Global standards could help bring about the future growth of Latin American (LatAm) airlines which have made substantial progress, adding to their fleets, lowering fares and achieving healthy growth, yet their individual home nations are not implementing globally accepted rules, instead presenting the carriers with many difficult obstacles.
“Aviation’s contribution to the economies and the social benefits it creates in Latin America are unquestionable, aviation supports 4.9 million jobs and contributes $153 billion to gross domestic product,” says IATA Regional Vice President, Americas, Peter Cerda. “Now, the Latin American region is home to a strong group of airlines who have experienced 7-14% growth over the last several years, and who are now competing head-to-head with United States, European and Gulf carriers.”
The difficulties the airlines face include, cost increases caused by government policy, shortcomings in government infrastructure investment, monopoly airport services, excessive bureaucracy including anti-currency repatriation, and demanding all fuel purchases are in United States dollars.
Central to airlines’ profitability, fuel is a third of their operational costs. Carriers worldwide will have cheered the falling crude oil prices. Yet Latin America, with its oil producing regions, still manages to hinder air transport on its cost.
One example of the impact of all these policies is Venezuela. In the 12 months before 31 August 2015 that country saw traffic fall 12%, compared to the previous 12 months, while other economies prospered.
Fuel has been added to Venezuela’s list of items that airlines have to buy in dollars instead of Venezuelan Bolivars. This goes against the non-discriminatory spirit of the Chicago Convention, which Venezuela has signed.
A year ago Venezuela had blocked the repatriation of a total of $3.8 billion of airline revenue. Venezuela has made promises to pay what is owed, but nothing has been done. The amount held in Venezuela has not changed in the past 12 months. There was one approval for repatriating funds in 2015, but nothing in 2016. The total money held continues to stand at $3.8 billion.
Retrieving revenue had been a problem in Argentina, but since December the situation has improved. Argentina’s central bank was the institution that had established restrictions on the repatriation of funds. As a result, many airlines had stopped selling tickets in Argentina. But, as of 16 December last year, foreign companies no longer need approval to repatriate funds and they have been sending money back as they would anywhere else. The Argentine government has also set up a schedule to pay off the money still held and this is expected to be completed by June 2016 at the latest.
Another challenge for Argentinean airlines is the fall in the country’s currency, the peso. The peso fell considerably in mid-December when the new administration lifted the country’s currency controls and floated the peso on the exchange markets. Since then, it has depreciated further and trades around 14 pesos to the dollar. This was essentially a devaluation, but has had some positive outcomes, such as doing away with the complicated approval and currency control system. A downside is that fuel has become more expensive.
Brazil has a deadlier mix of problems that have led to the country’s airlines achieving a combined loss of almost $1.56 billion Reals ($400 million) in the first half of 2015 alone. During that time, according to Brazil’s own civil aviation authority, Agência Nacional de Aviação Civil (ANAC), Avianca made a loss of 38.6 million Reals, Azul Linhas Aéreas Brasileiras 236 million Reals, Gol Transportes Aéreos one billion Reals and TAM Airlines 183 million.
When fuel is a third of operational costs, being an oil producing nation might be an advantage for domestic airlines, but not for Brazil. Domestic fuel costs are as much as 50% more than anywhere else. Brazilian multinational energy company Petrobras has an import parity pricing formula and the annual cost impact, for all of the airlines that uplift fuel in Brazil, is about $800 million per year.
While the oil price has been falling this does not necessarily lead to a lower incremental impact of import parity pricing. This is because the difference between parity pricing and an international price includes logistical costs, for example, transportation and insurance. It is Cerda’s view that Brazil needs a national policy for the transparent pricing of jet fuel with a formula that prevents the abusive pricing being levied on airlines.
In the World Economic Forum’s competitiveness ranking of ticket prices and airport charges, Brazil ranks 118 out of 140 countries; just behind Sierra Leone and ahead of Burkina Faso. Airlines find Brazil overly bureaucratic and a very difficult place to do business.
IATA encourages the Brazilian authorities to observe global best practices and international guidelines, especially in regards to smarter regulation. The lack of harmonization with global standards for airport slots is a major problem in Brazil and increases the costs for passengers and airlines.
In 2015, Brazil made a retroactive request for carriers to provide information about slots used during the 2014 World Cup, but how does that help? Worldwide Slot Guidelines are the globally adopted standard for efficient slot allocation and optimizing the use of congested airports, Brazil needs to implement them.
Brazil signed and ratified the Montreal Convention of 1999 (MC99) in 2006, yet it does not adhere to it either. The ANAC’s resolution 141 contravenes the MC99, in particular regarding baggage allowances and accommodation for flight delays and cancelations, which are beyond the scope of the airlines’ responsibility. If central government policies, or lack of them, were not enough of a substantial set of obstacles, according to IATA, an increasing number of legal rulings in lower Brazilian courts are creating uncertainty for airlines.
LatAm is a region that has seen fares fall by more than 50% from 2002 to 2014 while passenger numbers have increased three-fold, despite the main problems cited above. Cerda says: “In summary, Latin America has some of the best carriers in the world, many of whom have invested in modern fleets and are looking to expand their reach and satisfy the growing demand for air travel in the region. But, in order for them to do so the region’s governments need to adopt global best practices which have allowed aviation to grow and transform local economies like they have in places such as the Gulf States and Singapore, [among others].”
On 4 May, an IATA Aviation Day will take place in Buenos Aires to demonstrate the value of the industry to Argentina. The event follows the Aviation Day Colombia in Bogota in December last year. The May event will see the industry engage in partnerships and promote dialogue to overcome their collective challenges.
It will also be an opportunity to engage with the government. It is an example that many of the LatAm nations could replicate.