LATAM Airlines Group CEO Enrique Cueto talks about what it has taken to merge LAN and TAM and what the future holds.
How has the merger between LAN and TAM gone?
It was long an ambition to bring LAN and TAM together and create an airline group in Latin America capable of competing in the aviation big leagues. Since we merged in June 2012, we’ve been working tirelessly to integrate our processes, products and network. While the road hasn’t always been easy and we’ve had to overcome cultural, operational and regulatory challenges, I think we’ve made extraordinary progress.
Over the past few years, we’ve successfully aligned the most extensive network in Latin America, implemented operational improvements, optimized our fleet use and introduced a renewed travel experience. And, in August last year, we announced that LATAM would be the new brand for LAN, TAM and affiliates, giving us the opportunity to create an airline group with a truly Latin American identity and a global presence.
Recently, in May, we marked the most significant milestone yet in our journey with the departure of the first LATAM aircraft, one of the most iconic symbols of any airline. Our passengers now have the ability to book tickets via the LATAM website, accumulate kilometers using LATAM’s frequent flyer program, check-in at LATAM counters, relax in LATAM VIP lounges and fly on LATAM-branded aircraft.
While mergers and take-overs are relatively commonplace in the industry, never before in the history of aviation have two airlines from different countries, with different languages and cultures, united under a single brand, leaving the previous names behind. Although the change will be gradual and we still have another three years until we will be ‘100% LATAM’, I think everyone involved should be very proud of what has been achieved so far.
Has the tie up changed the airline’s competitive position?
Absolutely. The changes since the merger have helped us to establish LATAM as the leading airline group in Latin America and give us a platform to become one of the leading groups in the world.
LATAM brings together the best of LAN and TAM, delivering our passengers much more than the sum of our parts. As LATAM, we offer an unrivalled network in Latin America with domestic operations in seven countries, serving over 137 destinations in 25 countries in total. We also have the most modern and efficient fleet in the region and were the first airline group in the Americas to operate both the Airbus A350 XWB and Boeing 787. And, we’ve invested $50 million a year in digital solutions to offer our passengers a more personalized travel experience.
Is there room for further consolidation in the region?
Despite the current economic climate, Latin America presents great long-term opportunities for growth in the aviation industry, so it is impossible to rule-out future consolidation or competition. This is healthy for the industry and ultimately passengers are the ones that benefit. However, LATAM’s priority is to ensure that we continue to offer products, services and a network that differentiates us from our competitors.
How has the difficult economic picture in the region changed LATAM’s operations?
It goes without saying that we are operating in a challenging economic scenario – particularly in Brazil. But, we are not waiting for a recovery; instead we are transforming the company to operate within the current environment. That is why we have introduced both cost and fleet reduction plans, and have worked to match capacity to demand.
With growth in the region expected to slow in the short-term, we need fewer aircraft and as a result we have restructured our fleet plan to reduce our commitments and postpone the arrival of some aircraft until 2018. This has helped us to save $2.9 billion to date.
The most notable drop in demand has been in Brazil and we have reduced capacity accordingly with plans of a further reduction of 8-10% in 2016. While the challenges may continue, we see this situation as temporary, and this does not affect our long-term strategy in Brazil or the connectivity we offer.
What’s more, we achieved cost reductions of approximately $325 million in 2015 and aim to continue with our reduction plan this year to cut costs by an additional $300 million.
Overall, it is important that we remain a financially healthy company, by staying alert and taking all necessary measures to mitigate the effects of the crisis and other risks to the business.
What can governments do to make sure the region is competitive for air carriers?
If we take the benefits that aviation brings to national and global economies as a given, it is important that governments help the industry to improve connectivity and widen access to more people in the region.
One way of doing this is to offer low fares. However, the challenge for every airline operating in the region is to maintain competitive pricing in a context where operating costs and airport taxes are high. This makes it difficult for any airline to avoid passing these inherent costs onto passengers.
Additionally, operators in Latin America have to navigate local differences in regulation and legislation, which can often slow processes. As we have seen in Europe and the United States, multi-lateral agreements can be a way to tackle this. An obvious example would be the introduction of an open-skies policy across the region.
What are the biggest pain points in terms of infrastructure?
Air traffic is anticipated to grow across the region and investment is needed to ensure that airports are equipped to deal with this. This does not just mean an increase in size to accommodate greater demand, but also improvements in technology and services to meet modern passenger needs.
In terms of environment, what do you believe a global market-based solution looks like?
As the first industry to collectively agree to limit CO2 emissions, aviation has already shown great leadership in recognizing its impact on the environment and shaping the concept of global sustainability. If these ambitious global emission reduction goals are ratified at the general assembly of ICAO [International Civil Aviation Organization] in September 2016, it could mark an historic milestone.
However, in order to achieve these goals it needs to be underpinned by a workable market-based solution – as proposed by IATA in its Four Pillar strategy – that both limits CO2 emissions in real terms and allows for sustainable growth.
We also need to work together with our passengers and allied industries such as aircraft and engine manufacturers, air traffic controllers and aviation fuel providers. Advances have already been made with the development of more efficient aircraft and precision flight planning for example, but an area of great potential is the production and commercialization of alternative fuels.
At LATAM, we are committed to operating in an efficient and sustainable manner, and ultimately reduce our environmental impact. Our strategy focuses on fleet modernization, increased operational efficiency and sustainable energy sources.
We now boast one of the youngest and most modern fleets in the world, with an average age of less than seven years. We are also developing an environmental management system to measure, control and reduce the environmental impact of each area of our operation. And, we have carried out three flights using second generation biofuel, with the goal of promoting the development of a sustainable biofuels industry in South America.
What is your mid- to long-term outlook for the Brazilian market?
Brazil is going through one the worst economic and political crises in its history and it is not something that will be resolved overnight. That’s why, we are not waiting for a recovery and instead we have had to adapt to the current scenario.
For example, we have reduced capacity by 8-10% on domestic routes and by 25% on routes between Brazil and the United States. Nevertheless, this does not affect our long-term strategy or the connectivity we offer in Brazil – it is, and will continue to be, essential for the company. Let’s not forget that Brazil is the third largest domestic market for air travel in the world and accounts for half of South America´s total traffic.
To be able to confront the crisis, it is necessary that the country and its leaders make decisions that benefit Brazil and its recovery. While the challenges may continue over the next couple of years, we are optimistic that the situation in Brazil is temporary.
How will the region’s air transport sector look after current economic difficulties? Will the industry in the region be leaner?
Every operator in the region has been affected by the crisis and we have all had to respond to mitigate its effects. The operators that adapt best will be the ones who shape the industry in the region going forward.
One of LATAM’s advantages is the breadth of our business and our presence in other countries in the region, which has enabled us to continue growing in other markets. For example, 40% of the passengers flying from Brazil to Europe today are not Brazilian – instead they come from other countries in the region served by LATAM and use Brazil as a connecting point.
It is important to remember that we are competing on a global playing field and need to ensure that we continue to offer world-class products and services. That’s why, for example, it is a priority to continue investing in digital technologies that improve the passenger experience.
Latin America has started to see its share of ultra-long-haul routes with flights to Asia, Oceania and the Middle East. Do you believe there will have to be more direct connections to these parts of the world in the future?
Ultra-long haul routes are a natural progression as Latin America develops and demand increases, especially with the introduction of new fuel-efficient, long-haul aircraft such as the A350 XWB and Boeing 787. We are committed to strengthening our international network and offering passengers greater convenience through new destinations, better itineraries and stronger alliances. However, as with any new route, there always needs to be a strong business case.
North America and Europe remain our two most important long-distance markets, but this doesn’t rule out other parts of the world and we already serve Australia [Sydney] and New Zealand [Auckland]. In October – subject to approval – we will also become the only Latin American carrier to operate flights to Africa, with a non-stop Boeing 767 service between São Paulo and Johannesburg.
2012 Appointed Chief Executive Officer of LATAM Airlines Group.
1994-2012 CEO of LAN Airlines.
1993-1994 Served on LAN Board of Directors.
1983-1994 CEO of Chilean cargo airline Fast Air.
Enrique Cueto is also a member of the Cueto Group, LATAM Airlines Group’s controlling shareholder.