Two steps forward, one step back - Rebuilding Latin American Capacity

The Latin America seat capacity market bottomed out the week of April 27th, 2020 when 184K seat were added to the market but twice as many seats were taken out the following week which showed the fragile environment that airlines were operating in by then. The same addition and reduction in capacity occurred a few weeks later, albeit at a lower scale, when 20K seat were added the week of May 11th and 53K were cut on May 18th. However, the earliest sign of a sustainable seat capacity recovery was observed the week of June 1st, 2020 when 384K seats were added to the market, an effort led by Vivaaerobus and Volaris with a 63% and 27% seat capacity share, respectively. Moreover, the week of August 31st, 600K seats were added to the market representing the largest number of seats offered during the entire year thus far. 

The following chart shows weekly capacity evolution from January 20th to October 19th, 2020 for a number of key Latin American carriers including Ultra Low-Cost airlines (“ULCC”)  such as JetSmart, SKY Airline, Viva Air, Volaris, Vivaaerobus, GOL and Interjet, Full Service Carriers (“FSC”) including Avianca, Azul Airlines, LATAM Airlines and Aeromexico as well as Copa Airlines which is neither as FSC nor a ULCC. In the chart, we can observe that the seat capacity market for a number of selected carriers has experienced seven capacity growth events greater than 150K seats and three capacity contraction events that follow. The latest contraction event of occurred after the largest observed capacity growth event of 600K seats on the week of August 31st.    

Chart 1: Selected Latin American carriers. Seat capacity evolution in millions. Source: OAG

At the beginning of August, the challenges created by COVID-19 in Latin America showed that capacity was moving at different rates in different countries as highlighted by the struggles being reported in South America with lower South America at just 17% of January  20th 2020 capacity levels while upper South America was at 12%. Today, the capacity recovery shows steady improvement (apart from the three capacity contraction events observed) due to several governments that have decided to reopen domestic and international borders such as Colombia, Peru and Panama on September 19th, October 5th and 12th, respectively. The Argentinian market continues to be the exception as both domestic and international travel are still under lockdowns.

The following week-over-week (“w/w”) table from September 7th to October 19th, 2020 shows that three FSC are expecting their largest seat capacity growth event the week of September 28th (LATAM Airlines) or the following week (Azul and Avianca).Aeromexico seems to be more cautious than its peers in terms of capacity growth as it continues its restructuring process and tries to match capacity with demand, maximize loads and profitability. However, neither the Mexican nor the Brazilian governments have closed their domestic and international operations and we can expect further aggressive capacity growth by Avianca and LATAM Airlines as they continue to rebuild travel confidence and stimulate their markets. In fact, as the Colombian government recently opened its domestic and international borders, Avianca shows the largest seat capacity Compound Annual Growth Rate (“CAGR”) of 16% in the period, followed by Azul Airlines. In addition, and when comparing the selected FSC from Jan 20th, 2020 capacity levels, it is important to note that they as group have recovered 43% of their capacity as of October 19th vs. 48% by the ULCCs.  

Chart 2: Selected carriers week-over-week seat capacity evolution September 7th to October 19th, 2020. Source: OAG

With regards to Latin American ULCC, all airlines except for JetSmart and the 3 ULCC in Mexico (Vivaaerobus, Volaris and Interjet that were not affected by government lockdowns and quarantines) within this period are expecting their largest seat capacity growth in the week of October 5th (led by SKY and Viva Air Colombia) or the week of Oct 12th (GOL). In addition, it is observed that all ULCCs (with the exception of GOL) plan to maintain w/w seat capacity within +/- 2,000 seats the week of Oct 12th and 19th showing that at least for now we are not expecting to observe large seat capacity cuts as we observed in the last 2 previous key capacity growth events observed in week 1 and 4 of August. 

In addition, and among all ULCC players, SKY Airline shows the largest seat capacity CAGR of 10% in the period followed by Viva Air Colombia and JetSmart with 7% and 4% respectively. Related to JetSmart, it has been impacted by its Argentinian operation as the country continues in complete lockdown preventing nearly all travel. Jetsmart continues to have plans to expand in South America by 2H 2020.  Moreover, Volaris shows no growth while Vivaaerobus and Interjet show a -1% seat CAGR followed by GOL with -3%.

Finally, Copa Airlines seat capacity growth shows a seat CAGR of 34% while it has recovered only 21% of capacity thus far by October 19th when compared to Jan 20th, 2020.

All 3 Mexican ULCCs show seat capacity cuts in the period as the airlines try to optimize loads and profitability. In addition, Mexican Civil Aviation Authority - La Secretaría de Comunicaciones y Transportes - shows that domestic passenger numbers have slowed down from 130% and 89% passenger month-over-month growth from May to July to 27% growth in August. Likewise, Vivaaerobus shows largest capacity swings in both directions with the largest capacity reduction in the period while Volaris is observed with a more stable capacity planning or potentially a better market read. However, Vivaaerobus seat planning strategy could be focusing on filing an extended schedule program and then adjusting its w/w network based on bookings and cancellations as it tries to optimize revenues.  

Finally, Interjet capacity stagnation is a direct consequence of its current active fleet of only 5 Sukhoi Superjet aircraft configured to 93 seats while Volaris and Vivaaerobus average 186 seats in their A320 fleet. Before its fleet of A320 was repossessed by lessors a few months ago, Interjet operated only 150 seats with generous seat pitch of 34 inch vs. Volaris and Vivaaerobus 28-30 inches. As the airline is going through a recapitalization and restructuring process, if it wants to compete head-to-head in the Mexican market Interjet must plan to upgauge its upcoming Airbus fleet as it tries to optimize revenues and reduce costs per available seat kilometer.

Throughout our tracking of capacity at MIDAS Aviation, we observe that the two most recent and key week-over-week capacity growth events (Aug. 3rd of 167K seats led by Volaris with 31% and on Aug. 31st of 600K seats led by GO with 61%L) in Latin America were followed by w/w seat contraction events in August 10th of 151K (led by Vivaaerobus with 90% and followed by GOL, Aeromexico and Copa Airlines) and 175K seats in September 7th led by GOL with 99% of the total contraction followed by Viva Air Colombia.   

To conclude, what we are observing seems to be that Latin American airlines are becoming better at reading market conditions and matching seat capacity with demand, especially as travel restrictions start to be lifted. This is only one aspect of recovery, however, as the key concern is profitability and for that we need visibility of booking trends, cancellations, yields and load factors.

As international borders continue to reopen, we should expect more capacity growth on the back of an increase in confirmed bookings due to pent-up demand (essential workers, leisure travel, VFR traffic and business travel among others) for travel in the region, especially given the many months of complete lockdowns in Peru, Colombia and Panama. 

Key challenges lie ahead as Latin American airlines try to stimulate regional and international traffic. Based on a recent statistic by John Hopkins University & Medicine related to COVID-19 deaths per 100,000 inhabitants, among the top 10 countries 7 are located in Latin American (Peru, Bolivia, Brazil, Chile, Mexico, Colombia and Argentina). What psychological impact could this statistic have on bookings and demand is to be seen. However, it might all depend on what measures are implemented to rebuild travel confidence by its governments, health organizations, tourism boards, airlines, airports and other stakeholders in the air travel ecosystem.      

-René Armas Maes