Welcome to WealthWisdom, the economy and investment knowledge blog! Enjoy reading and do sign up as members, before logging off!
Monday, June 13, 2016
Airlines in South America: No El Dorado
WHEN phone footage came to light last year of a stripper opening the throttle during the take-off of a commercial jet operated by Aerolíneas Argentina, the public outcry was predictably fierce. Argentina’s state-owned flag carrier swiftly sacked the pilots who had invited her into the cockpit and the lady herself was banned from the airline for five years. Endangering the safety of passengers is a serious concern. Yet the company’s assault on the public finances is almost as reckless: Argentines have tolerated vast subsidies and huge losses at their national airline.
Even without the drag of state ownership, other South American airlines have recently either lost money or made only meagre profits (see chart). Airlines in Latin America as a whole (whose performance is flattered by the inclusion of Mexico’s mostly profitable flyers) even surpassed Africa’s beleaguered carriers in their ability to lose money in 2015, according to IATA, an industry body. That marks them out at a time when the tailwinds of growing passenger numbers and cheap fuel have carried many other airlines to unusual heights of profitability.
The region’s airlines don’t lose money because flights are cheap. Air fares are eye-wateringly pricey—an internal flight in Brazil can cost as much as one to Europe. Travellers have not benefited from the ascent of low-cost carriers (LCCs) because budget airlines are thin on the ground. Outside Brazil’s domestic market, where Azul and Gol carry passengers between the country’s far-flung cities, there are few LCCs and their impact has been limited. As a result, the continent’s growing middle-classes have not taken to the skies as enthusiastically as in the rest of the world.
This is partly attributable to a lack of infrastructure. There are few secondary airports of the sort frequented by LCCs in Europe or specialist low-cost terminals at bigger airports that are common in Asia. That lands LCCs with the same high airport fees as big carriers. Gol, the largest Brazilian LCC, made a loss of 4.29 billion reais ($1.3 billion) in 2015.
In some countries, budget carriers have been kept at bay by state-run incumbents. Cash-rich left-wing governments in the region set up or revived flag carriers as money poured in when commodity prices were high. In Bolivia and Venezuela state-owned airlines are virtually the only means of domestic air travel. Appointing cronies has ensured inept management.
The standard of service on state airlines is often woeful. Aerolíneas cancels three times more flights than the industry average, and loses roughly twice as many bags. Venezuelan travellers have the added problem that foreign airlines are leaving the country in a dispute over how to repatriate money from sales because the government cannot find the dollars to pay them for tickets issued in the country.
Elsewhere publicly listed airlines provide much better service but are just as hard to dislodge. LAN Chile set up subsidiaries in Peru, Argentina, Ecuador and Colombia before merging with TAM, Brazil’s biggest airline, in 2012. LATAM is now the largest airline across swathes of the continent. In smaller markets such as Peru, Chile, and Ecuador LATAM and Avianca, a Colombian carrier, already have big networks that leave little space for LCCs to operate domestically. Barriers to entry are high: dealing with a slew of differing regulations makes setting up new cross-border routes expensive.
Why then are the incumbents not making more money? LATAM lost $219m in 2015; Avianca lost $140m. As passenger numbers grew during the commodities boom, most airlines ordered lots of expensive new planes. But just as they arrive on the tarmac, demand for air travel is stumbling. South America is still reeling from the bursting of the commodities bubble. This has hit domestic and cross-border air travel alike. Worries about the spread of the Zika virus have also deterred visitors to the continent. In 2016 growth in passenger traffic in Latin America is likely to lag every other region, according to IATA.
Some of the continent’s politicians have woken up to the industry’s structural problems. In Argentina, Mauricio Macri, the victor in November’s presidential election, has announced plans to withdraw a $500m subsidy from Aerolíneas. The airline’s new management plans to cut capacity and return to profit by 2020. Brazil is negotiating with the EU for an “open-skies” deal that would boost competition by allowing airlines from those countries to serve any airport in Brazil. Before her impeachment the country’s president, Dilma Rousseff, was said to be considering raising the share foreigners can own in local airlines from 20% to 100%, allowing better-run foreign carriers to buy domestic ones.
Michel Temer, Brazil’s interim president, is also said to be considering a relaxation of foreign-ownership rules. And intrepid budget carriers will doubtless try to overcome the difficulties and set up routes in more countries. But unless more politicians in the region turn their attention to aviation, South America will continue to be the continent of sky-high fares and limited choice.