Latin America makes moves from the left to the right
There’s a new political landscape for Latin America, but their remains plenty of challenges ahead. That was the view of David Appleby, Director, Latin America & the Caribbean Routes and ASM at UBM EMEA when Routesonline spoke to him on the opening day of this year’s Routes Americas forum in San Juan, Puerto Rico.
With a World Cup on the horizon for Brazil, and the first part of the highly lucrative government airport concessions programme completed, more Brazilians than ever are making the cross-over from travelling the country’s long and winding roads by bus to air travel. As a consequence, low cost airlines such as Azul and GOL are growing aggressively in a highly competitive domestic market.
Everything was looking so rosy, and not just for Brazil, but for Latin America in general. The Latin American Airline Association (ALTA) was reporting continuous airline capacity and passenger growth across the region, month after month, and the average overall GDP growth across Latin America was around a very healthy five percent mark.
Unfortunately, geo-political events from around the world have been affecting the region ever since. “The regional GDP outlook has contracted to between 2-2.5 percent in 2015, and certain markets have been hit the hardest with some experts even warning the region could be entering a recession,” said Appleby.
With a now very sluggish Chinese economy, a strong US Dollar and extremely low oil prices, the region has certainly been facing one of its most challenging moments ever since the economic downturn of 2009, according to the consultant. “Markets such as Mexico, Colombia and Brazil have all seen, over the past 12 months, negative exchange rate variances of up to 40 percent,” he explained.
This has had a detrimental effect not just on the most obvious areas of importation and exportation costs and national budgetary concerns that accompany those specific issues. But also in the spending power of their own citizens which has resulted in a demand for lower air fares and, together with the exchange rates difficulties affecting operations themselves, has produced much lower yields for the airlines.
“Shopping excursions to the US for example, a pastime previously enjoyed by many Brazilians, have become almost irrelevant given the weak Real. More and more Brazilians are taking holidays within Brazil and this has caused issues for international carriers serving the Brazilian market,” said Appleby.
Airlines are cutting back on capacity to the country. Sky Airline of Chile has withdrawn from the market entirely citing low yields. Copa Airlines has pulled back sharply on its own capacity in light of what they claim is a weakening demand and has left markets that it had only recently launched, such as Sao Paulo, Campinas – Viracopos. Domestic carriers GOL and Azul are also experiencing difficulty.
In the case of Venezuela, the nation with the largest oil reserves in the entire region, the extremely low price of oil and excessively high inflation has probably hit it the hardest, causing not only grave issues from an aviation perspective, but socially as well. “The serious issue of foreign airlines being unable to repatriate their US Dollars continues to be a headache for all international carriers serving the market,” said Appleby.
This is even more of a factor now that the government has recently ruled that the local currency, the Venezuelan Bolivar, cannot be used to purchase aircraft fuel – one of the only ways in which the airlines could still utilise the funds that are ‘stuck’ in this South American country.
Whilst Argentina has been going down a similar path to Venezuela in terms of the restrictions upon the acquisition of US Dollars, American Airlines has recently moved quickly to prohibit the sales of its tickets in Argentinian Pesos. Attempting to avert a similar scenario to the one it has faced in the Bolivarian state of Venezuela for a number of years, which resulted in millions of inaccessible revenue.
However, there have been political changes that could start to shift the fortunes of some of Latin America’s markets, noted Appleby. The ultra-socialist governments of Argentina and Venezuela were defeated. Argentina’s Peronista party was overcome by the centre-right Republican Proposal party.
In Venezuela, the Movement for Democratic Unity coalition gained the majority of seats in the national assembly, prompting a boost in the bonds of state-owned oil company, PDVSA – a clear sign that any change in Venezuela will bring about optimism in the oil markets.
“In Brazil, it’s also fair to say that another government that sits firmly on the left is under great pressure to get the country performing again and could suffer a similar fate if it is unsuccessful in doing so,” said Appleby.
The consultant hopes that these new incoming governments, or majorities, embrace the idea of liberalisation of the Latin American skies, placing all elements of protectionism firmly behind them. “This is the best way to drive growth in the region, through an increase in tourism and investment to stabilise the most affected economies, while allowing Latin America to fulfil the potential it clearly has to become one of the world’s major aviation markets,” he added.