LATAM and Avianca bankruptcies could reshape cargo in Latin America

April passenger air traffic in Latin America fell by 96%, and recovery in the region looks slow as many countries still have strict travel restrictions in place. In fact, Colombia and Argentina have stopped all flight operations through the end of August. IATA's forecast is for traffic in Latin American to drop by 50% year over year in 2020, resulting in revenue losses of approximately $18 billion. Air travel remains an essential part of the economy in this region, which serves as a connection between major population centers across large distances that lack adequate ground-based infrastructure. However, Latin American governments have been less willing to provide financial aid to their carriers than those in Europe or North America, for example. Meanwhile, IATA has urged regional governments to support the aviation industry and its airlines so they can survive the crisis. We believe these governments have an opportunity to acknowledge the impact to the industry in one of the fastest growing pre-pandemic air travel regions. LATAM and Avianca, the largest airline groups in the region, filed for bankruptcy last month. Together they account for about 45% of the total passenger capacity in Latin America, and both have agreed to continue operating flights while they restructure their debts in court and resize their operations to meet post-pandemic passenger demand. This situation is set to have a ripple effect on air travel within and outside the region, as well as on Delta and United airlines, since LATAM and Avainca's recent international strategies included both U.S. carriers. The groups encompass different entities operating across South and Central America, including affiliates in Costa Rica, Peru, Brazil, Paraguay and Ecuador. So far, Avianca Peru and LATAM Argentina have ceased operations, claiming the difficulty of reaching agreements for a sustainable project in the future. International carriers like Air Canada have taken advantage of the strong air cargo demand and instability of the main players in Latin America to start operating their own A330 passenger freighters to destinations such as Lima, Santiago, Quito, Buenos Aires and Bogota. Both, LATAM and Avianca have kept some passenger aircraft for cargo-only missions, with LATAM taking a step further and removing all seats from two aircraft (one 777-300ER and one 787-9). Table 1 shows a comparison of fleet, financials and passenger capacity of the two groups. It is worth noting that the share of cargo revenue for both airlines is similar to major combination carriers such as Turkish and Etihad Airlines. Source: Cargo Facts Consulting Analysis of Airline financials In addition to LATAM and Avianca, we have also looked at the other major players in the region. When comparing capacity share, we find that GOL and Azul are also leading carriers, accounting for more than 30% of passenger capacity prior to COVID-19. While other airlines have halted operations, both carriers have recently committed to guarantee access to all twenty-seven state capitals and nineteen large cities in Brazil, keeping some remote destinations connected. This group is followed by Aerolineas Argentinas, Chile-based SKY airline, Colombia's Viva Air and Boliviana de Aviacion, with other airlines comprising 10% of the remaining capacity. We have analyzed the domestic and international passenger capacity out of South and Central American share of all carriers, and compared the December 2019 and September 2020 numbers. These numbers show a significant passenger capacity reduction across all carriers, with LATAM having the largest decline of 24%, or almost 2 million seats, in September 2020. With less belly capacity available, the key questions are: How will these circumstances affect the freighter market, and what opportunities will arise? LATAM stated in late 2019 that the growth of imports and exports, coupled with the expansion of cross-border e-commerce in South America, were the main drivers to their recent freighter activity growth. Before the pandemic, LATAM was well positioned to remain a key player in the air cargo market, but its financial situation may not allow the group to make significant investments around their cargo division in the short term. LATAM’s 767 freighter platform is the right aircraft for their cargo operations and we don’t foresee the group going back to larger freighters (777F) or exploring a smaller option such as the A321F. In fall 2019, Azul Cargo signed a deal with Mercado Libre, the largest e-commerce platform in the region, to become the company’s preferred air shipping partner for domestic deliveries in Brazil. Azul has a strategic advantage since it is the only airline operating in more than 70% of routes within Brazil; its partnership with Mercado Libre allows it to support the rapid expansion of e-commerce deliveries with its two 737-400 freighters. Azul's cargo revenue grew 61% and 36% year over year during the first quarters of 2019 and 2020, respectively. We believe there is an opportunity for Azul to grow its narrowbody freighter fleet as Mercado Libre and other e-commerce platforms continue to expand in Brazil and throughout Latin America. Avianca shares some of the same risks as LATAM, and we don’t expect the group to invest in the cargo business anytime soon. Avianca is only using five passenger aircraft as freighters compared to LATAM's thirty-eight aircraft, leading us to believe their focus is not in the cargo business but in shrinking its fleet size and downsizing its network. We have expanded our analysis of future passenger capacity for the month of September 2020, and this interactive map below shows a breakdown of carrier capacity by country, displaying the major airline groups in each. var divElement = document.getElementById('viz1592898531075'); var vizElement = divElement.getElementsByTagName('object')[0]; if ( divElement.offsetWidth > 800 ) { vizElement.style.width='1000px';vizElement.style.height='827px';} else if ( divElement.offsetWidth > 500 ) { vizElement.style.width='1000px';vizElement.style.height='827px';} else { vizElement.style.width='100%';vizElement.style.height='727px';} var scriptElement = document.createElement('script'); scriptElement.src = 'https://public.tableau.com/javascripts/api/viz_v1.js'; vizElement.parentNode.insertBefore(scriptElement, vizElement);

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