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Economy

How Latin America's Largest Airline Group Floats Above The Industry Crisis

Flying high
Flying high
Carlos Tromben

SANTIAGO - On January 16th a Boeing 787 Dreamliner from All Nippon Airlines (ANA) was forced to perform an emergency landing in a regional airport after smoke was detected in the electric compartment. This was the fourth incident in less than a month for one of the world's most state-of-the-art aircrafts.

Dreamliner had represented a big bet for US-based Boeing. It would reduce fuel use and included new flying and cabin pressurization systems, as well as lighter components made of carbon fiber.

Following the ANA Dreamliner emergency landing incident, the US Federal Aviation Administration (FAA) decided to ground and suspend all flights for the 787 fleet. The decision was a shock to all companies, including those in Latin America.

For Chile's LAN airline, it had been the company's CEO Enrique Cueto who had proudly announced the debut of the 787 in Latin American skies. “Thanks to the state-of-the-art technology and visionary elements, we can now cover larger distances in a more efficient and environmentally conscious aircraft,” he'd declared.

Experts explain that the problems with the 787 are a sign of our times. Following the Boeing–McDonnell-Douglas fusion, the in-house engineering and financial mentality of Boeing eventually gave way to the McDonnell-Douglas approach. The result is a very complex organization with an unprecedented level of outsourcing, with more than 50 different providers of engineering and design.

These are hard times for an industry that is going through its second structural crisis since the Sep. 11, 2001 attacks, after which 11 companies went bankrupt. Since the global financial crisis in 2008, the number of failed airlines now totals 40, three of which are Latin American. (Boeing said on Friday that the 787 would be back in the air within weeks, though some remain skeptical.)

We still wonder who will be the winners and losers in the next few years, considering two, apparently contradictory, elements that mark the current phase: the need to control costs, especially fuel costs, and the ambition to take full advantage of the accelerated growth of an expanding aviation market.

The trends are particularly pointed in Latin America. According to IATA (International Air Transport Association), the Latin American aviation industry expanded by more than 30% between 2008 and 2012. Measured in RPK (revenue by passenger/kilometers), Latin America is the second region with the most growth at a global scale, after the Middle East. At the same time oil prices have shot up more than $10 per barrel.

Spanish and Brazilian woes

A report by the European Commission shows that the cost volatily of fuel has pushed airlines to adopt two important short term strategies: increasing revenue by applying surcharges for fuel to the passengers; and isolating volatility with financial hedges. Energy efficiency, meanwhile, is seen as a more long-term objective.

Within this context, which favors larger carriers, no one is better prepared to take advantage of the situation than Latam, the multi-Latin holding that groups Chilean LAN, and Brazilian TAM. Latam is the region's largest airline company, with 46% of the air transport capacity between Latin American countries. Latam also owns a fleet with an average age of less than seven years, which lowers overall fuel consumption.

Another of Latam's strategic advantages is having local airlines that participate in the cabotage market, whereby they fly domestic routes in other countries. “This way their priority is transporting passengers who fly internationally from non capital cities," says Guillermo Correa, from the travel agency Travel Security. “Latam has been very successful in segmenting their clientele, in a way where each one pays according to their capacity, allowing more people to have access to more economical rates, which become viable since other people pay more.”

Nevertheless, this Chilean-Brazilian company must still determine if it should take the routes that smaller airlines have stopped taking, such as Uruguayan Pluna. For José Manuel Rebolledo, Aergo Capital’s vice-president for South America: “before anything, they should rationalize their current routes together with Europe and Asia, to then be able to get the most out of all the destinations.”

As Latam seeks to synergies to consolidate itself as one of the most profitable airlines in the world, others struggle just to stay afloat. Two obvious examples are Spain's Iberia and Brazil's Gol.

During the first nine months of last year, Gol lost nearly $500 million, reduced staffing by 2000 posts, including pilots and ground personnel, reducing flight frequency from 1100 to 900 daily flights and closed Webjet, a low-cost airline acquired only a year ago.

Merged with British Airways in 2011 in the holding IAG, Iberia faces tough financial and labor problems. Today it is “fighting to survive,” as top Iberia officials have said. When IAG fired 537 pilots, 932 on-board personnel and 3,031 ground personnel, a wave of accusations and complaints hit the holding. Iberia has been bleeding around 1.7 million euros a day.

Jorge Carrillo, who heads the airline sector of the workers commission union (CC.OO), blames the decisions taken by Iberia’s president Antonio Vázquez (also president of IAG) and chief executive Rafael Sánchez-Lozano. “They both abstained from renewing the fleet, which would have saved the company more than 100 million euros in fuel per year." Carillo says. "This could have brought 40% less in losses in just the last nine months."

Ximena Bravo, Hebe Schmidt, Graziele Dal-Bó, Susan Abad and Loreto Urbina contributed to this report.

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Future

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Reports that the new AI natural-language chatbot is a threat to Google's search business fails to see that the two machines serve very different functions.

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Could ChatGPT really be on the verge of disrupting the global search engine industry?

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