ANALYSIS: Shifting dynamics on Europe-South American routes
Strong economic growth in South America over the last decade has stimulated air travel to and from the continent from across the globe, perhaps most notably with Europe.
There are now almost 25 million seats on an annual basis reaching every continent bar Asia with direct flights. While North America is still the largest destination for travel, Europe is not that far behind with over 30% of the total seats – and in terms of ASKs the European market is the largest international market out of South America.
The overall market in terms of ASKs grew by an average of 5.4% per annum between 2004 and 2014. Capacity by ASKs has increased at a faster rate than the number of flights and seats provided. The average aircraft size has increased from 266 to 293 seats per flight, and the average stage length has gone up slightly from 4,770nm (8,830km) to 4,870nm.
Overall this has been a positive growth story, but there have been several global trends that have impacted the way in which this growth was distributed among airlines and airports. Consolidation through mergers and bankruptcies, alliance developments, changes in aircraft technology and costs and low-cost carriers have all had a significant influence. Each has had a different impact on the South American market, and there are also some factors specific to the area.
In terms of airlines, on the European side there has not been that much change. Iberia, still the largest airline on the market, has merged with British Airways under the IAG umbrella, but both airlines still operate independently. While the Spanish carrier has cut plenty of capacity through restructuring over the last two years, that has mainly impacted its Caribbean and Central American schedule. Iberia's South American network remains intact, with only some capacity reductions.
Air France and especially KLM have expanded their South American network, partly by starting to fly non-stop to destinations previously served with stops in the Caribbean, Caracas or Bogota.
The biggest change has been on the Latin American side. Varig’s demise opened up opportunities for other carriers, as eventual owners Gol showed no interest in operating Varig’s long-haul network.
TAP Portugal and TAM have been the main beneficiaries, but many other European airlines have also significantly increased their capacity to Brazil. Also, while there were 22 independent airlines offering regular services between South America and Europe ten years ago, this number has now reduced to 18, and two of these are Asian carriers using fifth freedom rights.
The share of seats for the Latin carriers has decreased from 34% in 2004 to just over one-fifth in 2014. Besides Varig, several other Latin carriers exited the market, and while TAM, LAN and Avianca grew faster than the market, so did the large European carriers.
As airlines joined, exited or switched alliances, each of the three major alliances has been the largest – in terms of passenger seats – at some point during the last 10 years. Skyteam is currently the largest, with the other two close behind.
Connections between Europe and South America have a few large markets (Spain-Argentina, Portugal-Brazil) but most routes depend on the connecting feed that only an alliance can bring. The share of non-aligned airlines has thus fallen sharply from 37% in 2004 to just 3.3% in 2014. This is largely as non-aligned airlines joined an alliance or ceased operations.
There are now only a handful of non-aligned airlines left in the market, and they are mostly small airlines serving specific markets, such as Surinam Airways between Amsterdam and Paramaribo.
Alliances are not the only way in which airlines can generate connectivity, and codeshares to independent local operators are increasingly used, both outside and across alliances.
Brazilian low-cost carrier Gol, part-owned by SkyTeam’s Delta Air Lines and Air France-KLM, has codeshares with Air France and KLM, as well as Oneworld’s Iberia, which relies on Gol to provide onward connections in Brazil. It is expected that with TAM’s entry into Oneworld, Iberia might change its codeshares to the LATAM-owned carrier. Gol also recently concluded a codeshare with TAP, where the loss of TAM from Star required the Portuguese carrier to find an alternative local carrier for its most important South American market.
Brazil is by far the largest country on the South American side in terms of seats, and Spain the largest European country, but oddly Brazil-Spain is not the largest country-to-country market, nor is Madrid-Sao Paolo the largest city market. Brazil-Portugal is the largest country pair, driven by the fact there are no less than 11 different routes between the two countries, but Madrid-Buenos Aires is the largest single city pair.
The Andean countries – Colombia, Peru, Ecuador and Bolivia – have grown fastest over the past 10 years, driven by strong economic performance. However, Venezuela is the odd one out. It is the only large country in South America where traffic had declined slightly, before the country's currency crisis came to a head this year.
As airlines have no way to repatriate their revenues from Venezuela at an acceptable exchange rate, many have reduced their operations to the country and restricted the sale of tickets in Venezuelan bolivares. As a result, capacity to Europe in 2014 has plummeted by around one-third compared to the previous year. Some airlines are reporting that they have been able to strike a deal with the Venezuelan government, but it will take time to restore international connectivity.
Routes between Europe and South America are among the longest in the world and of limited size. Consequently, until recently many were flown with intermediate stops to combine the traffic of several cities into one, and to overcome any payload-range restrictions. Some airports additionally have restrictions because of altitude levels.
The types of aircraft used are a different mix than elsewhere, with 88% of flights operated by just three aircraft types: Airbus A330s (35%), A340s (28%) and Boeing 777s (25%). Of these, the A330 has become the aircraft of choice over the last 10 years. The A340 has held on because of the route requirements and fleet composition of airlines operating in the market. However, over the last couple of years its share has dropped, as airlines use the A340 less, mostly because of fuel costs.
Its place has been taken by the 777 – especially now the 777-300ER is coming on stream. One airline in the market operates Boeing's new 787, Lan Airlines. The carrier started operations with the type in 2013, and it is still too early to see where the 787 is going to be deployed as a route opener. Long, thin routes, such as London to Santiago or Lima, would seem ideally suited for the type.
Finally, long-haul low-cost airlines have been a mixed blessing for the market. There have been a few attempts at making it work, mostly backed by tourism interests. Both Air Madrid and Air Comet ceased operations. The closest to the LCC model is growing Spanish carrier Air Europa. However, that airline is now more of a hybrid, having become a member of SkyTeam and providing both online and interline connections.
The markets to South America are relatively small, and the distances make fuel costs a very large component of overall costs, leaving little scope for a true low-cost airline to enter the market. New aircraft and engine technologies incorporated in the 787 and Airbus A350 might provide an opportunity, but the entrenched, alliance-led incumbents are unlikely to make this an easy target.