Latin America Rebounds
At a Glance
- Business confidence indicators are showing signs of growth and recovery in the region, with strategies underway to combat inflation and creditworthiness improving.
- Many carriers have responded to decreased profits by cutting routes, exposing them to new competition in these areas.
- Right-sizing continues to be a compelling argument to address problems regarding shrinking profit margins and stagnant connectivity.
An Economic Turnaround?
After a decade of sustained economic growth in many countries in Latin America, the economic output was negative for the second consecutive year in 2016. Still, the region is at a turning point, gaining traction, as it is projected to resume economic turnaround and per capita income growth starting in 2017. However, this catch-up will take place at a modest growth rates in the short-term reaching 1.3% in 2017 and 2.2% in 2018, before accelerating to 2.8% over the next 20 years.
Latin America in the Global Economy
Looking ahead, Latin America will have a more balanced presence in the global economic scenario despite the enduring risks affecting Mexico as a result of the U.S. presidential elections and the potential policy shifts. Notwithstanding, prospects for mid and long-term growth remain positive in the coming years. In Brazil, for instance, the largest economy and the most influential country in the region, economic recovery is now in motion. Business confidence indicators show signs of improvement, active disinflation is under way, and creditworthiness has materially improved. As the GDP growth rate gathers momentum, the airline industry will be positively affected likewise. Traffic will gradually rebound.
Collaboration in the Region
The Latin American market is ripe for air transport and the region has plenty of untapped opportunities, but government backing to develop and support regional aviation is crucial. Latin American airlines struggle with high taxes, onerous regulations and infrastructure deficiencies. Collaborative work between states and industry stakeholders must enable aviation to deliver the vital economic benefits and value it brings and prevent the industry development from lagging behind demand for aviation connectivity.
Propensity to travel, measured by the economic output per capita of each country, is an indicator of such opportunity. Comparing the region with a mature air travel market like the USA reveals enormous potential for growth: Latin America has 0.5 airline passengers per capita, a figure that is one fifth that of the USA.
Air Transport DevelopmentSource: IHS Global Insight, Sabre, Embraer
The Brazilian government has recently reactivated the plan to push regional aviation forward. The project intends to incentivize national carriers to integrate new destinations into their route network, by subsidizing airline operations and revamping infrastructure. Medium-sized cities will top the priority list. As secondary cities are poised to lead the demand for new air travel, right-sized aircraft provide flexibility and therefore the ability to serve low and mid-density markets and to improve network connectivity. Many individual routes cannot sustain large-capacity jets, as there is not enough demand to fill the additional seats that the new entrants bring. Fleet optimization is vital.
A Challenging Economic Environment
The 70 to 130-seat jet segment has been key to network rationalization as it provides the opportunity to keep service level or even expand operations with incremental capacity and lower risk in the ups and downs of the business cycles. As the primary driver for air transport demand, the challenging economic climate has had a widespread impact on the airline industry across the region. According to the Latin American and Caribbean Air Transport Association (ALTA), its members carried 185.7 million passengers in 2016, down 0.9% from the previous year. The steepest reduction befell in the intra-Latin American operation (domestic and international) where 3 million fewer passengers flew in 2016, driven mainly by the adverse scenario in Brazil.
While individual airlines are faring differently, all business models are undergoing operational difficulties and so are all aircraft categories. However, the service reduction by large-capacity narrow-bodies was higher than any other segment. Relatively few markets truly warrant larger NBs. Some major carriers responded to the capacity/demand mismatch and financial losses by cutting routes and reducing capacity to achieve a more viable business environment. This adversely affected network connectivity and exposed them to new competitors. On the other hand, the optimum range and capacity of jets in the 70 to 130-seat segment allowed operators to effectively meet intra-regional market requirements.
The Case for Right-sizing
Whereas some 65% of all markets with predominance of large-capacity narrow-bodies experienced service reduction or even cancellations in the Brazilian domestic arena, the service level has been kept stable or even increased in 60% of all markets in which jets in the 70 to 130-seat segment are prevalent. Latin America has always proved fertile territory for right-sized jets.
A mix of large narrow-body aircraft and small narrow-bodies gives airlines more flexibility to respond to a dynamic market environment. Right-sized aircraft, such as the E-Jets family, allow Latin American carriers to offer a better combination of capacity and frequency and therefore keep service quality or even expand their network in lower density markets. The segment is critical to gradually improve the overall connectivity of regional air travel in the region.
Service Level - Brazil Domestic Market: Narrow-bodies vs. 70 to 130-seat JetsSource: Innovata
Business confidence indicators are showing signs of growth and recovery in the region, with strategies underway to combat inflation and creditworthiness improving. • Many carriers have responded to decreased profits by cutting routes, exposing them to new competition in these areas. • Right-sizing continues to be a compelling argument to address problems regarding shrinking profit margins and stagnant connectivity.Business confidence indicators are showing signs of growth and recovery in the region, with strategies underway to combat inflation and creditworthiness improving. • Many carriers have responded to decreased profits by cutting routes, exposing them to new competition in these areas. • Right-sizing continues to be a compelling argument to address problems regarding shrinking profit margins and stagnant connectivity.