0
0
CAPA Fleet DatabaseSource: CAPA Fleet Database
COPA projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
31
Route area pie chart COPA international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Top routes table COPA top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
32
Premium/Economy profile COPA schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Share price 2012/2013
Source: CAPA - Centre for Aviation and Yahoo! Financial
33
Panama’s Copa on course for more industryleading profits and double-digit growth in 2013 Panama-based Copa continues to outperform nearly every airline group in the world, recording an operating profit margin of 17.9% for 2012 as profits increased by 5% to USD327 million. Copa has been consistently highly profitable since its 2005 initial public offering, with annual operating margins every year of at least 17%. During this period the average operating profit margin in the global airline industry has been in the zero to 4% range. Copa, which has more than tripled its annual RPKs since 2005, expects more double-digit growth and industry leading profitability in 2013. Panama has the fastest growing economy in Latin America and the region overall continues to have healthy GDP growth, fuelling demand for travel within the region. Copa is well positioned to cash in on the continued rapid growth in international travel within Latin America as Panama City is the largest intra-Latin America hub and, unlike most other airports in the region, is committed to expanding the infrastructure to keep up with Copa’s rapid growth trajectory.
Copa reports another year of healthy profits for 2012 Copa in 2012 saw a slight reduction in its margin compared to 2010 and 2011, when it recorded operating profit margins exceeding 20%. But the airline group continues to be able to grow profitably on the back of rapid growth in intra-Latin America traffic and keep intact its record of operating margins above the 17% mark. Copa annual operating profit margin: 2004 to 2012 2004 2005 2006 2007 2008 2009 2010 2011 20.6% 17.9% 19.5% 19.2% 17.4% 17.8% 20.5% 21%
2012 17.9%
Source: CAPA – Centre for Aviation & company reports
Copa revenues grew 23% to USD2.25 billion in 2012 as costs increased by 28% to USD1.85 billion, resulting in an operating profit of USD403 million. Revenues have more than quintupled since 2004, when Copa generated only USD400 million in revenues. The carrier grew RPKs by 23% in 2012, nearly matching a 24% growth in capacity. Copa’s 75.4% average load factor is much lower than its US peers. But the group is more focused on maintaining yields and its unusually low break-even load factor of 61%. Copa Holdings financial and operating highlights: 2012 vs 2011 and 4Q2012 vs 4Q2011
34
Source: Copa Holdings Note: Adjusted net income excludes fuel hedge losses and one-time items
Copa clearly benefits from relatively limited competition in the intra-Latin America market, where it is able to offer more city pairs and generally shorter transit times than the region’s other airline groups. It also benefits from virtually no competition from low-cost carriers as nearly all LCC capacity in Latin America is allocated to domestic markets while Copa allocates over 90% of its capacity to the international market. Panama City is served by only one LCC with three weekly flights to a destination Copa does not serve. Copa currently accounts for about 84% of seat capacity at Panama City, according to Innovata data. But it is Copa’s approximately 25% share of international capacity within Latin America and the Caribbean that is most important as Panama itself is a small albeit rapidly growing market with a population of less than four million. Its strong position in a growth market has allowed Copa to increase fares and pass on the higher price of fuel to passengers when necessary to maintain profit margins. Copa has consistently been able to avoid any significant impact to its bottom line when fuel prices rise because most of the markets it serves benefit economically from higher commodity prices, resulting in higher demand that is sufficient to absorb increases in fares and fuel surcharges.
Copa’s outlook for 2013 is again bright In reporting another year of strong profits on 06-Feb-2013, Copa painted a bullish outlook and said it expects its operating margin to return to the 18% to 20% range in 2013. But capacity growth will slow down from 24% in 2012 to 14% in 2013. ASKs are expected to grow by 17% to 35
18% in 1H2013, driven by the expansion from late 2012, while year-over-year capacity growth in 2H2013 will be only about 11%. Copa CEO Pedro Heilbron is confident the additional capacity will be absorbed given the continued positive economic indicators from Panama and the broader Latin America region. “Economic prospects for the region continue to be favourable,” he told analysts during a discussion of the group’s 4Q2012 results. Mr Heilbron added that Panama’s economy grew by an estimated 10% to 11% in 2012 and is expected to grow by a further 8% in 2013. Latin America’s overall GDP is expected to grow by almost 4% in 2013. “This should have a positive impact on the demand for our services, as we continue to expand and strengthen even more our network dominance for intra-Latin America travel,” he said. Unlike in 2011 and 2012, when Copa added 14 new destinations, Mr Heilbron said Copa will focus in 2013 on expanding capacity to existing markets. So far Copa has unveiled plans to add only one new destination in 2013, Boston, although a couple more destinations are under consideration. Boston, Copa’s eighth destination in the US and its 65th overall, will be served daily from 10Jul-2013. Mr Heilbron says he is “very optimistic” about the prospects of the Panama CityBoston route as the city is not currently well linked with Latin America. Copa will be the only Latin American carrier serving Boston, which has traditionally been only a gateway for services to Europe, the Caribbean and Canada until Japan Airlines became the airport’s first Asian carrier in 2012.
Copa steadily grows existing routes Copa has also already unveiled plans to increase capacity in 1H2013 to Orlando in Florida, Punta Cana in the Dominican Republic and Port of Spain in Trinidad. Orlando and Punta Cana will receive their fourth daily frequency while Port of Spain will be upgraded from seven to 12 weekly frequencies. Copa in recent years has been steadily adding frequencies in its existing markets as it adds banks of connecting flights at Panama City. The additional frequencies lead to more city pairs and reduced transit times, allowing Copa to further increase the advantage it has in the intra-Latin America market. Copa in 2012 added capacity in 24, or nearly 40%, of its destinations as it added almost 90 frequencies. In Dec-2012 capacity increases were implemented to six destinations: Bogota (six to seven daily flights), Cancun (four to five daily flights), Sao Paulo (three to four daily flights), Los Angeles (two to three daily flights), Washington Dulles (one to two daily flights) and Santa Cruz in Bolivia (one to two daily flights). Panama City-Bogota is Copa’s second largest route and connects its main hub with the smaller hub of subsidiary Copa Colombia. Bogota-Panama City is currently served with 92 weekly return frequencies. Only Panama City-San Jose (Costa Rica) is bigger, with 98 weekly frequencies. Cancun is one of four markets now served with five daily flights – the others being Lima in Peru, Medellin in Colombia and Santo Domingo in the Dominican Republic. 36
Copa Airlines top 10 routes based on weekly frequencies (to and from): 10-Feb-2013 to 17-Feb2013 Source: CAPA – Centre for Aviation & Innovata
Copa also has been expanding capacity by up-gauging frequencies. Copa in recent years has only been taking 737-800s, which it sees as the ideal aircraft given the maturation of most of its routes. Copa currently has an allnarrowbody fleet consisting of 57 737NGs and 26 Embraer E190s. As new 160-seat 737-800s come in Copa has been returning some of its smaller 124-seat 737700s while not changing the size of its fleet of 94-seat E190s. Copa still sees a need for -700s on some of its longest routes that the -800 cannot operate without payload restrictions and the E190 for thin regional routes. The re-engined 737 MAX would open up the possibility of bigger aircraft on its longer routes. But Copa, which operates some of the longest 737 routes in the world, has not yet ordered the 737 MAX or A320neo. Copa is now committed to purchasing another 30 of the current generation 737-800s, which will be used for a mix of replacing older 737NGs and for growth as the carrier plans to expand its total fleet to 102 aircraft by the end of 2015. Copa will expand its fleet by seven 737-800s in 2013, giving it 64 737NGs (46 737-800s and 18 737-700s) by year-end. The group expanded its fleet by 10 aircraft in 2012, when it took delivery of 13 additional 737-800s while returning one 737-800s and two 737-700s. Copa fleet plan for 2011 to 2015: as of Feb-2013
Source: Copa Holdings
37
Copa completes 18-month period of very rapid network growth Only two years ago Copa’s network consisted of 50 destinations. Copa has launched services to 14 destinations since Jun-2011, including nine in 2011 and another five in 2012. Mr Heilbron stated that Copa plans to focus on spooling up and improving the contribution to these 14 destinations before resuming rapid network expansion. The 14 new destinations have included an even mix of North America (Chicago, Las Vegas, Toronto), the Caribbean (Curaçao, Nassau and Montego Bay), Central America (Liberia in Costa Rica and Monterrey in Mexico) and South America (Asunción in Paraguay, Cúcuta in Colombia, Iquitos in Peru and Brasilia, Porto Alegre and Recife in Brazil). Copa tries to maintain a well-balanced network as an overwhelming majority of its traffic consists of transit passengers. With the addition of Boston, Copa’s network will include 31 destinations to the south in South America and 33 to the north, spread across North America (9), Central America/Mexico (11 excluding Panama) and the Caribbean (13). All but two of its 64 destinations are linked to Panama City, with the other two only served with domestic flights from Bogota. Copa Airlines network: as of Feb-2013
Source: Copa Airlines Note: includes flights operated by Copa Colombia
38
Unlike larger Latin American airline groups, Copa is focused almost entirely on international traffic within the Americas. Copa is in one domestic market, Colombia, where it has been steadily reducing capacity in recent years to avoid competition from Avianca and LAN Colombia. Based on Colombian CAA data, Copa saw its domestic traffic drop by 19% through the first 11 months of 2011 to 1.4 million passengers, giving it only an 8% share of Colombia’s domestic market. Copa, however, grew its international traffic in Colombia by 25% through the first 11 months of 2012 to 1.4 million passengers. Copa is the second largest international carrier in Colombia, accounting for 17% of international traffic through the first 11 months of 2011. Mr Heilbron said Copa foresaw a challenging domestic market and reacted by focusing more on increasing capacity from Colombia to its Panama hub. Copa currently links nine cities in Colombia with Panama City and also operates some niche point-to-point international routes from Bogota. Over 90% of Copa’s international seat capacity is currently allocated to Panama City.
Panama City is Copa's main advantage Copa is keen to continue to exploit Panama City’s position as the leading hub for intra-Latin America traffic. While Copa is much smaller than leading Latin American airline groups LATAM and Avianca-TACA, it currently has as much intra-Latin America international capacity as LATAM and has about 25% more intra-Latin America international capacity than Avianca-TACA, according to CAPA and Innovata data. Unlike its rivals, Copa is also almost entirely focused on one hub and only operates in one domestic market. The 61 destinations currently served by Copa from Panama City are over double the number of destinations offered by LATAM and Avianca-TACA at their intra-Latin America hubs in Bogota (Avianca-TACA) and Lima (LATAM and Avianca-TACA). This results in not only more city pairs but also more frequencies and shorter transit times on most of the city pairs which are served by multiple carriers. Copa, LATAM and Avianca-TACA combined account for nearly 70% of intra-Latin America international capacity with the remaining 30% provided mainly by airlines carrying point-to-point rather than connecting passengers. Unlike LATAM and Avianca-TACA, Copa does not operate long-haul services to Europe. But by focusing entirely on the intra-Latin America market its exposure to weaker economies abroad is limited and its all-narrowbody fleet allows for a lower cost structure. Copa’s strong relationship with United and its membership in Star Alliance, which it formally joined in Jun-2012, allows it to offer a virtual global network without worrying about the economic downturn in Europe. Intra-Latin America has been one of the fastest growing markets in recent years. Latin American and Caribbean Air Transport Association (ALTA) reported 9.5% intra-Latin America RPK growth for 2011 (international only) and 8.2% growth (both domestic and international) for 2012. As intra-Latin America traffic continues to grow, Copa and to a lesser extent its two larger rivals are well positioned for more profitable growth. The intra-Latin America market consists of hundreds of small but fast-growing city pairs which cannot easily support non-stop service, giving Copa an advantage given the strength of its 39
network. Such market dynamics means few airlines will be able to match Copa’s network and make it difficult for LCC penetration as low-cost carriers typically operate on point-to-point rather than network models. Copa also has a huge advantage in that Panama recognises the value of aviation to its economy and continues to invest in airport expansion. Tocumen Airport opened a new concourse in 1H2012, providing 12 additional gates for a total of 34. The airport has already started planning further terminal expansion, with work expected to begin in 2013. Mr Heilbron said the new project, which includes 20 additional gates, should be completed within four years. Tocumen has more air bridges than other Latin American hubs, a status it seeks to maintain. With other leading Latin American airports such as Bogota well behind the growth curve, Panama along with its hometown carrier is poised to maintain its current infrastructure advantage. After recording several consecutive years of profitable growth, Copa is not about to slow down. Market conditions continue to be in its favour. There is little reason to believe it cannot maintain its record of remarkable accomplishments in an otherwise challenging industry. BACKGROUND INFORMATION Copa Holdings annual RPMs: 2008 to 2012
Source: CAPA – Centre for Aviation and company reports
40
Copa Holdings monthly RPMs: Jan-2010 to Jan-2013
Source: CAPA – Centre for Aviation and company reports
41
GOL
Key Data Fleet and Orders GOL Fleet Summary: as at 10-Apr-2013 Aircraft
In Service
In Storage
On Order
129
1
128
31
0
0
Boeing 737-700(ETOPS) 5
0
0
Boeing 737-8
0
0
60
Boeing 737-800
93
0
68
Boeing 767-200ER
0
1
0
Total: Boeing 737-700
Source: CAPA Fleet Database CAPA Fleet DatabaseSource: CAPA Fleet Database
GOL projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
42
Route area pie chart GOL international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Top routes table GOL top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
43
Premium/Economy profile GOL schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Share price 2012/2013
Source: CAPA - Centre for Aviation and Yahoo! Financial
44
Gol pledges a financial turnaround as it records a second consecutive annual loss, of USD745 million Brazil’s second largest carrier Gol was unable to turn its fortunes positive in 2012 and actually widened its loss for the year. Despite its attempts to combat the cooling Brazilian domestic market through marked capacity cuts and turning some of its attention to international services, Gol recorded a BRL447 million (USD222 million) loss for 4Q2012 and a BRL1.5 billion (USD745 million) negative result for the full year. Gol believes the changes it has made with respect to its domestic supply and various costcontainment schemes should produce a positive operating result for 1Q2013. But the carrier made similar pronouncements during 2012 as it recorded four quarters of unprofitability, so the pressure is mounting on management to put some grit behind a pledged turnaround. Unlike its major rival TAM, which is now part of the powerful LATAM Airlines Group, Gol does not have the benefit of large network to help it diversify from areas of weakness to more robust regions. Both Gol and TAM during 2012 had to combat softening demand that resulted from Brazil’s slowing economy. During 2012 GDP growth in Brazil was revised down to 2% from 4%, and during 2013 Gol is projecting growth of 2.5% to a maximum of 3%. This compares to GDP growth of approximately 7.5% growth in Brazil during 2010.
Gol suffers same problems, different quarter The familiar problems Gol discussed throughout much of 2012 – rising fuel costs, currency fluctuations that resulted in a 17% devaluation of the BRL against the USD, a roughly 30% rise in airport fees and modest GDP growth – continued to plague its 4Q2012 and full-year 2012 results as its operating losses for 4Q2012 plummeted 954% to BRL358 million (USD177 million) and 270% for the full year 2012. The airline recorded a negative 17% operating margin for the last three months of 2012 and a negative 11% for the full year. Gol financial highlights: 4Q2012 vs 4Q2011 and FY2012 vs FY2011
Source: Gol
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Some of Gol’s negative results were attributed to added costs of BRL197 million that stemmed from the shuttering of Webjet, a regional carrier Gol purchased in 2011. Gol closed down Webjet’s operations in Nov-2012, folding the network into its larger domestic offering. At that time Gol grounded Webjet’s 20 remaining Boeing 737-300 Classic narrowbodies for pre-devolution maintenance. As of 25-Mar-2013 Gol stated three of Webjet’s 13 remaining leased -300s had been returned to lessors and the 10 remaining on lease should be returned by the end of 1H2013. Gol stated the sale of six of the aircraft is currently under negotiation. Gol's fleet as of 26-Mar-2012
Source: Gol
Capacity cutting leader in Brazil, reducing by 5.4% in 2012 - towards sustainability In an attempt to ease the effects of slower demand in Brazil Gol throughout 2012 continually revised its domestic capacity estimates and ultimately cut domestic supply by 5.4% for the year, eliminating 130 unprofitable flights from the combined Gol-Webjet network. During a 26-Mar-2013 earnings discussion Gol management declared the company was the capacity-cutting leader among Brazil’s largest carriers as domestic supply at Gol during 2012 fell 5.4% compared with a 1.1% cut at TAM and 32% growth at Azul and TRIP, two carriers in the process of merging. But Gol highlights that even Azul and TRIP, which have been growing rapidly during the last few years, began to moderate their growth beginning in the Mar-2012-Apr-2012 timeframe, which helped to drive just 2.7% ASK growth in Brazil’s domestic market, a marked decrease from previous years. Gol’s management is encouraged by the slower domestic capacity growth, as CEO Paulo Kakinoff remarked, the capacity discipline introduced in the domestic market is an “important sign that Brazil’s airline industry is underway to constructing a more sustainable environment”.
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Brazil domestic year-over-year supply and demand growth: 2010 to Feb-2013
Source: Gol
Operating data for the Brazilian domestic market: 4Q2012 vs 4Q2011 and FY2012 vs FY2011
Source: Gol
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Gol operating data: 4Q2012 vs 4Q2011 and FY2012 vs FY2011
Source: Gol
Gol believes its prudent capacity management helped to lay the foundation for a more stable environment in Brazil during 2012 as its yields began to stabilise during 3Q2012 as capacity rationalisation set in.
Gol's yields improved - but less than costs, inflated by the Webjet grounding Its unit revenue growth also began to grow year-over-year in 2Q2012. But the improvements did not cover the run-up in Gol’s unit costs, which excluding fuel and the charges related to the grounding of Webjet’s fleet increased roughly 16% during 4Q2012, and 10% for the full year 2012. Gol produced strong unit revenue growth year-over-year during 4Q2012 of 10.5%, and a decent 4.5% increase for the full year, but yields during 4Q2012 only increased 2.3% and 1% for the year, indicating the capacity cuts were not at that point producing strong pricing traction in the Brazilian domestic market. Some of the improvement in unit revenues is attributable to an increase in Gol’s ancillary product sales, which on a unit revenue basis increased nearly 22% yearover-year during 4Q2012 and 11% for the full year. Gol estimates revenues from its buy-on-board programme jumped 145% year-over-year during 4Q2012, and food for purchase is presently offered on about 50% of the carrier’s flights. Gol has taken measures to reduce its unit costs including a 15% reduction in its workforce (including Webjet), the grounding of Webjet’s less fuel-efficient 737-300s. Some network changes that include improved connections could also contribute to cost reductions as a result of potential improvement in turnaround times. Its championing of remote check-in, which reached a rate of 12% during 2012, should also deflect some of its airport staffing costs.
Brighter prospects during early 2013, planning 10% revenue growth
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During the first two months of 2013 Gol appeared to be reaping some benefits from its own capacity discipline and the overall reigning in supply in the domestic market place. Its yields grew 8% year-over-year in Jan-2013 and 17% in Feb-2013. The carrier has a set a goal of 10% unit revenue growth during 2013 and positive margin growth of 1% to 3%. It expects unit costs during 2013 to fall between BRL9.7 cents (USD4.8 cents) and BRL10.3 cents, an improvement over the BRL17.38 cent unit cost Gol recorded during 2012. Gol's yield performance: 4Q2011 to Feb-2013
Source: Gol
Mr Kakinoff buffered some of those projections by stating that the larger macroeconomic environment remains uncertain, and that if Brazil’s GDP is lower than projections, then Gol may need to revise its current revenue and cost guidance for 2013.
Gol is setting the bar high for a rebound, and will have far to fall if it fails Gol’s aggressive capacity cutting during 2012 relative to its peers did result in the carrier ceding market share to Avianca Brazil and Azul-TRIP, as Gol’s share of domestic traffic (including figures from Webjet) fell 4ppt year-over-year to 39%; meanwhile Avianca Brazil saw its share jump from 3% to 5% and Azul-TRIP recorded a 3ppt increase from 3% to 5%. TAM’s share remained flat year-over-year at 41%. Capacity cuts at Brazil’s largest carrier were not as deep as the reduction at Gol. TAM cut its ASK growth to about 1.1% year-over-year in 2012, but increased traffic by nearly 6%, which allowed it to raise its load factor by about 5ppt to 73.6%. Despite putting specific numbers behind its pledge of an improvement in unit revenue and costs during 2013, the reality is that Gol faces the same problems that triggered the weak performance it turned throughout 2012 – high fuel costs, uncertain demand and currency issues. The carrier has made some effort to diversify its network outside of the Brazilian domestic market, primarily with service to Miami and Orlando in the US during late 2012 through a one-stop service in Santo Domingo, Dominican Republic.
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Gol is hoping to capitalise on better demand, and presumably better yields, that international service to the US can deliver, but rival TAM and the largest carrier between the US and Brazil, American Airlines, each offer direct service between Brazil and Florida, without the stopover. Gol’s current schedule on its flights to the US also doesn’t allow for connections onwards to its more extensive domestic network, and there are no connection opportunities for Gol in the US beyond Miami and Orlando. But it seems as if Gol will attempt to stick it out with its less than ideal US-Brazil offering as the carrier declined to offer system-wide capacity guidance for 2013 due to its negotiations to increase its routes operating over Santo Domingo, company officials explained.
Gol is now more exposed than TAM to a slowing Brazilian economy With TAM now firmly entrenched in LATAM and the joint company’s keen focus on maximising network value, TAM is in a better position to successfully weather any further deteriorating economic conditions in Brazil since its aircraft operating within the Brazilian domestic sphere can be redeployed elsewhere. For that reason Gol is less shielded from the effects of its smaller domestic competitors that, despite slowing their historically rapid growth, will still continue expanding capacity. Gol faces a tough climb during 2013 if it is to rebound from a dismal financial performance during 2012. For the moment the number of sceptics of its plan are likely to outweigh the believers as the circumstances that drove the carrier deeply into the red remain largely unchanged. While Gol’s management assures improvements are underway, and the costly Webjet rationalisation is mostly out of the way, the carrier is placing its faith for a rebound in continued prudent capacity management. Gol’s plan is only executable if capacity rationalisation in Brazil continues. The prospect of continued sensibility in the domestic market place is as difficult to predict as a time period of when Gol will return to consistent profitability.
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BACKGROUND INFORMATION Variation in domestic supply among Brazil's three largest airline groups: 2010 to 4Q2012
Source: Gol
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LATAM Group
Key Data Fleet and Orders LATAM Fleet Summary: as at 10-Apr-2013 Aircraft Total: Airbus A318-100 Airbus A319-100 Airbus A320-200 Airbus A320-200NEO Airbus A321-200 Airbus A330-200 Airbus A340-300X Airbus A340-500 Airbus A350-900XWB Boeing 737-700 Boeing 767-300ER Boeing 767-300F Boeing 777-300ER Boeing 777F Boeing 787-8 Boeing 787-9 Bombardier DHC-8-201 Bombardier DHC-8Q-201 Bombardier DHC-8Q-402
In Service 320 3 55 143 0 10 20 5 0 0 6 42 10 8 4 0 0 1 9 4
In Storage 5 0 0 0 0 0 0 0 2 0 0 0 0 0 0 3 0 0 0 0
On Order 201 0 3 52 42 47 0 0 0 27 0 3 0 4 0 19 4 0 0 0
Source: CAPA Fleet DatabaseSource: CAPA Fleet Database
LATAM projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
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Route area pie chart LATAM international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Top routes table LATAM top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Premium/Economy profile LATAM schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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LATAM’s 4Q2012 yields are damaged by aggressive competitive expansion in the USBrazil market Competitive pressure in long-haul markets between the US and Brazil was a major driver in the 10.3% year-over-year decrease in yields during 4Q2012 for the powerful newly minted LATAM Airlines Group, which is the combination of Brazil’s leading carrier TAM and South American group LAN. The performance in long-haul markets is likely disappointing for the group as its performance in Brazil’s cooling domestic market improved during the last three months of 2012. In some ways the competitive pressure on long-haul markets from the US and Brazil will be short-lived as TAM and American Airlines are working to forge a codeshare partnership that will see the two historic rivals team up in the market now that LATAM has selected oneworld as its alliance of choice. Once all the regulatory approvals for the tie-up are in place, TAM will be able to benefit from onward connections in Miami and New York that it currently does not enjoy. Based on current schedules in Innovata (24-Mar-2013 to 30-Mar-2013) TAM and American presently account for 69% of the capacity between the US and Brazil. Brazil to United States (seats per week, one way): 19-Sep-2011 to 15-Sep-2013
Source: CAPA - Centre for Aviation and Innovata
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The decline in LATAM’s yields and corresponding 7% fall in passenger unit revenues were mainly attributable competitive pressure in its international market. Both LATAM and its international competitors introduced ample capacity on international routes as ASKs in LATAM’s international network increased 13% year-over-year during 4Q2012. LATAM Airlines Group change in select operating statistics: 4Q2011 vs 4Q2012
Source: LATAM Airlines Group
LATAM executives recently explained to analysts that both their company and other carriers introduced excess capacity in international service, particularly in the US-Brazil market, noting American and United added 16 weekly frequencies between the US and Brazil and LATAM’s capacity between the two countries increased about 22% year-over-year during 4Q2012. The result was carriers “becoming aggressive in their commercial conditions”, LATAM executives explained, which created pricing pressure in the markets. American’s during 2012 introduced direct flights from Miami to Manaus while also increasing frequencies between Miami and Belo Horizonte and Brasilia. The carrier also expanded weekly frequencies from Dallas to Sao Paulo. TAM responded by increasing frequencies from Miami to Belo Horizonte and Brasilia. The carrier also upgauged its Sao Paulo-Miami flights from 223-seat Airbus a330s to 362-seat Boeing 777-300ERs, a seat expansion of roughly 63%. TAM also introduced service between Rio de Janeiro and Orlando in Oct-2012, but later opted to cut the flight in early Apr-2013. It service from Sao Paulo to Orlando remains intact. LATAM executives assured that the company’s fortunes should improve on international service between the US and Brazil during 3Q2013, noting that is the timeframe of when the carrier expects to turn a positive result from the added capacity from Sao Paulo to Miami and New York.
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Company management also stressed that the planned codeshare with American Airlines, which is subject to approval from Brazilian authorities, was a significant element of its international network strategy going forward as the tie-up would allow TAM to improve connections at American’s hubs in Miami and New York JFK. Presently, TAM is limited in its offerings beyond those markets as its Star partner United has no presence in the robust Brazil-Miami market and serves the New York metro area from its Newark hub.
Lima remains as key connection point in the combined LATAM network LATAM has no plans to deter from building up its hub in Lima to build the market as a stopover to connect passengers from North and South America. The company will leverage the combined networks to funnel traffic through Lima. Now that the merger is complete LATAM can flow traffic from Brazil through Lima as well as passengers from other important Southern Cone markets of Argentina and Chile. Presently LATAM is focusing on changing flight times to improve connections in Lima, said company officials. While LATAM is keen to leverage its strength as Lima’s largest carrier, where it accounts for about 53% of the seating capacity, the market’s second largest airline Avianca-TACA began basing a widebody Airbus A330 jet in Lima during late 2012 to boost capacity between Lima and Buenos Airs and its hub in Bogota. A second widebody will be placed in Lima in 2013 to to expand capacity between Lima and Miami. Lima J Chavez International Airport capacity by carrier (% of seats): 25-Mar-2013 to 31-Mar2013
Source: CAPA - Centre for Aviation and Innovata
Lima is rising to a position of prominence in the networks of both LATAM and AviancaTACA as means to partially compete with Panama, where Copa enjoys a strategic advantage of connecting passengers between North and South America. Since both of Latin America’s largest airline groups now plan to bolster their connection capabilities in Lima, competitive pressure for 57
both companies is likely to intensify in the short term as Avianca-TACA works to strengthen its presence in the market and LATAM ensures its retains its commanding share.
A promising rebound in the Brazilian domestic market Pressure in LATAM’s international markets during 4Q2012 was somewhat counter-balanced by improvement in the company’s performance in the Brazilian domestic market, which was weak throughout the majority of 2012. Although TAM’s 4.2% reduction during 4Q2012 in ASKs was 11.3ppt below the 15.5% cut ushered in by its main Brazilian domestic competitor Gol (partially due to the shuttering of Gol’s subsidiary Webjet in Nov-2012), TAM’s traffic grew by nearly 12% while Gol recorded a 9% decline in its traffic. LATAM said it is working to improve revenue management within the different passenger segments in the Brazilian domestic market, with an emphasis on stimulating demand among price sensitive travellers. LATAM predicts it will continue to improve its performance in the Brazilian domestic market during 2013, and estimates a double-digit unit revenue increase year-over-year. LATAM Airlines Group operating performance year-over-year in the Brazil domestic market: Oct-2011 to Feb-2013
Source: LATAM Airlines Group
LATAM plans to reduce ASKs in the Brazilian domestic market by 5%-7% during 2013 as company executives stressed that capacity discipline is key to regaining profitability in Brazil. Gol’s planned capacity reduction is slightly more pronounced than its rival as it expects to cut domestic ASK growth between 8% and 10% in 2013. Both of Brazil’s largest carriers have declared that their fortunes in the domestic space will improve during 2013. Gol has joined its rival in predicting that its unit revenues will rise by double digits during 2013 and is encouraged that even smaller regional carriers including AzulTRIP and Avianca Brazil are slowing down their capacity growth. 58
Gol is encouraged that the domestic market will strengthen during 2013 as evidence by its 10% unit revenue growth in Jan-2013 and a 14% year-over-year increase during Feb-2013. The trends appear positive as the majority of Gol’s operations are centred in the Brazilian domestic market.
LATAM’s 4Q2012 profits are hurt by integration charges LATAM during 4Q2012 recorded a profit of USD8.5 million after recording USD21.9 million from transaction expenses and USD52.7 million in aircraft sales and redelivery costs. Factoring out those special items LATAM posted a USD115 million net profit even as revenues remained roughly flat at USD3.4 billion. LATAM Airlines Group financial results: 4Q2011 vs 4Q2012
Source: LATAM Airlines Group
Company executives estimate that LATAM should achieve USD250 million to USD300 million in merger synergies during 2013, and the group remains on track to achieve its full USD600 million to USD700 million synergy target in 2016. However, the group will incur certain integration expenses as it makes progress on its synergy goals. There is also an evaluation under way of the combined carrier’s fleet plan in response to the competitive and macroeconomic environment. Presently, the company’s projections indicate a combined fleet of 323 aircraft by year-end 2013, a decrease of four shells from year-end 2012.
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LATAM Airlines Group fleet projections: 2012 to 2015
Source: LATAM Airlines Group
LAN and TAM officially merged in Jun-2012, which means that the two companies are not terribly far along in the process of maximising their respective fleets and networks to really produce any meaningful results from the new LATAM Airlines Group. While there seems to be some miscalculation in the reaping the benefits of spooling-up the US-Brazil market, there are important pieces in place for LATAM to meet its synergy targets. With Brazil’s domestic market improving, TAM’s jump from Star to oneworld and the company’s leading position in Lima, benefits from the merger should surface in 2013. The usual risks of high fuel prices, currency fluctuation and aggressive competition could continue to pressure the group during 2013, but its heft and scope as the preeminent airline group in Latin America puts LATAM in a strong position to weather potential obstacles that could pressure its results.
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VIVA Group
Key Data Fleet and Orders VivaColombia Fleet Summary: as at 10-Apr-2013 Aircraft Total: Airbus A320-200
In Service 5 5
In Storage 0 0
On Order 0 0
VivaAerobus Fleet Summary: as at 10-Apr-2013 Aircraft Total: Boeing 737-300
In Service 20 20
In Storage 0 0
On Order 0 0
Source: CAPA Fleet Database
Route area pie chart Viva Group international capacity seats by region: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Top routes table VivaColombia top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
VivaAerobus top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Premium/Economy profile Viva Group schedule by class of seat - one way weekly departing seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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VivaAerobus and VivaColombia focus on domestic expansion as Irelandia ponders third Viva franchise VivaAerobus and VivaColombia are planning further expansion in the Mexican and Colombian domestic markets in 2013 while they remain separate entities without any network or operating synergies. But the two low-cost carriers could start exploring a closer partnership in 2014 as VivaAerobus looks to potentially join VivaColombia as an A320 operator and launch services to other Latin American countries. Meanwhile, Irish investment firm Irelandia Aviation, which owns stakes in VivaAerobus and VivaColombia, continues to study establishing a third Viva affiliate in a new Latin American market. With the Viva brand already established in Colombia and Mexico, and as the Brazilian market is currently over-saturated, smaller Latin American markets that lack any local LCCs are being studied. The Viva group could ultimately consist of several LCCs, with most of the carriers being small in size but enjoying economies of scale by being part of a pan-Latin American group.
Irelandia expected to remain with VivaAerobus after IPO VivaAerobus is the original Viva, having launched services in 2006 with investment from Irelandia and Mexican bus company IAMSA. Irelandia, led by former Ryanair director Declan Ryan, has remained with VivaAerobus for over six years despite the carrier struggling at times. Unlike its previous investments, Irelandia intends to stay invested in VivaAerobus after the carrier’s planned initial public offering (IPO), which highlights the firm’s commitment to continue developing the LCC market in Latin America. Irelandia decided to exit its investments in Singapore’s Tiger Airways and Las Vegas-based Allegiant Air following IPOs. Irelandia is now left with stakes in just two airlines – VivaAerobus and VivaColombia – and continues to scour the market for new opportunities in Latin America as well as other emerging markets. VivaAerobus and VivaColombia both have IPO strategies. But it is logical for VivaAerobus to go first as VivaColombia, which is also owned by IAMSA and Colombian partners along with Irelandia, only launched services in May-2012. VivaColombia chairman and part-owner Juan Emilio Posada told CAPA in Nov-2012 that its “IPO strategy is less urgent” and is “to be refined” as the carrier develops. VivaAerobus is aiming to have its IPO on the Mexican Stock Exchange in 2013, hoping to use the proceeds to accelerate expansion. But the timing is contingent on market conditions. Mexican LCCs Interjet and Volaris also have IPO strategies and have stronger positions in the Mexican market, which could impact investor appetite for VivaAerobus. Interjet failed in its original attempt for a listing on the Mexico Stock Exchange during tough market conditions in 2011 but plans to ultimately make a second attempt.
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The aborted IPO at Interjet in Jun-2011 followed a successful IPO at the Aeromexico Group in Apr-2011. The IPO at Aeromexico would likely not have been possible without the collapse of Mexicana in 2010, which left Aeromexico as Mexico’s only full-service carrier and significantly improved the outlook of Aeromexico as well as Mexico’s three LCCs.
VivaAerobus has had mixed success in its first six years VivaAerobus struggled through most of its early years as Mexico’s two other surviving LCCs, Interjet and Volaris, have expanded more rapidly. VivaAerobus currently operates a fleet of about 20 ageing 148-seat 737-300s while rival Interjet and Volaris each now operate a fleet of about 40 new A320 family aircraft. VivaAerobus accounts for a 13% share of Mexico’s domestic market, compared to 24% for Interjet, 20% for Volaris and 38% for the Aeromexico Group, based on passenger data for Nov-2012 from Mexico’s DGAC. VivaAerobus also competes with Interjet and Volaris in the Mexico-US transborder market but has struggled to gain a foothold in the US. The carrier currently only serves two destinations in the US, compared to five a year ago. It has tried and failed in several transborder routes over the years, having initially launched services to Austin in Texas from multiple Mexican destinations in 2008. VivaAerobus beat Volaris to the US market by one year and Interjet by four years but it is now by far the smallest Mexican carrier in the transborder market with a meagre 0.4% share of total capacity between the two countries. VivaAerobus, however, has succeeded in that it survived while two other LCCs that launched at about the same time as the Mexican market de-regulated – Avolar and ALMA – failed. The carrier also has succeeded at opening several new point-to-point domestic routes which were previously un-served. VivaAerobus has always followed the Ryanair model, primarily operating low frequency pointto-point routes and trying to stimulate demand in un-served or under-served city pairs through very low fares. It is a pure LCC model, purer than the model used by Volaris and much purer than the model used by Interjet, which targets business and upmarket leisure traffic with low density configuration 150-seat A320s.
VivaAerobus is largest LCC in Monterrey and has niche operation in Mexico City While smaller than Mexico’s other LCCs, VivaAerobus has built up a niche and gained traction in the dynamic Mexican market, particularly at its Monterrey headquarters. VivaAerobus now operates 20 domestic and two international routes from Monterrey, including nine low frequency routes that are not served by other carriers, according to Innovata data. VivaAerobus currently has about a 31% share of domestic capacity at Monterrey, second only to the Aeromexico Group’s 33% share. Monterrey is Mexico’s fourth largest airport after Mexico City, Cancun and Guadalajara. Like Volaris and Interjet, VivaAerobus also has benefitted from the collapse of Mexicana and Mexicana LCC subsidiary Click in Aug-2010. VivaAerobus’ original strategy was to bypass Mexico City with point-to-point routes, but the carrier adjusted this strategy in early 2010 and entered the Mexico City market. As a result of Mexicana’s collapse slots became available so VivaAerobus was able to rapidly expand its Mexico City operation. 65
VivaAerobus operates 14 domestic routes from its Mexico City base (including seasonal services) and currently accounts for 6% of domestic capacity at Mexico City compared to about 15% for Volaris and 29% for Interjet. While a modest operation, VivaAerobus has been able to build up meaningful presence at the capital serving niche routes such as Puerto Escondido (only served by turboprop operator Aeromar) as well as high frequency trunk routes to its Monterrey and Guadalajara bases. The carrier’s four largest routes are now at Mexico City – Monterrey, Cancun, Reynosa and Guadalajara. Mexico City is now the second largest of VivaAerobus’ three bases, smaller than Monterrey but larger than Guadalajara. VivaAerobus top 10 hubs/bases/stations based on weekly seat capacity: 07-Jan-2013 to 13-Jan2013
Source: CAPA – Centre for Aviation & Innovata
VivaAerobus top 10 routes based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013
Source: CAPA – Centre for Aviation & Innovata
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VivaAerobus opened its Guadalajara base in 2009 and now operates 12 domestic routes from the city. But as is the case with Mexico City VivaAerobus remains the fourth largest carrier in Guadalajara, accounting for 15% of domestic capacity.
VivaAerobus plans new base in Cancun as domestic capacity surges in 2Q2013 VivaAerobus is planning to open a fourth base in Jun-2013, Cancun, which is currently the carrier’s fourth largest destination. VivaAerobus now has seven domestic routes at Cancun, four of which are served less than daily. The additional base, which reportedly will initially include four 737-300s, will allow VivaAerobus to better serve its Cancun routes and open up potential new destinations from the beach resort. Cancun also has seen growth from Volaris over the last year as both Volaris and VivaAerobus have been focusing on stimulating a growth in demand to beach destinations. Volaris, like VivaAerobus, plans to focus capacity expansion on Mexico’s domestic market in 2013, which grew by about 11% in 2012 and will likely record double digit growth again in 2013. Volaris sees the US-Mexico market, which is dominated by US carriers as US carriers account for over 75% of capacity in the transborder market, as more challenging while there are plenty of domestic opportunities, particularly in the discretionary travel sector as more and more bus passengers are persuaded to fly. VivaAerobus for at least the short-term will likely only retain a small niche presence in the US market although it will look at more rapid US growth in 2014 and beyond. Domestic growth in 1H2013 will focus entirely or almost entirely on existing routes. VivaAerobus has not launched a new route since Jul-2012, when it added service to Cuernavaca from Cancun and Monterrey. It also has not yet announced any new routes for 2013, which indicate the carrier is focusing on adding capacity to existing routes through at least the first few months of the year. The carrier plans to offer a consistent 107,000 weekly seats in 2Q2013 (including 105,000 domestic seats), up about 26% from current capacity levels, according to Innovata data. Most of the capacity increase will be allocated to its Monterrey hub, where it will offer about 53,000 weekly domestic seats compared to about 39,000 currently. VivaAerobus weekly seat capacity: 07-Jan-2013 to 30-Jun-2013 Source: CAPA - Centre for Aviation & Innovata
VivaAerobus will also temporarily increase capacity over the Easter holiday in late Mar-2013 to about 120,000 domestic weekly seats. The carrier’s model of operating older aircraft give it the flexibility to utilise its fleet less during quiet months and spool up capacity during peak periods. Ryanair, which now parks a large portion of its fleet during the quiet winter months, and Allegiant, which Irelandia previously had an investment in, follow similar strategies. 67
VivaAerobus and VivaColombia expected to eventually operate common fleet VivaAerobus may have to adjust this strategy in 2014, when the carrier plans to start phasing out its 737-300s. VivaAerobus is currently evaluating new aircraft options and will most likely opt for second-hand A320s, which was the selection VivaColombia made in 2011 during its prelaunch phase. Having both Viva carriers operating the same type will allow for synergies and cost savings in such areas as maintenance, spare parts and training. The two carriers may also place a joint order for new-generation aircraft, most likely the A320neo, which would replace the current generation A320s as they come off lease at VivaColombia and potentially VivaAerobus. VivaAerobus envisions ultimately operating 50 aircraft, with proceeds from its IPO helping to fund the expected fleet renewal and expansion While it will focus on domestic growth in 2013, VivaAerobus plans to look at international expansion in 2014 both in the Mexico-US transborder market and to Latin America. Southbound services to Central America and South America, including Colombia, are likely as the carrier looks to promote the Viva brand in the region.
VivaColombia to focus on domestic market for the short to medium term VivaColombia also eventually plans to expand into the international market but will stay entirely domestic-focused for at least 2013 and likely 2014. Mr Posada stated that while international destinations are in VivaColombia's five-year plan it is in no hurry to operate internationally and will not expand into the international market purely for exposure. He pointed out that international flights are always more expensive as operating costs and taxes are higher. For example a flight from Colombia to a Caribbean destination is 60% more expensive than a similar length domestic flight to Santa Marta, a city on Colombia’s Caribbean coast. “We want to be very disciplined and operate the most profitable routes,” Mr Posada explains. “The glamour of flying international is not part of our DNA.” VivaColombia prefers its customers to take two domestic trips instead of one international trip as its model is to stimulate frequent travel with “ridiculously low fares” and then profit off ancillary sales. If passengers pay less for their tickets in theory they have more to spend on more frequent travel and on ancillaries when on board. Mr Posada said the carrier also wants to remain flexible when it comes to growing its fleet. It now operates five A320s, which is the minimum number of aircraft required for Colombian carriers. A sixth aircraft will likely be added at some point in 2013 but Mr Posada said the carrier is now focusing on consolidating its current five-aircraft operation. He said VivaColombia is an opportunistic acquirer of aircraft, similar to the aircraft acquisition strategy at VivaAerobus, and while it has a five year fleet plan it is “not anchored to a specific schedule”.
VivaColombia should capture a 10% share of Colombia’s domestic market in 2013 VivaColombia carried 400,000 passengers in its first six months of service and about 500,000 passengers in 2012. The carrier aims to carry two million passengers in 2013. Based on a projected domestic market of about 20 million passengers in 2013, VivaColombia should capture 68
approximately a 10% share of the domestic market this year. In Oct-2012, the last month the Colombian CAA reported traffic data, VivaColombia flew 85,000 passengers, giving it a 5% share of Colombia’s domestic market. Through the first 10 months of 2012, domestic passenger traffic in Colombia was up 15% to 15 million. More double-digit growth is likely in 2013 as VivaColombia continues to build up its operation. As the only LCC in a fast-growing market, there are huge opportunities to stimulate demand. While VivaColombia has entered some trunk routes such as Medellin-Bogota, it has taken a similar approach to its sister carrier in Mexico and opened several routes which were previously under-served or not served at all. In several cases flag carrier Avianca has responded by launching the same route and matching VivaColombia’s fares but Mr Posada said the result is that these markets have grown significantly with all carriers transporting more passengers. VivaColombia in Dec-2012 stated there has been 185% passenger traffic growth on the routes it operates while routes it doesn’t operate have only grown by 5%. According to Colombian CAA data for Oct-2012, the Bogota-Medellin trunk route that VivaColombia serves saw a 36% increase in traffic while Bogota-Barranquilla, a trunk route VivaColombia has not yet entered, traffic was up by only 5%. Not surprisingly the impact on smaller point-to-point routes has been more pronounced with passenger traffic up in Oct-2012 by 294% on Cartagena-Medellin, 187% on Cali-Medellin, 183% on Barranquilla-Medellin and 162% on Santa Marta-Medellin. VivaColombia currently serves 10 destinations. Over 80% of its capacity is allocated to its only base in Medellin, which accounts for its seven largest routes. But the carrier also operates several point-to-point routes bypassing Medellin and will eventually look to establish a second base. VivaColombia top 10 hubs/bases/stations based on weekly seat capacity: 07-Jan-2013 to 13Jan-2013
Source: CAPA – Centre for Aviation & Innovata
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VivaColombia top 10 routes based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013
Source: CAPA – Centre for Aviation & Innovata
VivaColombia has had to make some network adjustments, discontinuing some of its initial routes, and encountered reliability issues in its first few months. But the carrier’s on-time performance has improved in recent months and Mr Posada stated that financially “all indications are performing better than the business plan”. As Latin America’s third largest market after Brazil and Mexico, Colombia has plenty of opportunities for growth for all carriers despite the intense competition. The country’s economy and middle class is growing rapidly, creating ideal market conditions particularly for LCCs but also for the three main full-service carriers – Avianca, LAN Colombia and Copa Colombia. According to VivaColombia, 94% of Colombia’s 34 million people have never flown before but the carrier’s low fares and point-to-point routes are starting to give people an option to buses and increase the first time flier population. Mexico went through a similar movement after the launch of VivaAerobus and Volaris and before that Gol started a new trend in Brazil, where there are now more domestic air passengers than interstate bus passengers. Infrastructure and congested airports is a huge challenge in Colombia but VivaColombia’s focus on point-to-point routes that bypass Bogota should allow the carrier to grow until the situation in Bogota improves. Given the 100 aircraft that Mexico’s LCC industry is now supporting, it is not unfathomable to think that VivaColombia could at one point join VivaAerobus in operating a 50 aircraft fleet, particularly if it is Colombia’s only LCC.
Viva has potential franchises in Ecuador, Peru and Central America Viva as a group is now tiny, accounting for only 7% of total LCC capacity within Latin American. But the seeds are there for a much bigger group as Latin America has a need for more LCCs.
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With the recent consolidation in Brazil, which has seen Gol acquire Webjet and Azul acquire TRIP, there are now only six LCCs in all of Latin America. VivaAerobus and VivaColombia are the smallest carriers in this group, which also includes Gol, Azul, Volaris and Interjet. Virtually all of the region’s LCC capacity is allocated to just thee markets – Brazil, Mexico and Colombia. While two of Latin America’s other big markets are off-limits for political reasons to LCCs, Argentina and Venezuela, there are several smaller markets which could support smaller LCCs that are part of a bigger group. In these markets, such as Ecuador and Peru, it would be challenging for an independent LCC to carve out a sustainable niche but more feasible if the LCC is part of a group or umbrella. There is currently not a single LCC operating to or within Ecuador. In Peru the LCC penetration rate is 0.1% as there is only one LCC operating one route once a week (Spirit Airlines from Fort Lauderdale). Both markets, particularly larger Peru, have been growing rapidly in recent years. Peru also has a modest size domestic market with four full-service carriers. Colombia is also a large international market for both Ecuador and Peru, presenting synergy opportunities between VivaColombia and a potential VivaEcuador and or VivaPeru. Central America also presents potential opportunities for Viva. The intra-Central America market has extremely high fares as it is dominated by TACA and Copa. Central America consists of seven small countries but has a common market across five countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) permitting any airline from these countries to connect any two countries. As a result, there is potentially enough demand to support a LCC in one country that serves the entire region. There are only very limited domestic markets in Central America but the region as a whole when combined presents a reasonably sized regional market that currently consists of over 100,000 weekly seats and could be significantly larger through low fare stimulation. Costa Rica, the largest of the Central American markets, would be the most logical country for a local LCC. Costa Rica has a LCC penetration rate of 9%, which is significantly higher than the LCC penetration rate in other Central American countries. But all the LCCs serving Costa Rica come from North America including Mexico. There are no LCC services linking Costa Rica with other Central American countries or South America. There are only two LCC routes that connect a Central American destination with another destination in Latin America (Interjet from Mexico City to San Jose in Costa Rica and Guatemala City). The potential is enormous and Viva could be the solution.
The emerging Viva group has big ambitions under Irelandia Irelandia has a team led by ex-Tiger CEO and Irelandia partner Tony Davis looking at potential LCC opportunities in Latin America. Mr Davis has experience with the pan-regional group LCC model in Asia, a model that could potentially be adopted to unlock the LCC potential of Latin America’s still untapped markets. As CAPA’s airline strategy journal Airline Leader reported in Nov-2011: The cross-border LCC model pioneered in another emerging market, Asia, offers an enticing alternative for several of the Latin American markets not yet penetrated by LCCs. Malaysia-based AirAsia and Australia-based Jetstar have expanded and 71
continue to pursue further expansion by launching new affiliates or joint ventures with local partners. While technically separate entities from a regulatory perspective, the affiliates leverage the powerful brand of their partner and enjoy several important synergies such as common fleet, IT systems and websites. As more affiliates are launched, access to new domestic markets is gained and more dots within the region can be connected, resulting in a pan-regional network. Mexico’s VivaAerobus and its two major shareholders, the Ryan family-backed investment firm Irelandia Aviation and Mexican bus company IAMSA, have emerged as the first group ready to test out the cross-border LCC model in Latin America ... Viva could quickly emerge as a large pan-Latin America player, as all of the other low-cost carriers in the region are now entirely focused on their home markets. Irelandia, led by Declan Ryan, clearly sees the opportunity to strike first in virgin LCC markets throughout Latin America. With the iconic Ryan family as major shareholders in the Mexican and Colombian affiliates, Viva is well positioned to establish ventures across the region and become the first pan-Latin America LCC brand. With all of Latin America’s other LCCs focused entirely on their home markets of Mexico and Brazil, Viva could have first mover advantage in establishing LCCs in the rest of Latin America. There will be challenges, as there was initially in Asia. But it is just a matter of time before the challenges are overcome and the LCC revolution spreads to the rest of Latin America. Irelandia could be in the driver seat.
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Brazil
Key Data Fleet and Orders Brazil projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
Route area pie chart Brazil capacity seats per week by carriers: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Top routes table Brazil top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Seats share Brazil capacity seats share by alliance: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Brazil domestic growth slows in 2012 as AzulTRIP continues to take market share from Gol Domestic RPK growth in Brazil slowed to 6.8% in 2012, after growth of 15.9% in 2011 and 23.5% in 2010, and will likely remain in the single digits in 2013 as the country’s two major carriers continue to reduce capacity in response to challenging market conditions. But Brazil’s two other main domestic players, the new Azul-TRIP group and Avianca Brazil, will continue to expand and take market share away from the leading TAM and Gol groups. Azul-TRIP and Avianca Brazil have each seen market share gains of between 2 and 3ppt over the last year. Their gains have come at the expense of Gol, which has been cutting capacity and struggling financially after acquiring smaller low-cost carrier Webjet. Gol saw its share of the domestic market slip by about 4ppt in 2012 while TAM has been able to keep its share relatively stable despite reducing capacity by lifting its load factors.
Azul-TRIP market share reaches 15% as merger progresses Azul, which unveiled plans in May-2012 to merge with TRIP, captured a 14.5% share of the Brazilian domestic market in 2012, according to newly released RPK figures from Brazil’s ANAC. This includes a 10% share from Azul and 4.5% share from TRIP. Azul and TRIP combined captured only 11.8% of RPKs in Brazil’s domestic market in 2011, when they were still separate independent carriers. Brazil domestic market share (% of RPKs) by carrier: 2012 versus 2011
Source: CAPA – Centre for Aviation and Brazil's ANAC Note: *Gol figures include Webjet and Azul figures include TRIP. For comparison purposes these figures are combined for entire period.
Azul and TRIP in Nov-2012 received conditional preliminary approval from Brazilian anti-trust authorities to proceed with their planned merger. The carriers have already moved to a single reservation system and sales channel and have begun the process of integrating their operations under the Azul brand.
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The two carriers currently operate over 120 aircraft and serve a network of about 100 destinations, giving the new group the largest network in the Brazilian industry. Both Azul and TRIP have been growing quickly in recent years and continue to take delivery of additional Embraer E-Jets and ATR 72s at a rapid clip. Azul recorded 25% RPK growth in 2012 on a 27.9% increase in ASKs while TRIP recorded 47.2% RPK growth on a 41.1% increase in ASKs. TRIP traditionally has had the lowest load factors in the Brazilian industry while Azul has had some of the highest load factors since the LCC launched services in Dec-2008. While Azul’s load factor in 2012 slipped below 80% for the first time since 2009, to 79.3%, it was only .1ppt below load factor leader Avianca Brazil. TRIP saw its load factor improve from 65.2% to 68%, which is still the lowest among Brazil’s major carriers but the merger with Azul should lead to higher load factors across the TRIP network. Azul annual domestic RPKs, 2009 to 2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
Azul annual domestic load factors, 2009 to 2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
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TRIP annual domestic RPKs, 2008 to 2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
TRIP annual domestic load factors, 2008 to 2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
Azul and TRIP will continue to grow in 2013 albeit at a slightly slower clip. In the most recent month, Dec-2012, the duo grew RPKs by 10% and captured exactly a 15% share of the market. As Azul-TRIP continues to expand and as larger Gol and TAM continue to cut capacity, the Azul-TRIP market share could approach the 20% mark by the end of 2013. Only four years ago, in 2008, TRIP captured a 2.5% share of Brazil’s domestic market while a just-launched Azul captured less than 0.1%. In 2009, the two carriers combined captured only a 5.3% share.
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Azul and TRIP monthly domestic market share (% of RPKs): Jan-2010 to Dec-2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
Azul and TRIP monthly domestic RPKs: Jan-2010 to Dec-2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
Avianca Brazil market share reaches record high Older full-service carrier Avianca Brazil also has seen its market share rapidly increase since slipping under 3% in 2009 following a restructuring. Avianca Brazil, formerly known as Oceanair, resumed growth in 2010 and pursued even faster growth in 2012. Avianca Brazil captured 5.4% of Brazil’s domestic market in 2012, the highest ever figure for the carrier, compared to 3.2% in 2011. The carrier’s RPKs were up 82.3% compared to 2012. ASKs were also up 82.3%, resulting in an impressive 79.4% load factor for the second consecutive year. 78
Avianca Brazil is planning to slow down expansion in 2013 and keep the size of its fleet roughly flat after nearly doubling in size over the last two years from 18 to 34 aircraft. But Avianca Brazil is still expecting capacity growth of 33% in 2013 as much of the fleet expansion in 2012 occurred in the latter portion of the year. As a result, Avianca Brazil’s share of the domestic market should reach 7% in 2013. Already in Dec-2012 the carrier’s market share had risen to 6.5%. Avianca Brazil monthly domestic RPKs: Jan-2010 to Dec-2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
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Avianca Brazil monthly domestic market share (% of RPKs): Jan-2010 to Dec-2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC
Gol continues to lose market share despite acquisition of Webjet TAM has been able to maintain its status as Brazil’s largest domestic carrier despite Gol’s purchase of Webjet. After Gol initially unveiled plans in mid-2011 to acquire Webjet it appeared the Gol group would again leapfrog past TAM. But Gol, which was briefly the market leader in 2009 before losing that status to TAM in 2010, spent 2012 in cost and capacity cutting mode in a bid to return to profitability. Over the course of 2012 Gol several times revised downwards capacity plans for the year. At the end of Nov-2012 it shut down Webjet and moved the remaining Webjet fleet to Gol. In Dec-2012, the first month Webjet didn’t report separate traffic figures as it was no longer operating, Gol captured 34.4% of Brazil’s domestic market. In Dec-2011, Gol captured 35.1% while Webjet captured 5.9%. As a result the group has seen its market share slip year-over-year by almost 7ppt from 41% to only 34.4%. For the full year, Gol and Webjet combined captured a 38.7% RPK share in 2012 compared to a 43% share in 2011. Back in 2009 the two LCCs combined captured a 46% share. The Gol group will likely see its market share slip below 35% in 2013 as it continues to cut capacity. The carrier has said its capacity will be down between 5% and 8% in 1H2013 as the
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737-300 fleet previously operated by Webjet will be phased out, leaving the group with a smaller fleet consisting entirely of 737NGs. Gol’s capacity was down by 5.4% in 2012 while capacity at Webjet was down by 5.7%. Gol’s domestic RPKs were down by 3.3% in 2012, leading to a slight improvement in load factor to 70.4% but Webjet’s load factor dropped slightly to 73.2% as its RPKs declined by 7.6%. In Dec-2012, the first month without Webjet, capacity at the Gol brand was down by 9.5%. But when looking at the figures from a group perspective, capacity was down year-over-year by a sharp 21%. Gol annual domestic RPKs, 2008 to 2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC Note: excludes Webjet
Gol and Webjet domestic monthly RPKs: Jan-2010 to Dec-2012
Source: CAPA – Centre for Aviation and Brazil’s ANAC Note: No Webjet figures for Dec-2012 as Webjet ceased operation at the end of Nov-2012
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TAM capacity discipline pays off TAM also has shown capacity discipline over the last year and continues to cut its domestic operation. But it has had success in significantly increasing load factors which has allowed the carrier to maintain its market share and lead position. TAM was able to increase domestic RPKs by 5.9% in 2012 despite cutting domestic ASKs by 1.1%. As a result it was just about able to keep up with the overall industry growth of 6.8% while raising its domestic load factor by nearly 5ppt from 68.8% to 73.6%. TAM’s market share slipped only 0.4ppt from 41.2% in 2011 to 40.8% in 2012 – an impressive achievement given the aggressive expansion at Azul, TRIP and Avianca Brazil. In Dec-2012, TAM saw its domestic market share grow by 3.2ppt year-over-year from 40.5% to 43.7% despite a 3.7% reduction in ASKs as its RPKs were up 10.5% and its load factor soared by over 10ppt to 81.9%. This is a positive sign for TAM going into 2013 and shows the carrier should be able to keep its market share near the 40% mark in 2013 despite further capacity cuts. TAM has said it plans to cut capacity by 7% in 2013.
TAM continues to dominate Brazil’s international market TAM’s outlook is also much brighter than Gol as the carrier has a much bigger international operation. Demand for international services in Brazil, particularly to and from the US, remains relatively strong. Competition is less intense in international markets and on many routes demand is currently exceeding supply. The US is TAM’s main long-haul market and currently accounts for 43% of its international ASKs and 34% of its international seats, according to Innovata data. Currently TAM allocates 41% of its ASKs and 12% of its seats to the international market while Gol only allocates 12% and 5%, respectively. Gol and TAM are the only scheduled Brazilian international carriers as Avianca Brazil dropped its only international route, Sao Paulo-Bogota, in 2012 while Azul currently does not operate scheduled international services. TAM captured 89.4% of Brazil’s international market (includes only Brazilian carriers) in 2012, compared to 88% in 2011, based on ANAC international RPK data. TAM’s international RPKs were up 1.9% in 2012 on a modest 2.2% increase in capacity as the carrier’s international load factor dropped 0.2ppt to 81.3%. Gol captured only 10.3% of Brazil’s international market in 2012, compared to 10.6% in 2011. Its international capacity for the year dropped 4.9% while RPKs dropped 2.5%. Gol, however, has been growing its international operation in recent months, including launching scheduled services to the US in Dec-2012. In Dec-2012, Gol’s international ASKs were up 13.9% and this trend is expected to continue into 2013 as Gol starts to focus more on the international market given the challenges domestically. But Gol will need to improve its international load factor, which slipped to 55.4% in Dec-2012 and was only 64.2% for the full year. Gol faces a challenging 2013 as it continues to restructure. Conditions in Brazil’s domestic market, which Gol relies on more heavily than TAM, remain far from ideal and have cooled significantly since 2011.
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The era of high double-digit growth is gone but there are still plenty of opportunities Brazil, which is currently the world’s third largest domestic market after the US and China, recorded 15.9% domestic RPK growth in 2011, 23.5% growth in 2010 and 17.7% in 2009. The return in 2012 to single-digit growth for the first time since 2008, when RPK growth of 7.4% was recorded, is not surprising given the total domestic market has nearly doubled in size in only five years from 44 million RPKs in 2007 to 87 billion RPKs in 2012. Brazilian industry monthly domestic RPKs and ASKs: Jan-2000 to Dec-2012
Source: Brazil’s ANAC
There was bound to be a slowdown at some point given the huge capacity that the market has had to absorb in the post-Azul era. Brazil’s LCCs have already succeeded at persuading a majority of interstate bus passengers to take to the skies, leading to a huge increase in the portion of Brazil’s 200 million population that flies. Economic growth, particularly in Brazil’s middle class, has led to higher discretionary incomes, fuelling the huge growth in domestic travel since 2008. But there is a limit to the new sources of consumer spending and the growth in discretionary income. Brazil’s GDP growth in 2012 dipped below 2%, marking a further reduction after GDP growth slowed from 7.5% in 2010 to 2.7% in 2011. GDP growth is expected to remain a relatively moderate 3% in 2013. The impact of the cooling economy has particularly been felt on trunk routes, leading to the cuts at TAM and Gol. Secondary markets and point-to-point routes continue to see relatively faster growth in demand as these markets are less mature. Given their focus on secondary markets and point-to-point routes that bypass Brazil’s congested major airports, further capacity increases at Azul-TRIP should be absorbable. Gol and TAM are hoping their continued capacity restraints will lead to higher load factors and yields and therefore profitability while Avianca Brazil also starts to slow down capacity growth in hopes of becoming profitable. Brazil remains one of the world’s largest emerging markets and there are huge opportunities for carriers of all types. The consolidation the industry has seen over the last couple of years, leaving four major players that account for 99% of the market, should help lead to the restoration of profitability and a relatively bright medium to long-term outlook. While 2013 will likely see growth in Brazil’s dynamic aviation market stay in the single digits for the second consecutive year, double-digit growth could resume in the medium-term. A return of growth in the 15% to 25% range as seen in 2009 to 2011 is unlikely but such huge growth is not always healthy – for airlines and for infrastructure, which in Brazil is now buckling as the country struggles to get ready for the 2014 World Cup and 2016 Olympics. 83
Chile
Key Data Fleet and Orders Chile projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
Route area pie chart Chile capacity seats per week by carriers: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Top routes table Chile top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Seats share Chile capacity seats share by alliance: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Chile emerges as Latin America’s fastest growing market despite domination from LAN Chile has recorded 17% passenger growth for the second consecutive year, making it the fastest growing market in Latin America. The rapid growth in Chile is somewhat surprising as it is one of the more mature markets in Latin America and the market is dominated by one player, LAN, which can have a stifling impact on competition. But the small country of 17 million continues to support rapid increases in travel propensity, which is already the highest in Latin America, driven by a strong economy and Chile’s unusual geography. After recording flat traffic figures for 2009, Chile’s aviation market has grown by 57% over the last three years to 15.2 million passengers, according to Chilean Civil Aeronautics Board data. Growth in 2011 and 2012 was an impressive 17% while 2010 ended with 11% growth despite the impact of a devastating earthquake which struck Santiago in Feb-2010. Chile monthly systemwide passenger traffic and growth: Jan-2010 to Dec-2012
Source: Chile’s CAB
Chile annual passenger traffic (millions) and year-over-year growth (%): 2009 to 2012
Source: Chile’s CAB
Chile has Latin America’s fourth largest and fastest growing domestic market Chile’s domestic market has grown by 63% over the last three years from 5.1 million passengers in 2009 to 8.3 million passengers in 2012. The international market has grown only slightly more slowly, increasing by 47% from 4.7 million passengers in 2009 to 6.9 million passengers in 2012.
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Chile now has the fourth largest domestic market in Latin America, smaller than only the much more populated countries of Brazil, Mexico and Colombia. It has a bigger domestic market than three other more populated South American countries – Argentina, Peru and Venezuela. Passenger growth in Latin America’s six largest domestic markets: 2012 vs 2011 Source: CAPA – Centre for Aviation, Brazil’s ANAC, Mexico’s DGAC, Colombia’s CAA, Chile’s CAB and Aeropuertos Argentinas 2000 *Note: Mexico, Peru and Colombia data is for the first 11 months of 2012 because full-year 2012 data is not yet available. For Brazil, Chile and Argentina data is for the full year. All data comes from civil aviation authorities except for Argentina in which case the data comes from the country’s privately-owned airport operator.
Argentina, which has more than twice the population of neighbouring Chile, had six million domestic passengers in 2012, according to data from airport operator Aeropuertos Argentinas 2000. Peru, which is about 70% more populous than Chile, had 6.6 million domestic passengers through the first 11 months of the year, according to Peruvian DGAC data. Full year data is not yet available but Peru most likely ended 2012 with 7.2 domestic passengers. The relatively large domestic market in Chile is a reflection of Chile’s high spending power as it has the highest GDP per capita in Latin America – about USD17,000. Chile’s very long and narrow shape, which spans 4,300km from the desert by the Peruvian border to Antarctica, also makes it a natural aviation market.
LAN accounts for more than 75% of Chile’s domestic market Chile’s carriers are confident the domestic growth spurt seen over the last three years – which included 18.6% in 2012, 17.6% in 2011 and 18.1% in 2010 – can continue. LAN, which merged in mid-2012 with Brazil’s TAM to create leading Latin American airline group LATAM, reportedly expects its domestic traffic in Chile to increase by 15% to 20% in 2013. LAN recorded domestic traffic growth in Chile of 18% in 2012, matching the growth of the overall industry, according to Chilean CAB data. LAN captured a powerful 76% share of Chile’s domestic market. This includes a 29% share from LAN Airlines and a 47% share from the predominately domestic brand LAN Express. LAN Express carried just under 4 million domestic passengers in 2012, representing growth of 22%, while LAN Airlines carried 2.4 million domestic passengers in 2012, representing growth of 12%. LAN Airlines and LAN Express both operate under the LAN Airlines’ LA code although the LAN Express brand has a lower cost structure and different labour contracts. LAN Express was initially launched in 2001, taking over flights from Ladeco, which had been an independent Chilean carrier before being acquired by LAN in 1995. While LAN Express grew faster in 2012, almost all of the capacity the LAN group added to Chile’s domestic market in the 2008 to 2011 period came at the main LAN Airlines brand. In
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2008, LAN Airlines only transported 300,000 domestic passengers while LAN Express transported 3.3 million.
Chile’s Sky continues to grow rapidly Chile’s second largest carrier, Sky Airline, captured 20% of Chile’s domestic market in 2012, up from 19% in 2011. Sky was able to expand its market share despite the rapid growth at rival LAN by growing its domestic traffic by 24% to 1.7 million passengers. Chile domestic market share (% of passengers carried) by carrier: 2012
Source: Chile’s CAB
Chile’s domestic traffic (number of passengers carried) by carrier: 2012 and Dec-2012
Source: Chile’s CAB
Sky has grown rapidly since launching services in late 2001. Sky passed the 500,000 passenger mark in 2004, giving it at the time a 17% share of Chile’s domestic market. It passed the 1 million mark in 2010, giving Sky at the time a 19% share of Chile’s domestic market. 88
Sky also has been focusing the last three years on renewing its fleet, replacing its original 737200s with A320 family aircraft. The carrier, which serves 13 domestic destinations according to Innovata data, currently competes with LAN across all major trunk routes.
Chile’s PAL struggles to compete in scheduled market Chile’s third carrier, PAL Airlines, launched as a charter carrier in 2003. It expanded into scheduled services in 2009, primarily in the domestic market, and grew from 2009 to 2011. But PAL shrunk by 7% in 2012 as the overall market expanded significantly, carrying only 272,000 domestic passengers compared to 293,000 passengers in 2011. PAL captured only a 3% share of the domestic market in 2012, down from 4% in 2011. PAL has continued to shrink in recent months, carrying only 14,000 domestic passengers in Dec-2012 – a 43% reduction compared to Dec-2011 and giving it only a 2% share of the market. It is now barely larger than Chile’s fourth largest carrier, Aerovias DAP, which unlike Sky and PAL is a regional carrier and does not overlap with LAN. DAP, which operates within the Patagonian region of southern Chile, carried about 36,000 passengers in 2012. The challenge PAL has faced in competing with LAN domestically is highlighted in the load factor data reported by Chile’s CAB. PAL recorded a domestic load factor of only 35.4% in 2012. While this is the carrier’s highest domestic load factor since expanding into the scheduled domestic market, it is clearly not sustainable. PAL’s domestic load factor was only 29.2% in 2009, 25.4% in 2010 and 24.5% 2011. The improvement in 2012 came as PAL reduced ASKs by 32%. Chile domestic RPK, ASKs and load factors by carrier: 2012 versus 2011
Source: Chile’s CAB
The domestic load factor for the overall industry improved significantly from 70.9% to 75.2% as RPKs were up 18% on only an 11% increase in capacity. LAN Express and LAN Airlines both recorded load factors of 82% in 2012 while Sky recorded a load factor of 65.7%. Sky’s domestic load factor has been consistently in the mid to upper 60s over the last four years – a respectable level given the competition with LAN but likely not high enough for sustainable profits. LAN’s domestic load factor has been consistently above 80%, and as a result the carrier’s domestic operation has consistently been highly profitable while the country’s smaller carriers have struggled. PAL, which operates a small fleet of 737-200/300s, is particularly in a vulnerable position. The carrier only operates scheduled services to five domestic destinations. It has struggled to compete against LAN and has been more a nuisance rather than a serious competitor, filing a protest to 89
Chile’s anti-trust court TDLC against the LAN-TAM merger that resulted in a delay to the merger process. More recently PAL filed protests to try to block non-Chilean carriers from operating domestically.
Foreign carriers are free to compete in Chile’s domestic market Chile has opened up its domestic market to foreign carriers, hoping to attract new entrants and avoid the market from being stifled by powerful LAN. Uruguay’s Pluna briefly operated some domestic routes in Chile in 2009 and 2010 and again in 2012. But Pluna, which carried about 9,000 domestic passengers in Chile during 1H2012, ceased all operations in Jul-2012. Mexican carrier Global Air, also known as Aerolineas Damojh, entered Chile’s domestic market in 2012 and continues to operate a 737-200 in the country. But it only transported 21,000 domestic passengers in 2012, including 4,000 passengers in Dec-2012, giving it a 0.5% share of the total market. Swedish cargo carrier West Air also has taken advantage of Chile’s openness and started operating during 2012 a Bombardier CRJ200 freighter domestically, which allowed it to capture a 4% share of the domestic cargo market. But it will be nearly impossible for any carrier – from Chile or overseas – to become a significant player in Chile’s domestic market. The domestic market could potentially be big enough to support an LCC but the prospect of competing with LAN would likely turn off any LCC group that potentially considers a Chilean operation – such as Gol, Azul or VivaColombia/VivaAerobus. Competition with LAN already prompted Gol to suspended international operations in Chile in 2012, leaving the Chilean market without a single LCC. The fact Chile’s domestic market has been able to grow rapidly over the last decade with only a slight increase in competition shows the market can still expand despite having a dominant leading carrier. LAN has only seen its market share slip by 6ppt over the last decade, from 82% in 2003 to 80% in 2007 to 76% in 2012. LAN believes its cost structure and fares are low enough to support further growth, particularly among the portion of Chile’s 17 million people who have not flown before. LAN has said it carried about 1 million first time fliers in Chile during 2012. This trend will likely continue as Chile’s economy, which expanded by about 5% in 2012 and is expected to grow by another 5% in 2013, and the country’s middle class continues to grow. While almost the entire country is already covered by air, there are opportunities to continue growing on most existing domestic routes. In 2012, LAN Express recorded double digit growth on eight of its 10 domestic routes (see background information), giving LAN confidence there is room to pursue double-digit domestic growth again in 2013.
Chile sees strong international growth with LATAM controlling 67% of the market The strong economy will also likely drive further rapid growth in Chile’s international market. Outbound international travel has been growing as more and more Chileans have the income levels to holiday overseas. The outlook for the inbound travel market is also promising as Chile has become a major tourist and business destination.
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Chile’s domestic market overtook Chile’s international market in size during 2009 and every year since the domestic market has been growing at a faster pace. But Chile’s international market has also grown at an impressive clip since 2009, growing by 9% in 2010 despite a huge drop in traffic during March because of the late Feb-2010 earthquake, followed by 17% growth in 2011 and 16% in 2012. LAN, not surprisingly, is the leading carrier, capturing 61% of Chile’s international market in 2012, compared to 60% in 2011. The merger with TAM, which is the largest foreign carrier serving Chile, gives LAN and the new LATAM grouping a powerful 67% share of Chile’s international market. LAN recorded 18% international passenger growth in Chile in 2012 to 4.2 million passengers (excludes TAM). TAM, including the Brazilian carrier and its Paraguayan subsidiary, also recorded 18% growth in 2012 to slightly less than 400,000 passengers. As a result LATAM, which was formally established in Jun-2012, recorded 18% growth to 4.6 million passengers. LATAM therefore was able to surpass the 16% growth in the total international market and increase its market share by 2ppt. Chile-based LAN Airlines recorded 25% passenger growth in 2012 while LAN Peru and LAN Ecuador saw decreases and LAN Argentina’s traffic doubled on a low base. LAN often transfers international flights between its different affiliates so only the overall LAN figure is significant. TAM’s Brazilian carrier, TAM Lineas Areas, recorded 18% growth while the Paraguayan subsidiary TAM Airlines recorded 17% growth. Chile international market share by airline group: 2012 vs 2011
Source: CAPA – Centre for Aviation and Chile’s CAB Note: *Gol ended flights to Chile in Oct-2012, Pluna suspended all operations in Jul-2012 and Qantas launched flights to Chile in Mar-2012
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Chile international market share (% of passengers carried) by carrier: 2012
Source: Chile’s CAB
Chile’s international traffic (number of passengers carried) by carrier: 2012 vs 2011
Source: Chile’s CAB
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LATAM is the only airline group with a strong position in Chile’s international market as there are no other players with more than a 4% share. Two other leading Latin American airline groups, Avianca-TACA and Copa, only captured a 4% share of Chile’s market in 2012. American Airlines and Sky Airline also captured a 4% share while Aerolineas Argentinas, Air France and Iberia each captured 3% shares. There are currently only 13 airline groups serving Chile, including the smaller local airlines Sky and PAL.
Sky looks to become international player through codeshares and network expansion Sky currently serves four scheduled international destinations: Arequipa and Lima in Peru; Buenos Aires in Argentina; and La Paz in Bolivia. The carrier grew its international traffic by 28% in 2012 to 276,000 passengers (includes charter passengers). Most of Sky’s international expansion came in 2011, when international growth of 241% was recorded on a very low base. Sky is in a stronger position than smaller PAL both domestically and internationally. It has pursued a smart strategy of modest international expansion while forging partnerships with international carriers. Sky began codesharing with Avianca-TACA in 2011 and plans to start codesharing with Aerolineas Argentinas in 2013. Aerolineas and Avianca-TACA are two of LAN’s biggest rivals in the region. The partnerships are logical as it gives Sky some leverage in the Chilean market against powerful LAN while Aerolineas and Avianca-TACA gain domestic feed for its services to Santiago. While LAN and to a lesser extent Sky have some international flights from secondary Chilean cities, all foreign carriers in the Chilean market currently only serve Santiago. As LAN is in oneworld, it is logical for airlines from SkyTeam such as Aerolineas and from Star such as Avianca-TACA to use Sky to virtually expand their networks in the fast-growing Chile market.
Sky faces uphill battle as it tries to compete with LAN Sky, however, still faces a challenging future as independent carrier. There are very few remaining carriers in Latin America that are competing on major routes (rather than thin regional routes) and are not part of one of the region’s seven major groups. Sky may ultimately need to sell out to a larger airline group such as its partner Avianca-TACA. Sky’s hiatus in further expanding its international network since late 2010, when it added Buenos Aires and Lima, illustrated the challenges of competing against LATAM. Sky for example could have launched Santiago-Sao Paulo and would have been given slots at Sao Paulo Guarulhos from LATAM as part of a mitigation measure in the LAN-TAM merger. But Sky has not yet entered the market, leaving LAN and TAM as the only carriers in the second largest international route from Santiago. Brazil’s Gol previously served the route but stopped operating non-stop flights between Santiago and Sao Paulo in 2008 and in Oct-2012 also dropped one-stop services, leading to an even stronger position for LATAM. About 850,0000 passengers flew between Santiago and Sao Paulo in 2012. Only the Santiago-Buenos Aires route was larger, with nearly 1.2 million passengers.
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Santiago's international markets by passengers carried: 2012
Source: Chilean CAB data
LAN Airlines grew traffic on the Santiago-Sao Paulo route in 2012 by 74% to 505,000 passengers, according to Chilean CAB data. TAM grew its traffic on the route by 16% to 326,000 passengers. Santiago-Sao Paulo is now LAN Airlines’ third largest international route from Santiago (see background information) after Buenos Aires and Lima.
Santiago Airport sees rapid growth, prompting terminal expansion Santiago International Airport has seen rapid growth in recent years, prompting the airport to launch a terminal expansion project. The airport handled over 14 million passengers in 2012 and has seen traffic growth of nearly 60% since 2009. The airport is now operating over capacity but construction is expected to begin this year on a new multi-phase project which is designed to increase the airport’s capacity to about 29 million annual passengers. Santiago, which has a population of 5 million, handled 6.8 million international passengers and 7.4 million domestic passengers in 2012. Santiago accounted for 98% of Chile’s international passenger traffic in 2012 and 45% of Chile’s domestic traffic, according to Chilean CAB data.
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Santiago Airport monthly passenger traffic: Jan-2010 to Nov-2012
Source: CAPA – Centre for Aviation and company reports
Iquique, Easter Island, Antofagasta, Arica, Punta Arenas and Conception also have international airports but with limited services. Antofagasta is the second largest airport, handling 1.6 million domestic and 15,000 international passengers in 2012. Iquique, Puerto Montt and Calama are all roughly equal in size, each handling about 1.1 million passengers in 2012. Projects have been unveiled to expand all three of these airports. Santiago-Antofagasta is the largest domestic route from Santiago with about 1.25 million passengers in 2012. LAN accounted for over 75% of the market, with LAN Airlines carrying 550,000 passengers and LAN Express carrying 406,000 passengers. Sky carried 231,000 passengers on the route, giving it about an 18% share, while PAL carried 61,000, giving it a 5% share. Santiago-Antofagasta was Sky’s largest route in 2012 while it was the second largest for LAN Airlines. Santiago-Calama was the only other route with over 1 million passengers with LAN accounting for about a 74% share. LAN Airlines carried 696,000 passengers on the route in 2012, LAN Express 47,000, Sky 149,000 and PAL 80,000. Santiago-Calama was the largest domestic route for PAL and LAN Airlines in 2012 while it was the second largest for Sky.
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Santiago top 10 domestic routes by passengers carried: 2012
Source: Chilean CAB data
LAN has driven growth in Chile but the market needs more competition Santiago and Chile’s aviation market has benefited significantly from being the home of LAN, which started as a tiny carrier in a remote corner of the world before the company started pursuing a rapid pan-South America expansion strategy that included establishing passenger airline affiliates in four countries before merging with TAM, the biggest carrier in South America’s largest market. Chile’s market is poised for further rapid growth as LATAM continues to expand at several of its hubs. But the market could also benefit from more competition, particularly outside oneworld. TAM is expected to join LAN in oneworld, which would further grow oneworld’s share of Chile’s international market from 69% to an even more powerful 75%. Chile would also benefit from more low-cost carrier services as the market lost its only LCC in Oct-2012, when Gol dropped service on the Santiago-Buenos Aires-Sao Paulo route. The loss of Gol shows the challenges that Chile faces in attracting carriers in a market dominated by LATAM. While Chile’s aviation market will likely continue to grow at a rapid clip for at least the near to medium term, LATAM will likely continue to control three-quarters of the domestic market and two-third of the international market. Chile’s consumers would benefit from more competition but the overall relatively modest size of the market and LAN’s very strong position means new entrants are unlikely and the smaller carriers now serving the market face a challenging future.
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BACKGROUND INFORMATION LAN Airlines top 20 international routes based on passengers carried: 2012 vs 2011
Source: Chile’s CAB
LAN Express top 10 domestic routes based on passengers carried: 2012 vs 2011
Source: Chile’s CAB
Chile monthly passenger domestic traffic and growth: Jan-2010 to Dec-2012
Source: Chile’s CAB
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Chile monthly international passenger traffic and growth Jan-2010 to Dec-2012
Source: Chile’s CAB
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Colombia
Key Data Fleet and Orders Colombia projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
Route area pie chart Colombia capacity seats per week by carriers: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Top routes table Colombia top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Seats share Colombia capacity seats share by alliance: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Colombia's aviation market poised for more rapid growth in 2013, led by VivaColombia, Avianca & LAN Colombia recorded 15% growth in domestic passenger traffic in 2012 and should see more double-digit growth in 2013 driven partially by expansion at low-cost start-up VivaColombia. The Colombian international market also grew by 13% in 2012 and should see more rapid growth in 2013 driven partially by expansion at LAN Colombia. Colombia’s strong economy and growing middle class population provide favourable market conditions. The rise in Colombia’s LCC penetration rate, which has always been significantly lower than Latin America’s other two major markets, is also stimulating demand as VivaAerobus brings low fares to more domestic routes. But competition in Colombia is intense, making it difficult to achieve profitability in the domestic market.
Colombia growth outpaces growth in larger Mexico and Brazil There were 18.85 million domestic passengers in Colombia in 2012, a 14.7% increase compared to 2011 levels, according to Colombian CAA data. On an RPK basis, domestic traffic in Colombia increased by 16.6% to 8.4 trillion RPKs. In 2012, Colombia was Latin America’s fastest growing domestic market among the region’s three main markets but growth was even faster in some smaller countries including Chile and Peru. Colombia is Latin America’s third largest domestic market after Brazil and Mexico and the 19th largest in the world based on current seat capacity. Passenger growth in Latin America’s six largest domestic markets: 2012 vs 2011
Notes: ranking is based on seat capacity data for week commencing 18-Mar-2013. Growth figures are based on passenger data All passenger/RPK growth data comes from civil aviation authorities except for Argentina in which case the data comes from the country’s privately-owned airport operator. Supply and demand data used rather than origin and destination data when possible. Source: CAPA – Centre for Aviation, Brazil’s ANAC, Mexico’s DGAC, Colombia’s CAA, Chile’s CAB, Peru's DGAC and Aeropuertos Argentinas 2000
Domestic traffic in Colombia has now increased by 76% since 2008, when there were only 10.7 million domestic passengers. The growth has been driven by a strong economy, growing middle class and intensifying competition, which has led to lower fares. Colombia’s GDP grew by over 4% in 2012 and by nearly 6% in 2011. 101
Lower fares have stimulated demand as more carriers have entered domestic trunk routes. Previously Avianca and Copa Colombia, formerly known as Aerorepublica, were the main carriers on trunk routes while several carriers primarily focused on the regional market. But Colombia now has four main domestic carriers – Avianca, LAN Colombia, Copa Colombia and VivaAerobus – and three regional carriers in Satena, Easyfly and Aerolinea de Antioquia. (Avianca and LAN Colombia also have regional turboprop operations.) The domestic LCC penetration rate in Colombia was only 3% in 2012, which makes Colombia the second least penetrated domestic market after Russia among the top 20 domestic markets in the world. Over 50% of domestic passengers transported in Mexico and Brazil in 2012 were flown by LCCs.
VivaColombia passes Copa to become Colombia’s third largest domestic airline Growth in Colombia’s LCC penetration rate along with continued growth in Colombia’s economy and middle class will be the main drivers of further domestic growth in 2013. VivaColombia, which is Colombia’s only LCC, continues to grow its domestic network and is aiming to carry two million passengers in 2013. This should give VivaColombia approximately a 9% to 10% share of Colombia’s domestic market in 2013, compared to only 3% in 2012. VivaColombia, which launched services in May-2012, carried 558,000 passengers in its first eight months of operations, according to Colombian CAA data. That made the LCC Colombia’s fifth largest carrier behind Avianca, LAN Colombia, Copa Colombia and Satena. But based on monthly passenger figures for Dec-2012, VivaColombia already passed Satena and Copa Colombia to become the country’s third largest domestic carrier. VivaColombia’s average load factor for 2012 was 73.1%, which was 5ppt below the Colombian industry average of 78.1%. Avianca led the Colombian industry with an average domestic load factor of 82%, followed by Copa Colombia at 78.6%. LAN Colombia had an average load factor of 71.4% while Satena’s load factor was 67.9%, Easyfly was 75.1% and Antioquia was 64.1%.
Avianca grows market share despite VivaColombia launch Market leader Avianca was able to grow its share of Colombia’s domestic market from 40% in 2010 to 41% in 2011 despite the entry of VivaColombia. Avianca carried 11.5 million domestic passengers in 2012, an 18% increase compared to 2011. LAN Colombia maintained its share of the domestic market at 19% as the carrier grew passenger traffic by 13% to 3.6 million. Copa Colombia has been the most impacted by the launch of VivaColombia and rapid growth of Avianca, seeing its share of the domestic market drop from 11% in 2011 to 8% in 2012. But the drop in market share at Copa Colombia has been intentional as part of a group strategy at Panama-based Copa to focus more on the international market. Copa Colombia cut domestic seat capacity by 18% in 2012, choosing to limit exposure to what it saw as irrational competition in the domestic market. As a result, Copa Colombia’s domestic traffic dropped by 18% to 1.5 million. Copa Colombia’s international seat capacity however was up by 33% in 2012 as it added frequencies on several of its routes connecting Colombia with Copa’s main Panama City hub. 102
Satena accounted for 4% of the domestic market in 2012, followed by 3% for Easyfly and 1% for Antioquia. Satena saw its traffic drop by 10% to 751,000 while Easyfly recorded 18% growth to 633,000 and Antioquia posted 4% growth to 260,000. Satena is a government-owned carrier operating regional jets and turboprops, including on subsidised routes to rural areas, while Easyfly and Antioquia are privately owned turboprop operators. Colombia domestic market share (% of passengers carried): 2012
Source: CAPA – Centre for Aviation & Colombia CAA
Colombia domestic market share (% of passengers carried): 2011
Source: CAPA – Centre for Aviation & Colombia CAA
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The rapid growth at Avianca has been driven by the launch of services or additional capacity on routes that VivaColombia has launched. The additional domestic passengers carried by Avianca in 2012, about 1.8 million, was more than three times the number of passengers VivaColombia carried.
VivaColombia proves potential of point-to-point domestic routes bypassing Bogota Colombian CAA data shows that a majority of the growth in Colombia during 2012 was on routes served by VivaColombia. This shows the huge potential for growth in Colombia’s domestic market as VivaColombia enters more markets. VivaColombia follows a Ryanair-like pure LCC model that offers very low fares and relies heavily on ancillaries. The carrier is partially owned by Irelandia Aviation, which is led by Declan Ryan, the son of Ryanair founder Tony Ryan. Medellin-based VivaColombia’s strategy of focusing on point-to-point routes that bypass congested Bogota, where it currently only operates five daily frequencies, has particularly led to huge growth on routes which were previously un-served or under-served. For example the Barranquilla-Medellin route saw 192% growth from only 79,000 passengers in 2011 to 232,000 in 2012. The average load factor on the route was 79.1% in 2012, down only 2.5ppt from 2011 despite the huge increase in capacity. This shows there is room for huge market stimulation on point-to-point routes. Barranquilla-Medellin is currently served with 12 weekly VivaColombia and 20 weekly Avianca frequencies, according to Innovata data. Avianca roughly doubled capacity on the route when VivaColombia entered. Cartagena-Cali showed the most growth among Colombian routes but on a very low base, increasing from only 3,500 passengers in 2011 to 101,000 passengers in 2012. The average load factor on the route was a respectable 80.8% in 2012. Cartagena-Cali is now served with three weekly VivaColombia and 10 weekly Avianca frequencies, according to Innovata. Avianca roughly tripled capacity on the route when VivaColombia entered. Colombia’s five main trunk routes (above one million annual passengers) also grew but not as rapidly. Bogota-Medellin grew by 17%, Bogota-Cali by 3%, Bogota-Cartagena by 15%, BogotaBarranquilla by 5% and Bogota-Bucaramanga by 8%. VivaColombia has so far entered three routes from Bogota – Cali, Cartagena and Medellin. On Bogota-Medellin, Colombia’s largest route, VivaColombia carried 117,000 passengers, accounting for 4% of total traffic, while Avianca carried 1.8 million passengers, an increase of 8% compared with 2011. LAN Colombia carried 600,000 passengers on the route, an increase of 47%, while Copa Colombia traffic dropped 17% to 222,000.
Passenger traffic at Medellin surges 32% in 2012 It is no coincidence that VivaAerobus’ only base, Medellin’s Jose M Cordova Airport, was by far the fastest growing major airport in Colombia in 2012. Passenger traffic at Medellin’s main airport surged 37% to 5.1 million passengers, according to Colombian CAA data. Cartagena also saw rapid growth, increasing 32% to 2.8 million.
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Traffic at Bogota still grew 11% to 22.5 million passengers despite congestion. Growth at Colombia’s other two major airports, Cali and Barranquilla, was 14% to 3.7 million and 17% to 1.9 million respectively. The 15% growth in overall Colombian domestic traffic in 2012 follows much slower growth of only 5% in 2011. But Colombian domestic passenger traffic surged by 13% in 2009 and 30% in 2010 as Aires added 737-700s as part of a new LCC operation on trunk routes. Aires was considered at the time to be Colombia’s first LCC although it continued to follow its original full-service regional carrier model on non-trunk routes. Aires was nearly bankrupt when it was acquired by LAN in late 2010. Under LAN management, Aires was restructured and transitioned back to a full-service carrier as part of an effort to improve profitability. The result was slower domestic growth for the overall Colombian market in 2011. But after completing the restructuring and rebranding as LAN Colombia in late 2011, the carrier resumed domestic expansion in 2012.
Colombia’s international market grows by 13% In 2013 LAN Colombia is focusing on international expansion as the carrier deploys a recently acquired fleet of Boeing 767s. LAN Colombia carried only 96,000 international passengers in 2012 giving it only a 1% share of Colombia’s international market. LAN Colombia last year only operated two international routes, linking Bogota with Miami and Sao Paulo (the latter was launched in Jun-2012 at about the time the LAN Group completed its merger with Brazil’s TAM). LAN Colombia is adding capacity on both routes from 01-Apr-2013 by up-gauging from A320s to 767s. Total international passenger traffic in Colombia grew in 2012 by 13.3% to 8.7 million. Avianca saw its international passenger traffic to and from Colombia grow by 15% in 2012 to 3.5 million passengers. This gave Avianca a leading 41% share of Colombia’s international market. When including sister carriers TACA (El Salvador), TACA Peru, LACSA (Costa Rica) and Aerogal (Ecuador), the Avianca-TACA Group carried 4.4 million international passengers to and from Colombia in 2012, giving it a 51% share of the market. The Copa Group, which includes Panama-based Copa Airlines as well as Copa Colombia, transported 1.5 million international passengers, giving it a 17% share. The LAN Group accounted only for a 5% share of international passenger traffic in Colombia in 2012, which it is keen to grow as LAN Colombia expands its international operation. American is the largest US carrier serving Colombia and transported almost 500,000 passengers to and from the country in 2012, giving it a 6% share of the total market. Colombia’s largest international market, the US, saw rapid growth in 2012 and is expected to see more rapid growth in 2013 as open skies was implemented at the beginning of this year. American Airlines saw its passenger traffic in Colombia grow by 14%. Spirit Airlines, the second largest US carrier in Colombia, recorded 10% growth. JetBlue, which launched several routes to Colombia during 2012 and is now the fourth largest US carrier in the market after United, recorded 83% growth.
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Spirit and JetBlue are the only foreign LCCs serving Colombia, giving the country a meagre international LCC penetration rate of 5%.
Colombia market offers opportunities, particularly for LCCs Colombia’s low LCC penetration rate should lead to opportunities for rapid growth in both the domestic and international markets. The country’s rapidly expanding middle class has a potentially huge appetite for low fares that VivaColombia and US LCCs are only starting to tap. Infrastructure constraints in Bogota could limit growth at the capital but Colombia has several fast-growing medium size cities which are relatively under-served. VivaColombia, Avianca and Colombia’s regional carriers have shown the potential of offering more direct domestic services between the secondary cities while Copa has succeeded at connecting Colombia’s secondary cities with its less congested Panama City hub. This is just the tip of the iceberg as Colombia continues to emerge as an important growth market.
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Mexico
Key Data Fleet and Orders Mexico projected delivery dates for aircraft on order: as at 8-Apr-2013
Source: CAPA Fleet Database
Route area pie chart Mexico capacity seats per week by carriers: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Top routes table Mexico top ten international routes by seats: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
Seats share Mexico capacity seats share by alliance: as at 8-Apr-2013
Source: CAPA - Centre for Aviation and Innovata
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Mexico returns to double-digit domestic growth in 2012, boosting outlook for Aeromexico and LCCs Mexico’s domestic market recorded double-digit growth in 2012 for the first time in five years and only the second time this century. The Mexican aviation industry has reached its healthiest point since deregulation led to the launch of five low-cost carriers seven years ago. The market now features a strong legacy airline group and three LCCs which are seeking to cash in on their relatively strong positions by holding initial public offerings. Mexican carriers flew 28.1 million domestic and 5.9 million international passengers in 2012, according to newly released statistics from Mexico’s DGAC. Domestically the market grew by 10% while the much smaller international market grew by 23%. Foreign carriers serving Mexico recorded much more modest growth of 3%, but still dominate Mexico’s international market with 21.2 million passengers carried in 2012. The 10% domestic growth represents the highest figure for Mexico since 2007, when five new low-cost carriers drove a 23% increase in passenger traffic to 27.4 million. The opening up of Mexico’s market to new entrants led to a prolonged period of over-capacity, irrational competition and unprofitability for every carrier. Mexico’s domestic market ended up declining after reaching a high of 27.7 million passengers in 2008 as several carriers went bust due to a brutal combination of over-capacity and deteriorating economic conditions. Two of the five Mexican LCCs which launched services in 2H2005 or 1H2006, ALMA and Avolar, ceased operations in 2008. One of the country’s smaller legacy carriers, AeroCalifornia, also ceased operations in 2008 while Azteca, a newer carrier which had launched in 2001, ceased operations in 2007. The shake-out continued in 2009 with the shutdown of smaller legacy carrier Aviacsa and concluded in 2010 with the collapse of Mexicana, including its low-cost unit Click and regional subsidiary Link. Mexico’s domestic market finally recovers and reaches new passenger record Seven years after deregulation, the Mexican market has finally recovered. The 28.1 million domestic passengers carried in 2012 represents the first time the previous record figures from 2007 and 2008, when nine to 10 major players competed in the market, have been exceeded. Mexico annual domestic traffic (millions of passengers): 2001 to 2012
Source: CAPA – Centre for Aviation & Mexico’s DGAC
Aeromexico, including its regional subsidiary Aeromexico Connect, is the lone legacy survivor while Interjet, Volaris and VivaAerobus are the three surviving LCCs. Grupo Aeromexico captured 38% of the domestic market in 2012, a decrease of 2ppt compared to the 40% share the group had in 2011 but still a 6ppt increase compared to its 32% share from 2009, the last full year before Mexicana’s collapse. Group Aeromexico has seen its domestic traffic grow by 34%
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since 2009, filling some of the void left by Grupo Mexicana, which captured a 27% share of the domestic market in 2009. Mexico’s surviving trio of LCCs have grown even more rapidly since the collapse of Mexicana and Click, filling most of the void left by Grupo Mexicana. Interjet, Volaris and VivaAerobus combined have seen their domestic traffic more than double over the last three years, from 7.6 million in 2009 to 16 million in 2012.
LCCs now account for 57% of Mexican domestic market, up from 47% in 2009 Interjet captured 24% of Mexico’s domestic market in 2012, compared to 25% in 2011 while similarly sized Volaris captured a 20% share, compared to 18% in 2011. Back in 2009 both Interjet and Volaris had nearly identical 13% shares of the market while Mexicana LCC brand Click had a 15% share. Interjet grew faster domestically in 2011 as Volaris focused more on expanding its US network. But in 2012 Volaris focused more on domestic expansion while Interjet, which had only been operating domestically until mid-2011, focused more on international expansion. Smaller LCC VivaAerobus has seen its share of the domestic market increase from only 6% in 2009 to 12% in 2011 and 13% in 2012. The other two carriers operating scheduled services in Mexico, regional carrier Aeromar and leisure carrier Magnicharters, account for the remaining 5% of the market. Mexico domestic market share (% of scheduled passengers) by carrier: 2012
Source: Mexico’s DGAC
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Mexico annual domestic traffic (millions of scheduled passengers carried) by airline group: 2009 versus 2011 and 2012
Source: CAPA - Centre for Aviation & Mexico’s DGAC Note: Aeromexico includes Aeromexico Connect. 2011 figures are not included as Mexicana suspended operations in Aug-2010, distorting the full year data
All of Mexico’s major domestic carriers recorded year-over-year passenger traffic growth in 2012, driving the 10% growth for the overall market. Volaris recorded the fastest growth at 25% followed by VivaAerobus, which like Volaris focused on domestic expansion in 2012, at 20%. Grupo Aeromexico and Interjet recorded 4% and 6% growth, respectively, as they focused more on international expansion.
Growth in Mexico has been paltry compared to other Latin American markets When compared to other emerging markets, including other markets in Latin America, the growth in Mexico over the last decade has been relatively unimpressive. Even with the launch of LCCs taking over half of the market and stimulating demand with lower fares, Mexico’s domestic market has only grown by 60% since 2002. It has also taken 20 years for Mexico’s domestic market to double in size. In comparison, Brazil’s domestic market has grown by over 50% since 2009 and by almost 150% since 2005. Colombia’s domestic also has seen rapid growth, growing by almost 80% since 2008. Brazil is currently the world’s fourth largest domestic market based on current seat capacity while Mexico is the tenth largest and Colombia is also in the world’s top 20. Chile, which is the fourth largest domestic market in Latin America behind Brazil, Mexico and Colombia, has grown even faster over the last three years. Chile recorded domestic growth of 18% in 2010 and 2011 and growth of 19% in 2012, making it somewhat surprisingly the fastest growing market in Latin America. Even with its first double-digit showing in five years, Mexico was the second slowest growing domestic market in 2012 among Latin America’s six largest domestic markets. Only Brazil, which experienced a dramatic cool down after recording 24% domestic growth in 2011, had slightly slower growth than Mexico in 2012.
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Passenger growth in Latin America’s six largest domestic markets: 2012 vs 2011
Source: CAPA – Centre for Aviation, Brazil’s ANAC, Mexico’s DGAC, Colombia’s CAA, Chile’s CAB, Peru's DGAC and Aeropuertos Argentinas 2000 *Note: Colombia data is for the first 11 months of 2012 because full-year supply and demand 2012 data is not yet available. For Brazil, Mexico, Chile, Peru and Argentina data is for the full year. All data comes from civil aviation authorities except for Argentina in which case the data comes from the country’s privately-owned airport operator. Supply and demand data used rather than origin and destination data when possible.
But while Mexico has not seen the growth of its Latin American peers over the last decade, the market has now finally stabilised, ushering in a new era of growth and – hopefully - profitable growth. Mexico’s economy also has stabilised and while it still is not the fastest growing country in the region the ingredients are there for growth. Mexico year-over-year GDP growth (% change) 2008 to 2013*
Source: International Monetary Fund, World Economic Outlook Database Note: *estimated
Mexico’s domestic beach markets record rapid growth, led by Mexico CityCancun LCCs are particularly well positioned to tap into the growth as rising discretionary income and low fares persuade more and more bus travellers to take to the skies. Volaris and VivaAerobus are particularly targeting the first time flier segment and leisure markets. Both carriers have particularly been adding capacity in beach markets, believing its low fares can stimulate more trips to Mexico’s many popular beach resort destinations. For example, Mexico’s biggest domestic route and largest beach market, Mexico City-Cancun, recorded 39% growth in 2012 to 3.1 million return passengers. The nearly 900,000 additional 112
passengers that flew between Mexico City and Cancun last year account for one-third of the additional 2.6 million passengers in the entire domestic Mexican market. Over the last year Volaris has grown capacity on the Mexico City-Cancun route by about 45%, according to Innovata data. Volaris is now the second largest carrier in the market with a 31% share of capacity, compared to a 36% share for Aeromexico, 23% for Interjet and 10% for VivaAerobus. In comparison, Mexico’s other two big domestic trunk routes, Mexico City-Guadalajara and Mexico City-Monterrey grew by a more modest 14% and 13%, respectively. These are more business focused markets as they connect Mexico’s three largest cities. There were just over 2 million return passengers in the Mexico City-Guadalajara market and 2.4 million return passengers in the Mexico City-Monterrey market in 2012, according to data from Mexico’s DGAC. Aeromexico and Interjet, which is focused more on the business sector of the market and operates A320s in a spacious single-class 150-seat configuration although technically it is an LCC, are the main carriers in the Mexico City to Guadalajara and Monterrey markets. Aeromexico has a 42% share of capacity on Mexico City-Monterrey and a 41% share on Mexico City-Guadalajara while Interjet has 36% and 30% shares, respectively.
Cancun leads Mexican airports with 25% domestic traffic growth Cancun was by far the fastest growing major domestic Mexican airport in 2012, providing another indication of the strength of the local beach market. Cancun recorded 25% domestic traffic growth in 2012 to 4.6 million passengers, according to Mexican DGAC data. Cancun is the fourth largest domestic airport in Mexico after Mexico City, Monterrey and Guadalajara. Mexico City recorded a 13% increase in domestic traffic to 19.7 million passengers while Monterrey grew by 9% to 5.2 million passengers and Guadalajara grew by 7% to 5 million passengers. Mexico’s top 10 airports by domestic traffic (millions of passengers): 2012 versus 2011
Source: Mexico’s DGAC
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Volaris is planning to grow capacity by another 20% in 2013, with again a focus on the domestic market and particularly beach routes. VivaAerobus, Interjet and Aeromexico are also planning to pursue domestic expansion in 2013. As a result Mexico’s overall domestic market will likely again see double-digit expansion in 2013. Interjet and Aeromexico will both be focusing primarily on expansion in thinner regional markets as Interjet takes its first batch of Sukhoi Superjet 100s and as Aeromexico Connect continues to grow its fleet of Embraer E-jets. VivaAerobus and Volaris will likely expand primarily on point-to-point leisure-focused routes where they see opportunities to stimulate demand.
Mexican carriers continue to lag behind foreign carriers in the international market Mexican carriers recorded rapid international growth in 2012 but they have traditionally struggled to compete against foreign carriers and are generally more excited about the short-term domestic prospects. While Aeromexico, Interjet and Volaris have pursued significant international expansion since Mexicana’s demise, Mexican carriers still have not completely filled the void left by Mexicana in the international market. The international void has proven to be more challenging to fill as Grupo Mexicana accounted for 65% of all international passengers carried by Mexican carriers in 2009 while domestically it only had 27% share of passenger traffic. Over the last three years Grupo Aeromexico has seen its international passenger traffic grow by 85%, from 2.1 million in 2009 to 3.9 million in 2012. In 2011 the group carried 3.6 million international passengers, according to Mexican DGAC data. Volaris has seen its international traffic grow from only 200,000 in 2009 to 1.3 million in 2012. But its international traffic grew by only 18% in 2012 as the carrier focused more on domestic expansion. Interjet, which only launched international services in mid-2011, flew 525,000 international passengers in 2012 while VivaAerobus flew only 128,000 international passengers. Combined Mexico’s trio LCCs have seen their international traffic grow by 1.7 million annual passengers since 2009 while Group Aeromexico has grown its international traffic by 1.8 million. But as Grupo Mexicana carried 4.5 million international passengers in 2009 there is still a gap of 1 million passengers or about 20%. Mexico annual international traffic (millions of scheduled passengers carried) by airline group: 2009 versus 2011 and 2012
Source: CAPA - Centre for Aviation & Mexico’s DGAC Note: 2011 figures are not included as Mexicana suspended operations in Aug-2010, distorting the full year data
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The 5.8 million international passengers carried by Mexican carriers in 2012 matches the 5.8 million passengers from 2002 and is 9% less than the 6.4 million passengers transported by Mexican carriers back in 2000. Mexico’s carriers have essentially lost a decade of international growth and it will be nearly impossible to grab the market share lost to foreign carriers, in particular US carriers.
Mexican carriers grow their share of the transborder market but US carriers still dominate In 2012, the US accounted for 19.2 million of the 27.1 international passengers in the Mexican market or 71%. US carriers transported 14.9 million of these passengers while Mexican carriers transported only 4.3 million, giving it only a 22% share of the market. But Mexican carriers were able to improve their share of the Mexico-US transborder market from 2011, when they flew only 3.4 million passengers to the US for only an 18% share of the total market. Overall the Mexico-US market grew by 5% in 2012. US carriers have seen their traffic to and from Mexico increase by 22% since 2009 from 12.2 million, but only recorded 1% growth in 2012. Back in 2002 US carriers only flew 7.7 million passengers to and from Mexico. While the expansion of Aeromexico, Interjet and Volaris in the US market has allowed Mexican carriers to claw back some of the market share lost to US carriers in the aftermath of Mexicana’s demise, it will be challenging for the Mexican carriers to capture more than one-quarter of the transborder market. Over the years Mexican carriers have found it challenging to compete against US carriers, particularly in beach markets which cater to inbound traffic. Mexican carriers have focused traditionally more on migrant worker and visiting friend and relatives (VFR) traffic in the Mexico-US market. But most of Mexicana’s former migrant worker-VFR routes have now been taken over by other Mexican carriers and Mexico’s LCCs prefer to expand domestically rather than compete with US carriers in beach markets. The large size of the inbound US market is illustrated in Mexico’s international airport traffic figures as Cancun is as large of an international airport as Mexico City. Cancun recorded 6% international growth in 2012 to 9.8 million passengers. Mexico City recorded 10% international growth in 2012, also to 9.8 million passengers. Several of Mexico’s smaller international airports recorded traffic declines in 2012, including the beach markets of Cozumel, Mazatlan, Puerto Vallarta and San Jose del Cabo. This shows the relative weakness in the US inbound leisure market in 2012 as US carriers only grew in the Mexican market by 1%. These airports rely entirely on North American carriers for their international traffic; but generally recorded overall growth as domestic demand for beach destinations increased significantly.
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Mexico’s top 10 airports by international traffic (thousands of passengers): 2012 versus 2011
Source: Mexico’s DGAC
Foreign carriers also dominate routes from Mexico to Canada and Europe The second largest international market from Mexico, Canada, is even more dominated by foreign carriers. Mexico-Canada traffic grew by 5% in 2012 from 2.2 million to 2.3 million passengers. But only 60,000 of these passengers were flown by Mexican carriers. Mexico’s third largest international market, Spain, saw a 6% drop in traffic in 2012 to 766,000 passengers. Aeromexico has only about a 25% share of the Mexico-Spain market. European carriers overall recorded a 4% increase in traffic to and from Mexico in 2012 to 2 million passengers. Air Europa, Iberia, Lufthansa, Air Berlin, Air France, British Airways, Virgin Atlantic, Transaero and Aeroflot as well as several European leisure carriers serve Mexico while Aeromexico currently only serves Madrid, Paris and (recently added) London Heathrow. Overall Mexican carriers only account for 22% of total international traffic to and from Mexico. Mexico international traffic share (% of passengers) by carrier nationality: 2012
Source: Mexico’s DGAC
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Copa emerges as fastest growing foreign airline serving Mexico Panama has emerged as Mexico’s fourth largest and fastest-growing international market, which is an indication that Mexican carriers are also losing out to foreign competitors on flights within Latin America. The Mexico-Panama market grew by 56% in 2012 to 740,000 passengers. Panama’s Copa Airlines, which aggressively markets its services beyond Panama City to South America and the Caribbean, has been growing rapidly in the Mexican market. Copa now operates five daily flights to Mexico City and four daily flights to Cancun. It also operates five weekly flights to Guadalajara and four weekly flights to Monterrey, which it launched at the end of 2011. No Mexican carrier currently serves Panama as Aeromexico quickly pulled out of the market after launching a Mexico City-Panama City service in 2011. Aeromexico has successfully added some capacity in Latin America since Mexicana’s collapse and now serves six destinations in South America and Costa Rica and Guatemala in Central America. Interjet also links Mexico City with Costa Rica and Guatemala but Volaris and VivaAerobus currently only serve the US. The rapid growth of Copa indicates the Panamanian airline is carrying a large portion of passengers heading from Mexico to South America, particularly destinations which are not linked with non-stop flights. Aeromexico and Mexican carriers risk losing more traffic to Copa and other Latin American carriers if they do not build up their Latin American networks as intra-Latin America traffic is expected to continue growing rapidly. Mexico is also served by Latin American carriers Avianca, TACA, LAN, TAM and Aerolineas Argentinas.
Domestic outlook is brighter as international opportunities are limited Mexican carriers remain predominately focused and have always been more attracted to the US market than to Latin America or Europe. The reality is Mexican carriers struggle to compete against foreign carriers in the international market and when market conditions are favourable domestically, like they are now, it is logical for Mexican carriers to focus on domestic expansion. Mexico’s aviation industry has gone through a tumultuous period with a huge wave of consolidation finally ending a prolong period of over-capacity and unsustainably low load factors. Aeromexico’s position has been strong since Mexicana’s collapse even if it remains a relatively small international operator with a widebody fleet of only 11 aircraft. The SkyTeam carrier has been consistently profitable since the demise of Mexicana and completed a successful IPO in mid-2011. All three of Mexico’s LCCs are keen to follow Aeromexico with their own IPOs, which could be used to further accelerate fleet and network expansion. VivaAerobus has indicated it aims to seek an IPO in 2013 while larger Volaris and Interjet also have IPOs in their plans. With the domestic market they rely on heavily growing again and Mexico’s aviation industry having reached a healthy equilibrium, the outlook for all three Mexican LCCs is relatively bright. Mexico may not be the best growth market in the world, or even in Latin America, but it should now be profitable and on a firm footing for the future.
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BACKGROUND INFORMATION Mexico domestic scheduled monthly traffic (millions of passengers): Jan-2011 to Dec-2012
Source: Mexico’s DGAC
Mexico international scheduled monthly traffic (millions of passengers): Jan-2011 to Dec-202
Source: Mexico’s DGAC
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