Along with Africa, aviation in Central and South America is arguably one of the lesser developed air transport markets in the world. There is considerable scope for growth and aircraft manufacturers are each positioning themselves to be the beneficiaries.
With a lower installed base of aircraft, operators will have the option to ensure their fleets are right-sized with aircraft such as crossover narrowbody jets – such as the Airbus A220 and Embraer E-Jet E2 families – from the outset of the coming growth period.
The most recent forecast came from Embraer with its outlook for Latin America (the company’s term) for 2020-2029. In it, the OEM foresees 380 deliveries of jets with up to 150 seats over that time period. This forecast took into account the early effects of the COVID-19 pandemic, which as it has gone one has brought a greater level of right-sizing than before.
Stuart Rubin, vice-president/managing director aviation at consultants ICF, sees things differently. “ICF’s view is somewhat more muted as we are forecasting about 150 deliveries of crossover narrowbody jets into the region over the same 2020-29 timeframe, so our view of the Embraer forecast is that it’s on the aggressive side,” he remarks. “Embraer’s 2019 Market Outlook was a 20 year forecast and in it they forecast 860 deliveries of jets of up to 150 seats. I think they have tempered their expectations somewhat in light of the pandemic and the impact on airline traffic as well as for some other reasons discussed later.”
Mark Neely, vice-president sales and marketing–The Americas for Embraer Commercial Aviation acknowledges that the 2020-2029 forecast of 380 deliveries of jets with up to 150 seats for Latin America is more optimistic in light of pre-pandemic forecasts. “There are three main factors related to the increased importance of smaller jets in the region,” he notes.
“First, the New Demand Curve characterized by the permanent reduction of business passengers estimated at 25%. This new demand pattern will require the adjustment of capacity in the existing schedule, especially in the most lucrative markets where frequency is the competitive edge. In addition, new market opportunities will also be better served by smaller aircraft: Latin America is an emerging economy, and its projected growth will generate more business and leisure markets,” Neely observes.
“Brazil and Colombia are economies that can benefit a lot from strengthening the importance of the environment for the planet. The generation of new business opportunities and the establishment of green tourist destinations will further leverage the need for growing access to air transport.
The next factor is new infrastructure. Brazil is one of the largest developing air transport markets in the world. It has established a comprehensive program to privatize 66 airports in seven stages, six of which have already been concluded. The execution of the sixth stage in 2021 proved the sector's potential,” he argues.
“Even with the uncertainties related to the pandemic, the Brazilian government raised USD 660 million, a premium of 3,800% paid by the winners of the auction. The new airport infrastructure available in all the state capitals and several secondary cities will favor the creation of regional hubs, which will not only expand access to air transport for low and medium density cities, but also generate new demand flows, reducing traffic concentration at Brazil’s biggest hubs. This operation is efficient when established with smaller aircraft.”
The third factor Neely points out is what he terms ‘connectivity efficiency’. “The importance of air transport for the development of Latin American economies will intensify after the pandemic. The change in the dynamics of the global economy may favor economic growth in the region and connectivity will be essential in this new stage. For this it is necessary that the networks are built with a high level of connectivity efficiency – meaning the level of frequencies and number of destinations,” he explains.
“Offering air transport on a weekly basis does not favor route development, hinders the opening of new markets and does not stimulate demand growth. The concentration of narrowbody jets in the fleet will not be able to meet this medium- and long-term challenge. The transition to a flexible fleet profile, with the inclusion of smaller aircraft, will be an essential condition to serve efficiently the various large, medium- and low-density destinations.”
Naturally, the VP also includes environmental concerns as an influence on the market. “The growing importance of sustainability was boosted significantly by the pandemic and is increasingly a key factor. ESG companies – or the ones that are critically acting on environmental, social and governance issues – are in the spotlight right now,” he reports. “In our industry, airlines across the globe face growing demands to pursue sustainable alternatives for the future, leading to a strong drive toward greater fuel efficiency. We therefore expect to see significant waves of modern, efficient aircraft replacing old and inefficient fleet types everywhere, including in Latin America.”
After a slow start, low-fare airlines have been growing in recent times across Central and South America, which will surely present sales prospects for crossover narrowbody jet OEMs.
Assessing this potential, Carlos Ozores, ICF Aviation’s head of the Americas believes that opportunities for these types in Central and South America are generally limited by two factors. “On the one hand, population and economic activity are concentrated in few very large cities, so in turn demand is concentrated in relatively few routes. The potential to connect secondary markets with other secondary markets – the sweet spot for these aircraft – is limited,” he posits.
“Even more critically, the region’s main airports are, for the most part, quite heavily constrained, so airlines are actually increasing average aircraft size, for example a shift away from A319s and greater presence of A321s. There are exceptions, such as Brazil, where Azul is replacing its current generation E-Jets with E2s in order to serve secondary markets.”
As might be expected, Embraer’s Neely offers a more positive view. “Latin American market opportunities will demand more flexibility from the fleets of low-cost companies. This strategy could be the inclusion of a fleet of smaller aircraft or even the entry of new low-cost companies with a single fleet, but with smaller aircraft. Unlike a carrier such as Breeze Airways, which is establishing itself in a mature economy [the USA], low-fare companies in Latin America have the opportunity to explore business passenger markets, but with the condition that they are able to offer a good quality product with number of frequencies and options for destinations,” he elaborates.
As has been argued, many major airlines in Central and South America have been increasing the capacity of their narrowbodies, but given the upheaval caused by the coronavirus, some level of right-sizing is surely to be expected.
ICF’s Ozores is not too optimistic. “The current environment, in which we expect a protracted recovery, will benefit airlines with low cost structures. Hence, we see ultra low-cost carriers (ULCCs) accelerating growth to take advantage of ongoing restructuring at major network carriers like Aeromexico, Avianca and LATAM, all in Chapter 11. The region’s major carriers are focusing on rationalizing their fleets and cutting costs, and not looking to introduce crossover jets. Meanwhile, we don’t believe ULCCs, who will lead the recovery, are potential customers for crossover narrowbodies.”
Mark Neely, however, certainly thinks the network carriers will look in the direction of crossover jets. “Major companies in the region will have the opportunity to rethink their fleet strategies during the sector's recovery period to 2019 RPK levels,” he says. “The challenges of indebtedness and the need to rebuild the schedule as soon as possible, given a slow recovery of the demand, will emphasize the importance of flexibility in the fleet as a permanent strategy for periods of crisis (others will come, this is the inherent characteristic of the sector) and for periods of expansion.”
Whichever outlook comes the closest to reality, with crossover jets at their disposal, operators across Central and South America won’t be able to say that they don’t have the tools to compete.
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