Airlines consolidate and relaunch to reshape Latin America’s skies

Latin American aviation is charting a course back to health despite receiving no direct government help in the Covid-19 crisis, with a battle for the skies heating up through mergers and expansion plans. 

On the brink of collapse when flights were grounded during the pandemic, three of the region’s largest airlines — Chile’s Latam, Avianca of Colombia and Aeroméxico — all exited US bankruptcy protection over the past 18 months.

Others such as Brazilian carriers Gol and Azul have struck deals with creditors to reduce debts and financial obligations to more manageable levels. 

As passenger numbers bounce back, growth is once again in focus. The sector’s dominant players have embarked on corporate combinations and launched new routes, with investors pumping in billions of dollars to aid the recovery.

This spirit is embodied by the newly created Abra Group, a pan-Latin holding company bringing together Avianca and Gol under common ownership. It will challenge Latam, the regional market leader by fleet size and itself the result of a merger over a decade ago.

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While the two brands are to remain independent with separate managements, Abra says it will lead to cost savings and greater economies of scale, at the same time increasing revenues and investments.

“You’ve seen consolidation in the US and Europe. Players like Lufthansa and Air France-KLM really now dominate the region, with low-cost rivals keeping them honest,” said Adrian Neuhauser, Avianca’s chief executive. “You’ve got very little of the old, one-market airline. And we think the same is starting to happen in Latin America.” 

Abra’s ambitions suffered a setback last month, however, when Avianca abandoned an acquisition of stricken fellow Colombian carrier Viva Air. It blamed conditions imposed by regulators as unworkable. 

Even so, analysts say there is logic to such business tie-ups, given the scope for greater bargaining power on fuel and aircraft purchases. 

Industry boosters also point to the potential to widen air travel in a region with 660mn inhabitants but a relatively low number of flights per capita. Poor road and rail infrastructure make planes vital for transport between many territories.

“There is a land grab — or air grab, if you prefer — in Latin America generally now between the various carriers,” said Mike Arnot, an analyst at Cirium. “Every player sees opportunities to add capacity.”

Throughout 2022, the region ranked first worldwide for passenger recovery and it is now virtually back to pre-pandemic rates, according to the Latin American and Caribbean Air Transport Association.

Its head José Ricardo Botelho said a factor was “revenge tourism” — holidaymakers seeking escape following the confinement of social distancing. European groups Air France-KLM and Lufthansa recently reported strong performances for South America.

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However across the region the picture is mixed, according to data from the industry body. Mexico has now overtaken Brazil as the largest market, with passenger numbers in the first quarter up 17 per cent on the same period in 2019. Colombia was also higher, but Brazil, Argentina, Chile and Peru were all below the level of four years ago.

For bigger Latin American carriers this is feeding through into improved financial results, with revenues and earnings on the rise — even if many share prices are yet to rebound from steep falls. 

Despite narrowing losses, the industry as a whole in Latin America will remain in the red in 2023, according to the International Air Transport Association, although it said some airlines will post “solid profits”.

Unlike in Europe and North America, what stands out is the absence of targeted state financial assistance in the depths of Covid-19. (An exception was Aerolíneas Argentinas, although it was already state-owned.) 

“Airlines in Latin America had to be warriors to survive,” said Botelho. “They had to reinvent themselves to become even more efficient.”

In a sign of confidence, Aeroméxico has spoken of returning to public markets. Abra has said it plans an initial public offering and Latam suggested it will seek to relist its American depositary receipts on the New York Stock Exchange, after they were suspended during its bankruptcy process. 

The convalescence is not across the board though. At least 10 Latin lines — mostly budget brands — have ceased operations since 2020, including four this year. 

Some have struggled against traditional competitors that adopted a ‘hybrid model’ of cheap tickets and charging for extras such as baggage and airport check-in. 

Yet low-cost providers are also among those that have fared the best in Latin America since Covid-19 began. The category increased its share of industry capacity — as measured by available seat miles — from around 30 to 42 per cent, according to data from Cirium.

One company sitting out the consolidation is Azul, which made an unsuccessful bid to take over bigger rival Latam in 2021. 

Chief executive John Rodgerson said it now had no M&A plans and was instead focused on adding new locations to its network, which will expand from 119 cities in 2019 to 170 by the end of the year. Its routes include Fort Lauderdale and the Amazonian jungle capital of Manaus. 

“It’s exciting — there’s demand for all these remote cities in Brazil,” he added. “The biggest opportunity is to continue to grow the domestic market.”

Another option short of mergers being pursued is commercial partnerships with US peers, with a view to boost flying across the continents.

American Airlines last year invested $200mn for a 5 per cent stake in Gol, with the pair to deepen a code-share agreement (under which companies sell seats on each other’s flights). 

Delta has a joint venture with Latam and was among shareholders that provided funds towards a $5.4bn cash injection as part of a restructuring last year. The Chilean company said it was “strengthened and more competitive” than before Covid.

Yet despite industry enthusiasm, weakened currencies in several Latin countries have made the rising cost of fuel — priced in dollars — even dearer in local terms, forcing up ticket prices. 

With an economic slowdown forecast in 2023, air travel may remain an unaffordable luxury for the millions pushed out of the region’s middle class as a result of the pandemic.