Brazilian airline TAM is famous for giving passengers candy as they board. While it is a great brand- and loyalty-building exercise in a very competitive market, it also prolongs the boarding process by an average of 4 min., which adds up during the course of a day when an aircraft is flying eight or more sectors.

So to achieve efficiencies, the carrier stopped handing out candy during boarding—but then Brazilian ex-soccer star Ronaldo tweeted that he missed his candy when boarding a TAM flight. What followed was a good example of the power of social media. Needless to say, the candy is back.

But that is an exception for Latam Airlines, the group created as a result of the merger of TAM and LAN Airlines that is now into its second year. Change is coming rapidly, and it affects all business units, often down to the smallest details.

It is change in the style of the Cueto brothers, Enrique and Ignacio, who were the controlling shareholders of LAN Airlines and are now the dominant figures in the broader group. They are aiming to replicate LAN's success in Brazil, Latin America's biggest market, which the airline was not able to access on its own. It is a challenging market not only because of its size but also because of cultural and language barriers. Brazil and Chile are very different, and people here are now taking lessons in Portuguese; Brazilians find it relatively easy to understand Spanish, a dialect of which is spoken in Chile.

The Cuetos managed to transfer the LAN principles of efficiency and operational execution to other countries in the region, thereby creating a pan-South American network that includes subsidiaries in Peru, Ecuador, Colombia and Argentina. The merger with TAM opened up the last big chunk of the continent.

The new discipline appears to be having the desired effect a year into the merger that created Latin America's biggest airline. After a few weak quarters, the combined entity posted much-improved results in the third quarter of 2013, even though only about one-third of the targeted synergies have been implemented.

Latam managed to turn a $49 million net loss into a $52 million profit in the period. Revenues remained stable at $3.3 billion, but the company reduced total costs by 4%. Most key operating indicators are slowly pointing in the right direction: Revenue passenger miles were up 1.9% on 0.4% more capacity, the load factor improved by 1.2 points—and by 3.6% in the long-struggling Brazilian domestic market.

Integration has been achieved more rapidly than anticipated, says TAM President Marco Antonio Bologna. “We have done more than imagined in a short time,” he says. The integration is a “complex process,” he admits, and both sides are still “learning in cultural topics,” but he leaves little doubt that “it was a necessary merger.”

Enrique Cueto says that “the most important aspect is to create a team that believes in the process and transfers that attitude downward in the organization. He concedes that “there are people that don't like change.” But he also knows what must happen: “They will have to leave the company.”

LAN and TAM were the region's largest airlines before they joined forces, but they were very different. TAM's huge home market was almost exclusively focused on the passenger side of the business and had no exposure in other Latin American markets aside from international services to them. By contrast, LAN had a small home market, with lots of initiatives abroad and a strong focus on cargo. Management styles and company cultures could not have been more different either, and they probably still are, to an extent.

Because one airline had what the other didn't, it looked like a perfect fit. But there is work to do. While the scope of integration is vast, the most important areas are fleet, network, cargo and maintenance, repair and overhaul (MRO).

Work to integrate fleets has been underway for some time. When it became apparent that LAN could operate the Boeing 767-300ER at lower unit costs than TAM's Airbus A330 fleet, 10 767s were transferred to TAM. The Brazilian carrier was thus able to retire its 10 oldest A330s and lower long-haul network unit costs. The A330s were due to be sold at the beginning of this year.

The next major fleet project is harmonization of the A320 fleet. Both airlines operate many A320 family aircraft and have placed large orders for the A320neo (new engine option). Starting this year, all the new aircraft received will have a common specification, making them interchangeable.

The differences between the two carriers' A320s are significant—they have different auxiliary power units (APU), and LAN's have temperature-controlled bellies (because of its large cargo business), while TAM's do not.

However, because the two airlines' markets are so different, there is a limit to the efficacy of joint widebody purchasing. LAN is taking delivery of 32 Boeing 787-8s and -9s; TAM has ordered 27 Airbus A350-900s, the first of which is to arrive by the end of 2014, to replace the remaining A330s and some 777-300ERs, unless Latam places an order for the 777X at some point.

“We are comfortable with operating both the 787 and the A350,” says Roberto Alvo, Latam Airlines chief corporate officer. Alvo served the same role at LAN and is now one of the three top executives in the group, along with the Cuetos. “We like the idea of Airbus and Boeing competing for our long-haul business as we continue to grow,” Alvo says.

In addition to its Airbus aircraft, LAN had an all-Boeing 767 long-haul fleet until it began receiving its first five 787s in early 2012. Another five are to join the fleet this year, and the first of the stretched -9s is to arrive in early 2015. Alvo says that “the 787-8 is too small” to meet demand on the Santiago-Madrid-Frankfurt and Santiago-New York routes. The aircraft are very heavily booked most of the time, and LAN is taking a hit on the cargo side due to weight limits on the northbound leg to Madrid from Santiago, a restriction that will only go away with the arrival of the -9. The original plan was for LAN to receive its first 787-9 in 2011, but program delays shifted delivery significantly. To save time, LAN decided to take the -8 first.

Despite the significant fuel-burn disadvantage, the airline has also been forced to continue operating a couple of A340-300s. All of the A340s will be replaced eventually by the 787, but the Boeing aircraft does not yet have the Etops clearance required for the very long South Pacific route to Auckland, New Zealand, that continues on to Sydney, Australia.

Alvo does not see a requirement for an aircraft larger than the 787-9 in LAN's fleet. But the situation is very different in Brazil, where TAM has access to a huge base of potential travelers in Sao Paulo and Rio de Janeiro. The airline operates a fleet of 777-300ERs out of its Sao Paulo hub, and Alvo says he can “see [Latam] having an interest in the 777X,” which will be even larger. On the other hand, he all but rules out ordering the 747-8 or A380.

Latam's skepticism about the A380 is a particular setback for Airbus, because the only likely buyer among Latin American carriers would be one of the Latam Group airlines.

At the other end of the widebody spectrum, Alvo says that “the 767 will continue to play an important role in the Latam fleet.” The aircraft fits Latam's size and range requirements almost perfectly, and “we know the aircraft extremely well,” he notes. All of LAN's 767s are equipped with winglets and the airline is willing to accept the fuel-burn disadvantage, given the lower capital costs of the 767 compared to the 787. With more 787s arriving, the 767s will fly more medium-haul services and sectors with long ground times at the other end of the route, something an airline would hesitate to do with a brand-new and very expensive aircraft.

In preparation for the 767s' changing role, LAN is reconfiguring their cabins, scaling down the business-class section to 18 seats from 32. It is also reducing most monuments in economy class to create space for more seats, which can then help drive unit costs down further.

While LAN plans to continue operating long-haul services with the 787s from its current bases in Santiago and in Lima, Peru, and possibly Bogota, the availability of a real hub in a good geographic location (Sao Paulo) opens up new options.

“We will never fly Santiago-Milan,” says Alvo. “The market just is not big enough.” But LAN could feed TAM's Sao Paulo-Milan route from Santiago and its other bases, and probably from cities such as Buenos Aires, were it not for government protection of distressed national carrier Aerolineas Argentinas on long-haul routes. To some it is worrisome enough that LAN has a domestic airline operation in Argentina, as shown by the recent dispute about its maintenance hangar at Buenos Aires's domestic Jorge Newbery Airport.

While it is clear that Sao Paulo will be the hub for European long-haul operations—TAM is even reducing its widebody flying out of Rio de Janeiro—Lima is playing an increasingly important role for longer flights to the U.S. West Coast. Destinations in Mexico and places such as Miami can be reached by narrowbodies from Lima, although they are on the edge of the A320's range profile. Lima's Jorge Chavez International Airport has been growing fast as the Peruvian economy continues to expand rapidly, and it is high-quality, too. For now, channeling regional feed through Lima to cities such as Los Angeles is all Latam can do. The currently available widebodies do not provide sufficient range for direct Asia services.

For years, LAN's various country subsidiaries have followed a cooperative model that could serve Latam well. The subsidiaries contribute to a “virtual airline” called international; the group buys capacity from the different units, but the flights are operated by the individual subsidiaries, LAN Airlines (Chile) or LAN Ecuador or LAN Peru. “We are doing this now with TAM, too,” says Alvo. The major difference is that TAM is keeping its own brand.

It seems that Latam Airlines would be the perfect brand for the group, describing what the broader company is all about: The largest Latin American airline with the biggest presence in the most important markets. Alvo says the branding issue has been raised and “we have looked at the Latam brand.” But there are a number of legal questions around whether the Latam brand could be used across the network and for each unit, and the move is being shelved until those are answered.

Branding aside, two areas with great potential for synergies are cargo and MRO. Since as much as one-third of LAN's revenues came from its cargo operations, it is now essentially controlling the group-wide freight business. “TAM did not have a cargo operation, but a lot of belly capacity,” says Alvaro Carril, LAN Cargo's senior vice president for sales and marketing.“We took control of that capacity pretty fast. Our system was in place two months after the merger.”

Both airlines now use LAN airway bills and its booking-tracking system. TAM had only general sales agents internationally to market its capacity, but that has now also been taken over by LAN. “It was more of what we were doing already,” says Carril.

The takeover is providing a major learning experience for LAN Cargo executives in Brazil, though. “Brazil's domestic market is very different,” admits Carril. “We are still learning and analyzing the best business model.” TAM has been offering door-to-door services, while LAN is strictly an airport-to-airport operation and, “we are still considering what to do in the future,” Carril says.

A lot of the network synergies in the cargo operation are linked to the connectivity now available in Sao Paulo. The group's various carriers can be used to feed cargo into the outbound operation from Brazil's biggest city, much as on the passenger side, making many long-haul flights economically viable. But there are still some limits because of aircraft availability and range, such as the payload restrictions on the important Santiago-Madrid route, flown by a 787-8.

In spite of the access to a lot more belly capacity, Carril believes there is still a role for freighters. “Some of the cargo cannot be moved in bellies,” he says. “And cargo flows are different from passengers.” Ecuador is not a major international passenger market, but cargo is huge there. Colombia has more passenger demand, although aircraft carrying them cannot always satisfy the demand for cargo capacity. “The bellies are always filled, and you adapt with the freighter,” Carril says. “If you only market 20 tons, you might fly empty.”

The two merged carriers have put much work into better organizing their MRO operations. Both tried to keep most work in-house in the past and continue to do so. And now they have a much bigger house. By better allocating resources, “we were able to increase hangar utilization to above 90 percent for both LAN and TAM,” says LAN's vice president for engineering and maintenance, Sebastian Acuto.

LAN has cut the number of outsourced C-checks in half, whereas before “TAM was selling part of their capacity to other airlines when we had to buy work from outside.” MRO specializations are forming within the now larger group. For example, most of the heavy Airbus A320 work will be done at TAM's San Carlos facility, while the 767s will stay in Santiago. San Carlos will perform heavy checks on 10 LAN A320s this year and four TAM 767s will be worked on in Santiago.

In MRO, as in other fields, it is sometimes a slow process, but progress is being made. “We start breaking paradigms,” says Acuto. “We start asking questions that have never been asked before.”

Tap the icon in the digital edition of AW&ST for data snapshots of the leading Latin American airlines, or go to AviationWeek.com/latinamerican

Latam Group Fleet
Airbus
A319 52
A320-200 160
A321-200 10
A330-200 20
A340-300 3
245
Boeing
737-700 4
767-300ER 40
767-300F 11
777-300 10
777F 4
787-8 5
74
Bombardier
Q200 7
Total 326
Source: Latam Group