Trouble in Latin America
While North American airlines are enjoying tremendous profitability, Latin America’s airlines are struggling mightily. The future may eventually be bright for Copa, Avianca, LATAM and other Latin American airline companies, but the present is stormy with no sunshine in sight. LATAM reported a $50 million second-quarter net loss and subsidiary TAM is slashing domestic Brazilian capacity. Copa stayed profitable in the second quarter, but its net income was down 45.8% year-over-year. Brazil’s GOL reported a doubling of its net deficit in the second quarter and is cutting capacity 2% to 4% year-over-year in the 2015 second half.
The hardest hit Latin American economies are Brazil, Venezuela and Colombia, and Latin American airlines’ ties to formerly fast-growing Brazil are particularly damaging to their bottom lines. Brazil’s economy is expected to contract in 2015 and the value of its currency, the real, has plunged. Of 152 currencies tracked by Reuters, only the currencies of Kyrgyzstan, Ukraine and Azerbaijan have performed worse than the real in 2015.
As a result of all this, the airline revenue environment is horrendous in Latin America. Both LATAM and Copa reported year-over-year revenue declines of more than 20% in the second quarter, and unit revenue performance was even worse.
Speaking to analysts to discuss Panama-based Copa’s second quarter earnings, senior executives didn’t sugarcoat the situation. “Demand for air travel in our region continues to weaken, driven by currency devaluation and low economic growth,” Copa CFO Jose Montero said.
CEO Pedro Heilbron doesn’t foresee a recovery anytime soon. “The economies of Latin America, particularly in South America, still don’t show signs of recovery,” he said. About 40% of Copa’s O&D revenue is tied up in Colombia, Venezuela and Brazil, and the company’s revenue from those markets has been cut in half this year. “The regional economic environment has weakened further” in recent months, Heilbron said.
The biggest problem for Latin American airlines is the difficulty they’re having planning going forward with so much uncertainty in the air. “More than anything, we need stable currencies and stable economies,” Heilbron explained. “It’s not that we need economic growth to rebound to where it was a few years ago, we just need stability and more certainty.”
The difference in financial performance right now between North American and Latin American airlines is striking. Airlines for America (A4A) VP and chief economist John Heimlich told reporters that “weakness in Latin America … has been a bit of drag on earnings” for US carriers that operate to Latin American countries. But the US “domestic situation is stable for the foreseeable future” and the problems for airlines in Latin America show no signs of migrating north, he said.