Latin American Capacity Recovery as Borders Re-open

The latest scheduled airline capacity data from OAG shows capacity growth is in full swing. By September and October 2020, capacity had recovered 41% and 47%, respectively, of the 2019 level, up from closer to just 26% back in May. By the second week of November this has edged up to 55%.

This is a direct consequence of borders and domestic markets that have opened up in the past 4 to 6 weeks in Argentina, Peru, Panama, Colombia and other markets. A key question now is how sustainable this is? Can the market support the capacity growth? There will be pent up demand fortravel, especially VFR traffic, essential workers and travel voucher passengers but beyond that are there enough passengers to support strong load factors, future booking curve improvements and low cancellation number besides a sound pricing and promotion strategy.

One factor to bear in mind is that Latin America experienced the impact of the pandemic on air travel later than most other markets. Many of those other markets saw capacity recover earlier than Latin America but since then recovery has slowed. Elsewhere, we’ve seen capacity added to markets only to be followed by a “correction” events (as shown in red), often when the recovery reached around 50% of capacity when compared to same month or week of 2019, although in Asia, the capacity correction event occurred when the market had recovered to almost 70% of previous year capacity.

Chart 1: OAG capacity data. Month to month or week to week comparison. 2019 vs. 2020.

In terms of fares, domestic discounting averages 30% to 50% in Latin America. Priorities are to stimulate demand and rebuilding networks while staying afloat. Moreover, two different market pricing strategies are observed:

1. Average fares continue strengthening while demand volumes remain steady growth albeit at a slower growth pace than when compared to few months ago. However, those fare increases remained off a low base and recuperating. This strategy can be observed in countries that did not experience extended lockdown periods such as Mexico and Brazil.

2. Extended low fares offering and multiple incentives and promotions including 2x1 offers as the key incentive is to rebuild travel confidence and demand. This strategy is observed in countries that were impacted by complete and extended lockdown periods including Peru and Colombia, among others.

Airline Product and Pricing Strategies

Other strategies being used to optimize profitability and ticket / ancillary product value include ULCCs targeting more aggressively budget conscious corporate accounts especially given that many corporation have cut travel budgets. Airlines are also offering 100% refund guaranteed ancillary products, a move that started in Mexico and aimed at reducing travel booking anxiety and to rebuild confidence and strengthen future bookings, load factors and profitability. Another strategy seen by at least one ULCC has been to offer a multi ticket sales product at an approximately 30% discount of base fare, a move which enables the carrier to collect up-front money while it “hedges” itself under a liquidity preservation strategy. This mimics a strategy introduced by Chinese carriers to stimulate domestic demand which included multiple promotions such as up to 90% discounts, buy-one-get-one-free tickets and multiple package flight deals allowing a family of three to five members to travel up 12 times per year, among others.

Another ULCC launched a no fee change product, a smart strategy aimed at customers who need extra flexibility. Given that advance booking has shrunk from a typical 60-120 days down to anything between 2 weeks and 48 hours in the current environment, this is also designed to reassure travelers that it is OK to book a flight.

Clearly, carriers in Latin America are working to strengthen pricing and rebuild demand by reducing traveler anxiety and encourage earlier booking. Airlines need to continue to survey customers to align travel confidence tactics with commercial boosters including refund policies, booking flexibility and the possibility to change flights without any additional fees.

How full are the planes?

A comparison of Latin American full-service and low cost carriers with a selection of global full-service and low cost carriers shows that the Latin American airlines have load factors that are 25% & 8% higher, respectively, in the third quarter 2020. The analysis compared full service airlines Aeromexico, LATAM Airlines and Azul with US peers Delta and United Airlines, and low cost carriers GOL, Vivaaerobus and Volaris with Wizz air, Ryanair and Spirit Airlines.

While the Latin American full service airlines have load factors that are still almost 15 percentage points below where they were in the third quarter 2019, load factors of 69% compare favourably with the average load factor of 44% that their global peers have reported.

Similarly, the Latin American LCCs have reported load factors that are 9 percentage points below the third quarter 2019 but, at 77%, they are performing well ahead of their international peers which reported an average load factor of 69%.

Chart 3: 3Q Load factor comparison. Source: Airlines 10Q reports. Note: DL Delta, UA United, W6 Wizz air, FR Ryanair and NK Spirit Airlines.

Tourism contribution to GDP

Tourism is an important part of the economy in many Latin American countries. Seven countries out of 18, or almost 40%, show a higher travel and tourism contribution as a % of GDP than the world average. This demonstrates how important aviation is for the region, its countries and the end-to-end travel ecosystem. Therefore, the travel chain needs to work together to stimulate demand and rebuild travel confidence from airlines, governments and tourism boards to health organizations, airports, hotels, tour operators among other players.

Chart 4: World Travel & Tourism Council 2019 data.

More room for growth in Latin America

Typically, travellers in Latin America fly less than citizens in many other countries, which means there is still huge potential for more air travel. At 0.36 trips per capita the Latin American average is 6 times lower than in the US and UK , and 9.5 times lower than in Spain, Switzerland and Singapore.

Airline strategies to survive and thrive

In these difficult time, Latin American airlines are employing a variety of strategies to get through. We are seeing low cost carriers go after market previously occupied by airlines now in trouble or gone, such as Interjet in Mexico and LATAM Airlines in Argentina. Meanwhile, restructuring processes at full service airlines are helping these airlines to cut costs deeply and narrow the gap in the cost base between them and their competitors.

Time for a capacity correction?

Nevertheless, we should expect a regional capacity correction to follow the addition of capacity, possibly by late November or by the first quarter in 2021. For the time being, the market fundamentals are still strong but the impact of macro-economic factors including GDP contractions, disposable income and currency depreciation is yet to be seen.

Latin America Market Presentation

-René Armas Maes