Podcast: Why The Latin American Air Transport Market Is One To Watch

Editors from ATW and CAPA – Centre for Aviation discuss the shifts behind international traffic booms to and from Latin American destinations.

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Karen Walker: Hello everyone, and thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm ATW and Aviation Week Network air transport editor-in-chief Karen Walker, and I'm delighted to welcome you on board. Now today I am very happy to be joined by two of my colleagues. Aaron Karp is ATW and Routes senior editor. Lori Ranson is CAPA senior analyst Americas. And we're all based in the Washington, DC, area. And what we're going to talk about today is the status of the Latin American market, which is really developing and changing fast and in most respects in the right way. I recently had a discussion with Peter Cerdá, who is the vice president Americas at IATA and he's also the CEO of the Latin American Airline Association (ALTA). And he shared some interesting numbers and trends over the summer. IATA data for that period shows that Latin American carriers led the world in terms of aircraft movement growth, which was up 9.3% internationally and 7.2% overall in July.

ALTA, meanwhile, has numbers showing a similar pattern. Overall air traffic in Latin America and the Caribbean reached 38.3 million passengers by the end of the summer, marking a 3.4% year-over-year increase. Brazil saw a run of record traffic numbers, which were up 11.2%, and Argentina's international traffic grew 14%. ALTA statistics also show that Mexico's overall passenger numbers dipped slightly by just under 1% in June, but the biggest drop was of 2.1% and that was in traffic to the US. And yet traffic numbers between Mexico and Canada grew a massive 12.2%. So I think that's a point we should like to pick up on in this discussion. ALTA will be holding its AGM and airline leaders’ forum in Lima, Peru, next week. Meanwhile, Lori has recently returned from the CAPA Latin America and Caribbean Airline Leader Summit, which was also in Lima.

So, Lori, let's kick off with you. Thank you so much for joining us. Give us a quick summary of what the key themes, issues and mood were at the CAPA event.

Lori Ranson: I think the mood was pretty positive, just listening to your numbers and the traffic growth. It's such an area with so much promise. Ironically, the Lima Airport just opened, the new Lima Airport, but there's no road to the airport. There's no train station to the airport. And now the government and the airport partner, Lima Airport Partners, who run the airport, they want to introduce a tax on connecting passengers. So, airlines are welcoming the new infrastructure and mind you, it's also a couple decades late, but they're saying that there's a risk that this new airport is not going to be competitive because of these proposed taxes. So there's a little trepidation there, and I think Peru can be an example of some of the challenges that airlines face in Latin America. Since 2001, I think there've been more than two dozen transport ministers of Peru. There've been several presidential administrations.

So, you have a change in administration and their policies change and they may not be as supportive of infrastructure as previous administrations. So that was a big theme at the conference and it's a big theme in Latin America, and I'm sure you'll hear more about it next week, is infrastructure and taxation. Those are the biggest challenges that Latin American carriers face. And interestingly enough, when you think of infrastructure, it's not just the big airports such as Lima, Bogota, it's the smaller airports. Intraregional traffic is one of the fastest growing markets in Latin America and airlines are warning that growth can't be realized unless some of these smaller airports have the infrastructure to support the growth. So, I thought that was a really interesting point that maybe sometimes doesn't get as much attention, but it should. It's not just infrastructure in the big airports that you think about. It's the smaller airports as well. And some other attendees made the comment [that] infrastructure is not just sort of airport infrastructure, it's also labor—developing air traffic controller employee pools. That's really important as well and doesn't get talked about as much. So I think there is a lot of hope there at the conference, but at the same time, these airlines have been operating for a while, and they understand the realities of what it means to be an operator in Latin America and the Caribbean right now.

Karen Walker: Yeah, thank you. Those points you made on infrastructure taxation were very much part of the discussion that I had with Peter Cerdá, with IATA and ALTA, as I said, and there are long-running issues in this part of the world. And it was interesting what he was saying on the infrastructure side. You've just touched on it about the building up of everything that keeps that airport connected to the cities and stuff. But also, if there were more secondary airports, it would reduce the congestion at these big airports because most of these big countries, they're all big countries in Latin America and they typically just have one major airport. And so everybody goes there and then they have to work out how they get to wherever else they're going. And there isn't the roads or trains as you say. So it's very difficult, but it would also reduce the congestion, as I said, to those major airports if they could build out more. Taxation, big issue in this part of the world. And another thing that you touched on there was how many government and administration changes they have. So the aviation side of the industry is always having to tell the story again.

Lori Ranson: Yeah, and just one other point, we talk a lot about sort of some of the countries that had challenges, but there are success stories. You mentioned Argentina in your opening remarks, and liberalization has occurred over the last couple of years there with the new administration. And I think the numbers kind of represent what can happen if you adopt a more liberalized stance, but the concern is what happens if another administration comes in and doesn't feel as strongly about liberalization? So I think that's something that is probably in the back of airline planners' minds in the region. How much of our resources do we dedicate to a market that could sharply shift if another administration comes in?

Karen Walker: And it's an investor issue as well, it's the back of their minds. Well, that's very important again for that wider infrastructure. Is this going to pay off for the long run?

Aaron, talking on investment, et cetera: A lot of these airlines in this part of the world, well first of all, most of them did not get any financial support through the pandemic unlike other regions. And secondly, several of them went into restructuring, most of them through the US Chapter 11 process. As we've now got to 2025, can you talk a little to, has that been good for them overall, that restructuring process?

Aaron Karp: Well, I think that both LATAM and Avianca are now about three years out from emerging. And so I think that the Chapter 11 for them is they're sort of in the rearview mirror, but they're three years out and they haven't gotten into trouble again. So in the United States, we see Spirit was in real trouble and they went into Chapter 11 and now they're in Chapter 11 again. I think the Latin American carriers, their perspective is they went through Chapter 11 because as you said, they didn't get any support from the governments and they feel if the North American carriers, particularly the US carriers hadn't gotten the support, they would've been in a similar situation. And so I think they view Chapter 11 as their alternative for getting support for the pandemic and getting through the pandemic. And so they were not in desperate shape going in in terms of their business structure and how they've been operating before the pandemic.

I think they're feeling pretty good now. LATAM was able to shed $3.6 billion in debt while they were in Chapter 11, and I think that's really helped them and they both seem to be very solid now. So I think the Chapter 11 process clearly helped them. They both seem to be very solid now, and so I think the Chapter 11 process clearly helped them. I know that the Brazilian carriers are a little behind. GOL just emerged earlier this year, and Azul is in Chapter 11 now, but I think they watched what the other carriers did and feel like they can shed a lot of debt and straighten out their situations and that the demand situation, as you've been saying, is pretty good in Latin America, and there's always huge potential in Brazil. So yes, I think the Chapter 11 has definitely helped them and especially now that they're three years out and they continue to perform well, I think they feel like they really steadied their ship.

Karen Walker: Yep. I agree with you and LATAM—there's a lot of good news going on around this region with the different airlines and what they're doing, but I think LATAM does stand out as having really, really quite transformed its position. Of course, it's got this partnership with Delta as well, and it just seems to be really getting the right idea at the right time, and I say the right time because it's very interesting also, and I think this goes to the geopolitical shifts that we're seeing. Lori, you've already mentioned that there's so many government changes within these countries, but of course we're also seeing on a more global basis shifts in political stances. And I can't help but think that that plays into some of those numbers that I quoted earlier where you are seeing this rise in international traffic numbers, and that's going both ways. It's more people from Europe [and] Canada going to Latin America destinations for the first time and more people from that region deciding that they won't go to the US, but they'll maybe go to Canada. Porter has recently opened up some new markets, correct, to the Caribbean and South America?

Lori Ranson: Yeah, they're planning to launch service later this year with their [Embraer] E190-E2s, which is an interesting aircraft for that type of market. They're going to serve Costa Rica and that kind of pushes the envelope for the E2s, but they feel pretty confident that the aircraft is going to perform well. Interestingly enough, I spoke with them recently, and these of course are their first markets outside of the US, first international markets outside of the US, and what they told me was, well, these were kind of on our radar. It was going to be more of a 2026 timeframe, but we accelerated this just because of the situation that's happening with the US and the falling demand. And so I'm interested to see how those markets perform. They seemed pretty upbeat at these early stages, kind of with the interest in the markets. And they're also operating from Toronto-Hamilton to some of those markets.

That's sort of a secondary airport in the Toronto area, and I think it's the first international flight from that airport as well. So, an interesting strategy that they're adopting. And I think it's also kind of interesting because a lot of Canadian carriers have taken capacity out of the US in a very rapid manner and have been able to redeploy it elsewhere—Latin America and the Caribbean. And I don't think five years ago, probably not even 10 years ago, they could have pivoted that quickly. So, I think that's something interesting that's happening on an industry level at the moment.

Karen Walker: Yeah, absolutely. So I should have made it clear. Porter of course is a relatively small Canadian airline based in Toronto, and yeah, it's getting these new markets to the Bahamas, Cancun in Mexico, Grand Cayman, Costa Rica. So it's going to be very interesting to see how that develops. Aaron, what's your feeling? I mean, on one hand you could just say, well, yes, but then if things change in the US politically, people go back to Florida the way they always did. But I'm just curious. I think some people, this could be a big change long-term in that they'd suddenly discover places and say, “Hey, that was really nice.” What do you think?

Aaron Karp: Well, what's really interesting about Latin America, we always talk about the potential domestically for more passengers moving into the middle class. But if you look at the tourism numbers, the visitor numbers, Mexico is a juggernaut. They get about 45 million visitors a year, but the rest of them, Argentina, Chile, Colombia, Brazil, are all in about the 5 million visitor range. And all of them combined are around Mexico. All of them combined are like half of France, half of Spain. And you look at the kind of countries that are in that 5 million range just to compare, it's places like Uzbekistan and Iran and Jordan and countries where you don't think of huge tourism. And so I think that there's enormous potential there if people, like you said, are starting to discover those places to have such low visitor numbers right now. There's just unbelievable room to grow. And it's really, when I was looking at those numbers, it's almost hard to believe that Brazil with 200 million people and some of the beautiful places they have in a country and a city like Rio that really attracts people and is known around the world, that there's only about 5 million people a year visiting Brazil.

Whereas in Spain, in France, it's over 80 million people. In the United States, it's like 65 million people. Puerto Rico gets about 5 million visitors a year. So Puerto Rico is on par with all the big Latin American countries, all the big South American countries. And if you take Mexico out, there really are very low visitor numbers in the region. And so I think like you said, the people could be discovering them. I think if the infrastructure is built up, if there's competitive pricing for airlines to operate there from other countries, and as Latin American carriers get better aircraft, better equipment, put better products on them, you could see more international travel. But just as domestically, there's those numbers. We always talk about Brazil having 0.5 airline trips a year for the average Brazilian, and that has enormous potential to grow. There's just so much potential for international travelers because right now those countries are not seeing big volumes of people visiting.

Karen Walker: And it's both the challenge as we mentioned on the infrastructure side, but it's also this massive opportunity because there's some beautiful places there and it's got everything across the region: beaches, histories, UNESCO sites, fantastic, gorgeous historic cities, ecotourism. It's really got it all. So I think it's a very interesting area to watch. You just mentioned these airlines getting new aircraft, Aaron, and we've also been seeing some quite big orders for very modern aircraft. What's the situation on the supply chain, do you think, at the moment? Lori, back to you—I think that was talked about a little bit at the CAPA event and the overall mood seemed to be a bit more positive about deliveries, et cetera.

Lori Ranson: Yeah, anecdotally both LATAM and Abra said that on the narrowbody side, they're getting their aircraft relatively on time. And I guess we all have to remember this is off a base that's very off-base for a few years, but Abra said that the deliveries are kind of matching the calendar, so that's a good sign. On the narrowbody side, there still are the high-profile issues, especially with the engines powering the narrowbodies. And I do think there are some challenges with securing parts and maintenance and manpower for maintenance, so stay tuned to watch that. But some green shoots are emerging, and Copa has recently said also that it has received a couple of aircraft this year, I believe, ahead of schedule. Still way off the original schedule. But again, a bit encouraging just given everything that the airlines have dealt with over the last few years.

Karen Walker: Yes, and certainly with the increases in international traffic, those aircraft deliveries coming closer to schedule will be a big help. Aaron, can we talk a little bit about Embraer? This is also a region that does have its own and quite historic aircraft manufacturing base. Embraer, like I say, in Brazil. They seem to be having a bit of a moment right now with the E2 jets. They're getting some big orders. How significant do you think that is for Embraer?

Aaron Karp: I think very much so. You talked about Porter, and they've taken the E195-E2 and created a very expansive network of cross-country transcontinental flights. And now going into Latin America. Avelo in the US just placed a big E2 order as the first order in the US, and I think the E2, they've always said it can be a real competitor to the [Airbus] A220. And I think you're seeing a carrier like Avelo or Breeze—which is the US carrier that came into existence the same year as Avelo, so they're often compared—uses A220s. So I think their response to that is the E2. And so I think Embraer is that aircraft they've always thought has a lot of potential and they're seeing some breakthroughs in the markets right now, particularly in North America. Their CEO was up in New York yesterday talking to investors and he was asked, could you actually start to compete with a [Boeing] 737 or an A320 type aircraft, particularly because the Boeing and Airbus haven't come up with any new clean-sheet airline designs.

[20;21] And he said it's definitely a thought, but they don't want to be a me-too airline aircraft manufacturer, so they need to come up with their own clean-sheet design and something innovative. And one thing he mentioned is that this was a record year for them investing in technology, and so they're really interested in the E2 right now, but also looking at how they can create new, more efficient aircraft, perhaps make the E2 more efficient. And I think with Boeing and Airbus just lagging and putting off and putting off a brand new aircraft, Embraer may see an opportunity there to say we could actually compete against a next-generation narrowbody and go beyond the sort of—I think the E195-E2 really does go beyond what we think of as a regional jet, but really move beyond the regional jet sector. So I think Embraer, you're right, is having a real moment now in commercial aviation. I think two-thirds of their deliveries are still business jets and that's a real strength for them, but that also gives them sort of a backstop of they have a steady business there, they have some military business. So I really think they, as you said, are having a moment in commercial right now and we see that with the E195-E2 breakthroughs.

Karen Walker: When we were talking earlier about the opportunities for building out these more regional airports and extending the reach of the airline networks across this region. I mean the E2 is sort of a perfect aircraft for that. Lori, what do you think?

Lori Ranson: Yeah, and let's remember that Embraer scored really big at home recently with LATAM's order for 24 E190-E2s. Deliveries start next year. That's a huge win for Embraer because LATAM is sort of Airbus-heavy. And so it was much needed. And it's going to be interesting to see how LATAM, to your point, uses those aircraft. I think initially they're going to be used in the Brazilian market. Its competitor Azul has flown E-Jets for a while to secondary cities in Brazil, and that's not been lost on LATAM for sure. So, I think they're taking advantage of an opportunity that they see in the market right now, but I think it's going to be interesting to watch how they operate these aircraft within South America as well. To your point about the secondary market, so a big step for Embraer, I mean, you're adding a totally new aircraft type. There are costs associated with that, but I guess the potential that they see for profits from these aircraft, they can absorb the cost.

Karen Walker: I mean the E2 just hits the sweet spot right now with a lot of carriers as they're looking at new markets, especially this is a long, thin market, and this is a plane that works well with that. I can't help but also think there are at least some airlines out there that are thinking this duopoly of Airbus and Boeing that we're in and then all the problems we've had with the supply chain. It's probably a good time to encourage a third strong player in here. I don't know, Aaron, am I being too out there with that?

Aaron Karp: No, I think Boeing has had so many problems and Airbus has been better off than Boeing, but like we said, they have put very little forward in terms of what their next-generation aircraft is going to be. And I think with Boeing, you're now looking at probably the 2040s before they get their new aircraft in service. And so I think Embraer really has an opportunity if they wanted to go that direction and say, why not? If it's not going to be till the 2030s and perhaps we could even get ours out before, if we can find technology that's relevant, why not go out there and perhaps the Latin American market would be interested in having an option, a third option. And I think because Airbus and Boeing are duopoly, there isn't probably not enough competition in aircraft manufacturing. They're the only ones that manufacture the big aircraft that have a global reach beyond the kind of things China's producing. But so a third competitor I think would be welcomed by airlines to be able to have a third option. And I think they would feel that third option would push Boeing and Airbus to get moving.

Karen Walker: And then Embraer is, let's face it, like I said, quite a historic producer of aircraft and already has that infrastructure in place for support as well, the maintenance, et cetera. It's all there. They've got that global connection. So, I just think it's an interesting time, interesting time all around for this region, airlines, airports, and the manufacturers. So, it will be fascinating to see. Well, thank you again so much Aaron and Lori for joining me today. I really appreciate it. I'm looking forward to being in Lima next week and hearing more directly from this market. Hopefully I'll be talking to some senior executives that I can bring onto the podcast, too. Thank you also to our producer Cory Hitt, and also of course, a huge thank you to our listeners. Don't miss an episode by signing up on Apple Podcasts or wherever you like to listen. This is Karen Walker disembarking from Window Seat.