US airlines in the Latin America market
A generally favourable outlook, with a potential disruptor in the wings. Two recent challenges disrupting the market for Latin American airlines are also creating headwinds for US airlines serving the region - payments trapped in Venezuela and weaker corporate demand during the FIFA World Cup tournament hosted by Brazil in Jun-2014.
American Airlines, the airline with the largest seat share between the US and upper South America at approximately 29%, has concluded some overcapacity exists in the market, and has cut its supply to the region during 1H2014.
North America to Latin America route map
Overall, supply from the US to Latin America appears to remain rational. At the end of Aug-2014, total seats deployed from the US to upper South America increased just 2% year-on-year, and is likely to remain in the low single digits in order to ensure a rational supply-demand balance.
But the ambitions of Azul may be sowing the seeds of a new force for the region.
The World Cup has disrupted demand patterns in the region's market. Both American and Delta issued warnings that their respective performances on routes to Latin America would dim each airline's performance in those regions during 2Q2014. During the quarter, American recorded a 2.5% drop in unit revenues; but yields grew 3% on a 10% increase in capacity. For 1H2014 the airline's capacity to Latin America increased by 8%, yields grew 2.7% and passenger unit revenues fell by 1.9%. American seems to be trading yield for load on its Latin American routes as load factors fell by 43ppts in 2Q2014 to 79.5% and 3.6ppts in 1H2014 to 76.2%, which are still healthy results despite the year-on-year decline.
American reached similar conclusions to its Latin American airline counterparts regarding a drop off in corporate demand triggered by the World Cup, and also determined that customers who would normally travel to the US for vacation during that time opted to stay in Latin America to attend football matches.
Delta also warned of a diminished performance in Latin America during 2Q2014 due to the World Cup dampening corporate demand. The airline recorded flat unit revenue and yield growth in the region during 2Q2014 on 24% capacity growth.
Delta's large capacity increase is driven by its strategy of leveraging its partnerships and equity stakes in Aeromexico and Gol.
According to data from CAPA and OAG, Delta still has the lowest seat share among US major network airlines from the US to upper South America, with an approximate 10% share for the week of 26-Aug-2013 compared with American's share of 29% and United's 12% share. Delta's share on routes to lower South America is roughly 11%, compared with 5% for United and 44% for American.
Delta estimated during the second quarter that Gol supplied 25% of Delta's traffic from the US to Brazil and Aeromexico delivered nearly the same amount of traffic on Delta's service between the US and Mexico. Together, the traffic generated by those two airlines generated approximately USD36 million in incremental revenue for Delta during the quarter.
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US to Upper South America capacity share, seats per week US/graph1.png" alt="" width="230" height="219" /> |
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US to Lower South America capacity share, seats per week US/graph2.png" alt="" width="230" height="188" /> |
Delta's seat share growth to Brazil and Mexico shows the airline is leveraging Aeromexico's position as Mexico's largest carrier and Gol's stature as Brazil's second largest, to shore up its Latin American performance. For the week of 26-Aug-2014, Delta had increased the number of seats deployed to Brazil by roughly 20% year-on-year and almost 21% to Mexico.
Combined, Delta and Aeromexico represent a nearly 27% seat share between the US and Mexico (17% for Aeromexico and 10% for Delta), compared with a 21% share for American and United's 20% share. Between the US and Brazil, American holds a 36% share (for the week of 26-Aug-2014), Delta has a 15% share and United's share is 14%.
Delta retained a bullish outlook on prospects for Latin America heading into the third quarter after it concluded forward bookings for its markets in the region looked strong. However, the airline is warning that a reduction in service to Venezuela would affect its unit revenues in Latin America by three to four points in 3Q2014. At the beginning of Aug-2014, Delta slashed its once daily Atlanta-Caracas service to once weekly to combat the effects of Venezuela freezing money owed to airlines worldwide. At the end of the second quarter, Delta estimated it had roughly USD30.2 million frozen in Venezuela.
American is also bracing for headwinds from flight reductions to Venezuela in 3Q2014 as it works to repatriate USD125.7 million held by the Venezuelan government.
Beginning in Jul-2014, American cut its weekly flights between the US and Venezuela from 48 to 10, and expects the reduction to pressure its overall unit revenue growth for 3Q2014. It has projected a 1% to 3% rise in passenger unit revenues, and eliminating the revenue pressure created by cutting service to Venezuela, it expects a 2% to 4% unit revenue increase.
Offering some explanation for the unit revenue pressure created by the cutbacks to Venezuela, American concluded that during 3Q2013, Venezuela's currency exchange rate began to spike, and American's revenues on the routes increased solidly. Even as service to Venezuela represented just a half point of American's total system capacity in 3Q2013, it accounted for about 2% of its consolidated revenues. The result of the service reductions results in an approximately 1.5% negative effect on the airline's system passenger unit revenues in 3Q2014. The airline has also cautioned that the pressure created by the Venezuelan service cutbacks could also linger into 4Q2014.
Overall American believes that South American markets are performing quite well, with the exception of Argentina, which is suffering from macroeconomic weakness and sovereign debt issues. Copa Airlines and LATAM Airlines Group have highlighted declining yields in Argentina spurred by the country's economic weakness.
As of late Aug-2014, American's seat share to Argentina had dropped year-on-year by 2%, Delta's was roughly flat and United's had declined by 49% after it cut service from its New York Newark hub to Buenos Aires during the past year. Aerolineas' share jumped roughly 70% year-on-year, driven by its resumption of service from Buenos Aires to New York JFK and additional frequencies from Buenos Aires to Miami.
Despite American's overall positive sentiment about its performance in Latin America, it has concluded the US-Latin America markets are lightly oversupplied, and has opted to trim its capacity to the region by 5% during 2H2014, which will result in flat capacity growth in the region for CY2014.
However, American is adding some new service to solidify its leading position between the US and Latin America. American plans to add new flights from Campinas Viracopos to New York and Miami in late 2014, coinciding with Azul's planned launch from Campinas to Fort Lauderdale and Orlando in Dec-2014. To support the new service from Campinas, American is ending US Airways' -American and US Airways are in the throes of merger integration - flights between Charlotte and Sao Paulo and trimming frequencies from New York and Miami to Sao Paulo.
The new international service will elevate the profile of Campinas, which is located in Sao Paulo state, roughly 100km north of Guarulhos. Copa is also planning new Panama City-Campinas service, citing Campinas' economic potential. American's decision to fortify Campinas as Azul introduces its new service to the US does show that Azul's competitors are taking its long-haul experiment seriously, and have no plans to cede the market to Azul.
American plans to operate older Boeing 767-300s on the new Campinas service; but those widebodies will feature lie-flat business class seats to ensure proper competition with Azul's A330s, which will also offer business class passengers lie-flat seats.
At the end of Aug-2014, American recorded a seat increase from the US to Brazil of nearly 16% year-on-year, and the new service to Campinas joins its existing flights from the US to Belo Horizonte, Manaus, Recife, Rio de Janeiro, Salvador and Sao Paulo. American serves more destinations within Brazil than any US airline, and the addition of Campinas is a clear move to solidify its leading position in the market.
Despite the loss of its Brazilian partner, TAM, United is holding its own in Latin America. TAM's move from Star Alliance to oneworld in early 2014 left United without a large partner in Brazil, which remains a strategic market despite its recent economic weakness. At this point United has not really outlined how it intends to backfill the service gap created by the ending of its partnership with TAM, but the airline has forged an interline and reciprocal frequent flyer arrangement with Azul. It is a small step, but it could be a test case for a broader cooperation as an ambitious Azul spreads its wings to the US.
Even as Star continues to seek a solution for the hole in its Brazilian coverage and United and TAM have severed ties, United recorded a 4% increase in passenger unit revenues in 2Q2014 in Latin America, a 1.5% rise in yields and 5.6% capacity growth. It reversed downward trends from 1Q2014 when it posted a 1.7% decline in passenger unit revenues on routes to Latin America on a 3.6% drop in yields and essentially flat capacity growth.
At the end of 2Q2014, United announced that advance-booked seat factor for the next six weeks was up 4.6 points year-on-year, and cited particular strength in Latin American leisure destinations and Mexican business markets. At the end of Aug-2014, United was the second largest airline operating between the US and Mexico based on seat share with 18%, and had increased its seats on offer year-on-year by 5.5%.
Despite the joint strength of Delta-Aeromexico, American was the largest single airline between the US and Mexico with a 21% share. United's commentary on robust demand in Mexican business markets could be a positive sign that the Mexican economy could be on the upswing, which would bode well for both Mexican and US airlines serving the country.
Along with a push by low-cost airlines Volaris and VivaAerobus into the US during 2014 through new transborder service, US low-cost operator JetBlue is also increasing its presence in Latin America. The carrier is continuing with its Colombian expansion and has entered the Peruvian market.
Although JetBlue's overall seat share at the end of Aug-2014 was only approximately 4% between the US and upper South America, JetBlue's seats on offer jumped 33% year-on-year, fuelled by new service from Fort Lauderdale to Medellin and Lima. The airline also launched service from New York JFK to Cartagena in late 2012, which drove some seat growth in 2014.
Those markets likely offer strong prospects, as Colombia remains a bright spot in Latin America in terms of economic growth and passenger demand. Peru is also underpenetrated by low-cost airlines in both its domestic markets and on international routes, although VivaColombia is slightly increasing the LCC presence in the international market with the launch of a new Bogota-Lima service in late 2014.
JetBlue is competing with Spirit on its flights from Fort Lauderdale to Lima, but it also competes with the ultra low-cost airline on service from Fort Lauderdale to Bogota and Medellin. The two airlines will also go head to head on service from Fort Lauderdale to Cartagena once JetBlue launches the route in Oct-2014. So far, JetBlue and Spirit have coexisted on the routes where they compete from South Florida to Colombia. It seems as if there is enough demand in the market for Spirit's bare-bones ultra low-cost product and JetBlue's more hybrid offering. JetBlue is certainly confident that it can stand up against the ULCC head to head.
Latin America and the Caribbean continue to be significant focus markets for JetBlue, evidenced by the airline's planned 20% capacity growth in those regions for 2014. JetBlue has previously concluded its new routes in Latin American and the Caribbean generally reach maturity within a year, so it should be enjoying some profitability on the new routes to Colombia and Peru it has introduced in 2012 and 2013.
Overall, US airlines should render a solid performance in the Latin American market in 2014 - with a possible disruptor around the corner. The challenges created by the World Cup and funds trapped in Venezuela appear to be short-term, although it is difficult to determine when the situation in Venezuela will stabilise, which means that US airlines, like their Latin American counterparts, have to re-deploy the supply taken out of Venezuela onto other markets and give that capacity some time to spool up to profitability.
Commentary by Delta and United regarding solid demand in Latin America heading into 3Q2014 is encouraging, and American's throwing down the gauntlet in Campinas shows that it is more than willing to endure any short-term weakness to retain its commanding presence between the US and Latin America.
Barring any other significant market disruptions, the US-Latin American market should continue to be a solid performer for airlines serving the market, as long as the supply-demand balance remains intact. For now it seems no one is prone to upsetting the market dynamics.
One potentially disruptive element in this increasingly stable scenario is an ambitious Azul's long-term plans to grow its Brazil-US presence, adding a new chapter in the market long dominated by American. With suggestions of closer links with JetBlue, a new force could be on the horizon in the US-Latin American market.