FIESTA TIME?

There was a festive mood surrounding the Latin American and Caribbean Air Transport Assn. (ALTA) Airline Leaders Forum in Rio de Janeiro late last year. Surely, holding the annual high-profile gathering of Latin American airline executives along Rio’s picturesque beaches contributed to the good spirits. But the region’s airlines are optimistic for a more fundamental reason.

“The phenomenon we now see in Latin America already happened in the US in the 1950s, in Europe in the 1960s and in Japan in the 1970s—a migration from buses to planes,” said TAM president Libando Barroso.  “This business is no longer a luxury business. It is for the masses. This will be the trend.”

There is a growing middle class in Latin America, Copa Airlines Colombia CEO Roberto Junguito said. As a result, passenger traffic growth will continue to increase at a faster rate than GDP growth in the region in the years ahead, he believes. ALTA predicted that member airlines’ aggregate passenger traffic will average 6.9% annual growth over the next 20 years, trailing only Chinese carriers’ rate of growth worldwide.

While US airlines have kept a lid on capacity, a number of Latin American carriers are growing aggressively. For example, Copa Holdings, parent of Panama’s Copa Airlines and Copa Airlines Colombia (formerly Aero Republica), was expected to increase full-year 2011 consolidated capacity 21% compared to 2010 and its 2012 capacity is slated to heighten another 20%. LAN Airlines’ third quarter 2011 capacity was up 11.4% year-over-year.

And there is still strong growth potential, according to Matias Campiani, CEO of Uruguayan airline Pluna. “In South America, there are still a lot of secondary cities that are not well served,” he said. “It is a region that is ripe to grow.”

But there is a caveat. Airport and air traffic control infrastructure in Latin America are seen as needing significant modernization. Also, various countries in the region impose differing regulations and taxes on the airline industry.

“Three out of every 10 flights that depart from the region do so from a congested airport. There is an urgent need for infrastructure investment,” ALTA president and TACA chairman Roberto Kriete said.

 Campiani added, “I think the biggest problem is the regulatory environment … There’s one group of countries that are moving forward, but there is another group that are actually going backwards … We still have to sort out the various regulatory frameworks across countries.”

Nevertheless, as ALTA executive director Alex de Gunten told ATW,“it’s much better to have those concerns than worrying about where your next passenger is coming from or whether you’ll be in the red.”

Profits, while steady, are not exceptional yet. IATA estimated that Latin American airlines earned an aggregate net profit of $200 million in 2011, expected to fall to $100 million this year. 

But there are a number of healthy companies, and the region’s airline industry is rapidly consolidating. “Around 36 airlines in the past 20 years have gone bankrupt in Latin America,” Campiani pointed out. But he said this meant that the strongest carriers have survived and are ready for growth. “Current macroeconomic conditions basically all help [airlines] in this region to grow profitably,” he said.

The major development in 2012 is likely to be the merger between Chile’s LAN and Brazil’s TAM under LATAM Airlines Group, a holding company that will control more than 40% of Latin America’s air passenger market. The merger is expected to be completed during the first quarter.

LAN already operates affiliates in Peru, Argentina and Ecuador and in December re-launched Bogota-based Aires, which it acquired in late 2010, as LAN Colombia. Those carriers combined with LAN mainline and TAM will give LATAM passenger and cargo flights to 115 destinations in 23 countries with more than 280 aircraft. It will employ more than 40,000 workers.

“Consolidation is the name of the game,” TAM CEO Marco Antonio Bologna said. “We want to be one of the [world’s] leading airline groups.”

Of consequence to the global airline business is which alliance LATAM will choose. LAN is a oneworld member, while TAM is part of the Star Alliance. But Chilean antitrust regulators are forcing the combined company to belong to just one. For the alliances, prime access to the burgeoning Latin American market is at stake.