Aviation in Latin America and the Caribbean, for decades a weak link in the global network, in the past five years has gained strength as the region benefitted from a shift in the world economic order, the development of its own upwardly mobile middle class and a growing acceptance of air travel as a viable and valued form of transport.

The region appears to have rid itself of the ghosts of decades past, especially the financial instability that mired Latin America in debt and poverty for most of the 1980s and again in the late 1990s. And while there is still a potential for upheaval among some governments, it is unlikely to reach the heights of previous generations. Added to this mix is a vibrant demand for the region’s natural resources, especially from emerging markets in Asia.

This has translated to a financially rewarding few years for Latin America’s commercial aviation sector, which according to the International Air Transport Association (IATA) has been the only market to posts profits in both 2009 and 2010, and should do so again in 2011, albeit depressed by escalating fuel costs (see table).

Now, the spread of wealth across the region is by no means equal, and the aviation sector naturally reflects that disparity. But while there are individual examples of the haves and have nots, there is also a general philosophical shift among the region’s aviation leaders that could reap dividends for many.

One prime example is the proposed merger between Chile’s LAN, which has already spread its reach across most of the continent, and Brazil’s TAM, a major beneficiary of the upturn in that country’s economic status. Both are healthy companies with 2010 revenues of $4.5 billion and $7.1 billion, respectively. And while TAM’s profits for the year suffered from some accounting issues, LAN’s 13.8% full-year operating margin would be envied in many industries, never mind the perpetually underwhelming airline sector.

Combined, the picture becomes even more interesting. The two airlines, which intend to operate separate brands under a parent company called Latam Airline Group, will rank with the likes of Singapore Airlines, Cathay Pacific and Air Canada in annual revenue and carry about the same number of passengers as US Airways, China Eastern or International Airlines Group, the company that operates British Airways and Iberia.

Also, Latam’s expected market capitalization will probably make it the world’s second-largest carrier by value.

Latam also will be close to American Airlines in market dominance between the Americas, a dramatic achievement for a sector that once depended on the U.S. for almost all its intra-continental and international services. A regulatory delay in Chile is viewed as a minor inconvenience to this merger, which could be finalized before year-end.

This merger is distinctive for many reasons, particularly as such a deal would have been impossible just a few years ago under previous trade laws. But of greater significance is the reaction among Latam’s regional competitors; they view the creation of a Latin American giant as a growth opportunity for all, rather than as an entity that could usurp them.

There is a reason for this: consolidation. While European and U.S. mergers have dominated the topic (and for the most part, rightfully so), Latin American capacity has come under the control of five groups: namely Aeromexico (which inherited the title after Mexicana de Aviacion’s failure last year); AviancaTaca; Copa Holdings; GOL Linhas Aereas Inteligentes; and the proposed Latam. Combined, these groups account for roughly 75% of the region’s capacity.

While critics warn of reduced competition, these airlines say they bring stability to Latin America’s aviation industry. The president of AviancaTaca’s board, Roberto Kriete, for one, points to LAN’s entry into Colombia via last year’s purchase of Aires, which he welcomes as a prudent owner for the country’s second-largest carrier that had an unpredictable pricing policy, confusing to consumers and competitors alike.

Most Latin American governments have also stopped distorting the market, and the past decade has seen many storied brands disappear with the demise of public-funded benevolence. The rise of Brazil’s GOL is a testament to this new paradigm, for in just 10 years its fortunes grew as the country lost brands such as Varig, VASP and TransBrazil. The same can be said of Caribbean Airlines, which rose from the ashes of BWIA to become the focal point of Caribbean aviation, and potentially a controlling interest in a multi-island consortium.

GOL’s rise also illustrates that new entrants can still influence Latin American aviation, and while market share for now is dominated by a few, the emergence of Brazil’s Azul, Mexico’s Interjet and Volaris, along with LAM in Colombia—combined with booming demand in Brazil, Colombia and Peru—should attract entrepreneurs and investors to the region.

Stability has also reaped rewards for Copa Holdings, which operates Panama’s Copa Airlines and the smaller Copa Colombia, until recently known as AeroRepublica. This company has built a formidable fortress hub at Panama’s City’s Tocumen International Airport, a sea-level port that provides Copa a single base to potentially dominate intra-Latin America traffic. Its status as hub operator, double-digit annual capacity growth and an ambitious airport expansion plan being considered by Panama—enhanced by Copa management’s stoic adherence to their business model—give this operator a foundation to rival Herb Kelleher’s Southwest Airlines in both achievement and reputation.

While Latin American aviation has its shining stars, reminders of times past remain. The nationalization of Aerolineas Argentinas in 2008 is still a cause of consternation and the region has become transfixed with the ongoing saga at Mexicana de Aviacion, which has become a political punching bag for a country preparing for a contentious presidential election in 2012, despite assertions that market forces would decide the bankrupt carrier’s future.

The uncertainty over Mexicana is only worsened by the Mexican government’s control of all route authorities to the U.S., a lucrative market with limited access rights under the current bilateral air accord between the two countries that would boost any of Mexicana’s domestic rivals’ balance sheets.

But these examples, once the norm, are now rare, says TAM Airlines CEO Libano Barroso during an interview with Aviation Week’s Intelligence Network, which subscribers can access through www.aviationweek.com/awin/latam.

Instead, Barroso again refers to a new stability within the region and a willingness among its airlines’ leaders to challenge old preconceptions. And there is a powerful incentive. Double-digit operating margins across Latin America (for now excluding the Caribbean) are producing healthy profits for many, particularly the larger carriers. And while the region will probably only increase one percentage point in total global capacity in the next 10-20 years to 6% of the total, if it can sustain this profitability it may well have found the airline industry’s El Dorado.

2009 2010 (estimated) 2011 (forecast)
Global (9.9) 16.0 8.6
North America (2.7) 4.7 3.2
Europe (4.3) 1.4 0.5
Asia-Pacific (2.7) 7.6 3.7
Middle East (0.6) 1.1 0.7
Latin America 0.5 1.0 0.3
Africa (0.1) 0.1 0.0
Source: IATA