Reboot South America: Top hubs primed for opportunity in 2017€¦ · Reboot South America: Top...

Reboot South America: Top hubs primed for opportunity in 2017

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Contents

Right time, right place for South America’s top airports 3Economics and hub airports 4Brazil – challenging times remain 6Peru – following the Inca Trail 7Colombia 9Chile 10Argentina – steady growth 11LATAM flexes its muscles 12Land of opportunity 13

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3

Right time, right place for South America’s top airports

Whilst 2016 is proving a testing time economically for much of South America, air traffic appears to be bucking the trend (with the notable exception of Brazil). Many markets, especially along the western side of the continent, are seeing robust growth in airline capacity as airlines flex capacity in response to demand, infrastructure projects deliver capacity at major hubs and low-cost carriers continue to stimulate demand.

In this report we look ahead with a focus on South America’s Top 20 hub airports, reflecting on the economic environment, the challenges and opportunities. Whilst short-term the picture looks gloomy, as we edge into 2017, prospects look much improved all around if IMF economic projections are to be believed. Even Brazil’s decline is expected to be arrested next year and most nations will see GDP growth above 2%. If the old adage of scheduled airline capacity growing at roughly twice the rate of GDP is reflected, then many of these markets could see capacity growth of 6-8% next year.

For many of South America’s major airports outside Brazil and Venezuela, there is more than a glimmer of good news. A glance at the current state of airline capacity growth shows that airlines are already responding with plenty of new capacity where economies are in reasonable shape.

GDP GROWTH

Country 2014 2015 2016 2017

Bolivia 5.5 4.8 3.8 3.5

Peru 2.4 3.3 3.7 4.1

Guyana 3.8 3.0 3.4 3.5

Paraguay 4.7 3.0 2.9 3.2

Colombia 4.4 3.1 2.5 3.0

Chile 1.8 2.1 1.5 2.1

Uruguay 3.5 1.5 1.4 2.6

Argentina 0.5 1.2 -1.0 2.8

Suriname 1.8 0.1 -2.0 2.5

Brazil 0.1 -3.8 -3.8 0.0

Ecuador 3.7 0.0 -4.5 -4.3

Venezuela -3.9 -5.7 -8.0 -4.5

Source: IMF World Economic Outlook database, April 2016

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4

SOUTH AMERICA – SEAT CAPACITY FOR TOP 5 COUNTRIES & TOP 20 AIRPORTS

Economics and hub airports

Of the twelve sovereign nations that make up the region, five of them - Argentina, Brazil, Ecuador, Suriname and Venezuela - are expected to experience economic contraction for the remainder of 2016. For Brazil and Venezuela this is a repeat of 2015. Venezuela has its own problems but Brazil’s woes are clearly spilling over to other countries. Only Peru and Guyana are expected to experience stronger economic growth this year than last.

That said, the picture is not uniform. Bolivia, Peru, Guyana, Paraguay, Colombia and Chile are all expected to see economic growth exceed 2% so, while slower expansion than last year, their economies continue to grow.

Airline seat capacity reflects this pattern, with Brazil’s market 10% smaller than in January-July 2015 whilst the likes of Peru, Colombia and Chile are all growing. Unsurprisingly, the major airports situated in Brazil have felt the heat while Top 20 airports located elsewhere in the continent are generally growing. Lima, Medellin, Cartagena and Cuzco are all experiencing capacity growth of 15% or more.

SEAT CAPACITY – JAN-JUL 2016

Source: schedules analyser

953,438+4%

1,410,894+14%

334,901+3%

319,273+3%

Departing Seats Jan-Jul

2016

Growth vs 2015

-8,467,477-10%

Colombia

Peru

Chile

Argentina

Brazil

GRU

BOG

CG

H

LIM

SCL

BSB

GIG

AEP

SDU

EZE

CN

F

VCP

MDE

CC

S

UIO

CLO GYE

CTG

CU

Z

VVI

13,0

88,7

69

10,7

51,1

64

6,77

1,82

5

3,69

0,02

9

2,73

3,47

07,00

7,13

0

4,25

4,15

3

3,35

8,00

8

1,96

8,85

1

1,31

8,64

8

7,90

3,79

9

5,81

3,74

9

3,69

0,34

8

2,10

5,80

2

1,47

5,14

66,35

8,63

2

3,90

3,03

3

2,75

4,85

6

1,64

9,74

9

1,17

4,82

2

5

SEAT CAPACITY GROWTH – JAN-JUL 2016 vs 2015

SOUTH AMERICAN COUNTRIES WITH TOP 20 AIRPORTS GDP AND AIRLINE SEAT CAPACITY

Country GDP 2016 USD billions

Departing Airline Seats Jan-Jul 2016

Variance vs Jan-Jul

2015

Growth in departing

seats, Jan-Jul, 2016 vs 2015

Airports in Top 20

Brazil 1,535 76,133,879 -8,467,477 -10% GRU, CGH, BSB, GIG, SDU, CNF, VCP

Argentina 438 12,879,756 +319,273 +3% AEP, EZE,

Colombia 253 22,229,534 +953,438 +4% BOG, MDE, CLO, CTG

Chile 235 10,474,783 +334,901 +3% SCL,

Venezuela 186 5,517,073 -515,381 -9% CCS

Peru 179 11,189,886 +1,410,894 +14% LIM, CUZ

Ecuador 94 4,498,761 5,474 0% UIO, GYE

Bolivia 34 3,674,350 381,188 +12% VVI

Source: IMF World Economic Outlook, April 2016

schedules analyser

GRU

BOG

CG

H

LIM

SCL

BSB

GIG

AEP

SDU

EZE

CN

F

VCP

MDE

CC

S

UIO

CLO GYE

CTG

CU

Z

VVI

-6%

2%

-6%

12%

-9%

15%

-3%

-14%

10%

21%

1%

-9%

-16%

-1%

18%

8%

-13%

13%

6% 3%

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6

Brazil – challenging times remain

The celebrations around Brazil’s hosting of the Olympic Games are a welcome relief for an economy which remains in the doldrums. It may be a few years yet before economic growth is positive so airlines and airports still face a few difficult years ahead.

Having said that, the country is one of the most populous in the world with high levels of urbanisation and cosmopolitan megacities which have attracted businesses, immigrants and tourists, so long-term prospects must be positive. Sao Paulo, the 5th biggest city in the world1, is expected to reach a population of over 23 million by 20302. The major airports have been wholly or partially privatised over the past few years and are benefiting from new infrastructure developments such as those at Sao Paulo Guarulhos Airport, which aims to double capacity to 60 million passengers per annum and includes a new terminal as well as upgrades to existing terminals. As and when the economy bounces back, Brazil has huge potential to develop air services further.

Brazil is home to seven of South America’s Top 20 airports and these seven airports together account for 53% of Brazil’s scheduled airline capacity. However, these airports have collectively seen capacity fall by 3.6m seats for the first half of 2016, versus the same period last year. Belo Horizonte (CNF) and Campinas Viracopos (VCP) airports have taken the biggest hit with 16% and 14% less capacity respectively.

Brazil is dominated by four carriers which collectively operate 90% of its airline seats. Three of these carriers, LATAM, GOL and Azul, are still reducing capacity, with Avianca, the smallest of the four, finding a way to add seats in this difficult market. LATAM alone took 918,000 seats out of the market between January-July 2015 and the same period this year, whilst GOL reduced capacity by just over 2.5m seats. LATAM has been taking advantage of its presence in multiple markets, working hard to move capacity away from Brazil and into markets with better immediate prospects.

1 World Urbanisation Prospects: The 2014 Revision, UNESA 2 UN

BRAZIL GDP GROWTH PROJECTIONS

2017 2018 2019 2020 2021

0.0% 1.1% 2.0% 2.0% 2.0%

Source: IMF World Economic Outlook database April 2016

7

BRAZIL – TOP 4 CARRIERS


Peru – following the Inca Trail

Peru has benefited from one of the strongest South American economies this year and looks set to continue that way. The buoyant economy has benefited from strong tourism marketing and double-digit growth in tourist arrivals in recent years3.

Privatisation of airports some years ago and subsequent infrastructure investment has helped create airports which can also deliver growth, although with Lima Airport operating at capacity and dominating international air access to the country, ongoing delays to the construction of a new runway could potentially interrupt this.

Two of Peru’s airports feature in the Top 20 South American hubs – Lima (LIM) and Cuzco (CUZ). Together these airports account for 57% of Peru’s capacity. With over a million new seats added at LIM and CUZ for the period January – July 2016 versus the same period last year, air capacity has grown at 15% at LIM and 21% at CUZ.

PERU GDP GROWTH PROJECTIONS

2017 2018 2019 2020 2021

4.1% 3.6% 3.5% 3.5% 3.5%


3 UNWTO e-library

LATAM

GOL

Azul

Avianca

Jan-Jul 2015 Jan-Jul 2016

0 5,000,000 10,000,000 15,000,000 20,000,000

-6%

-15%

-5%

+13%

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8

Much of the growth at both of these airports is being driven by LATAM, the dominant carrier. At LIM it operates 51% of seats and 54% at CUZ. LATAM has increased seat capacity at LIM by 10% and by 15% at CUZ, resulting in an additional 411,000 seats for the period January – July 2016 versus last year.

Domestic capacity is rising high with 21% more domestic seats at LIM and 22% more at CUZ. Local carrier Peruvian Airlines has increased capacity by 120,000 seats in the first 8 months of the year, equating to growth of 15%, while LC Peru has added 725,000 seats all in the domestic market.

VivaColombia recently announced its plan to expand its Bogota-Lima service to become a daily operation and have expressed an interest in flying to CUZ. With just 2% of capacity at LIM operated by LCCs and no LCC presence at CUZ, this can only be a positive move for passengers.

LAN NETWORK AT LIMA (LIM) – JULY 2016


9

ColombiaAlthough the Colombian economy has weakened in 2016, prospects remain good. Commodity price movements and the effect of El Nino on food prices contribute volatility. One of the recent highlights for the country has been its burgeoning identity as a technology innovation hub. With assistance and funding from a government programme and bold plans for broadband connectivity, Colombia has developed one of the stronger start-up eco-systems in the region, with the focus around Bogota (BOG) and Medellin (MDE).

These two main airports of Colombia rank among the Top 20 South American hubs, being the second and 13th biggest airports in South America respectively. Both airports are growing, though the rate of growth at MDE is faster with 13% more seats for the first part of this year versus last year, and strong growth in both the domestic (+12%) and international (+22%) markets. Growth at BOG is slower, with just 2% more capacity, mostly from international growth.

BOG & MDE CAPACITY GROWTH VS 2015


Both airports are dominated by Avianca which operates nearly two thirds of capacity. Avianca is not growing at MDE however, whilst LATAM, which operates a more modest 13% share of capacity, has added 100,000 extra seats at Colombia’s second largest airport, compared to last year. VivaColombia also goes from strength to strength at MDE, adding just under 100,000 seats and growing its share of capacity from 12% last year to 15% this year.

Penetration of low-cost carriers is relatively low at 4% of seats at BOG and 9% at MDE.

Avianca has added 105,000 seats at BOG, although this translates to just a 2% increase in its seat capacity at the airport. VivaColombia is also growing its share of capacity at BOG, up from 4% last year to 6% this year, with 160,000 more seats.

COLOMBIA GDP GROWTH PROJECTIONS

2017 2018 2019 2020 2021

3.0% 3.7% 4.1% 4.3% 4.0%


25%

20%

15%

10%

5%

0%

BOG

MDE

2016-01 2016-02 2016-03 2016-04 2016-05 2016-06 2016-07

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10

Chile

Like the other countries on the western edge of the continent, Chile’s aviation market is also in growth mode. Carriers have increased capacity by 8% at Santiago (SCL) for the first seven months of this year versus last year.

SCL is Chile’s main hub and the fifth biggest in South America. The LATAM group dominates with 66% of capacity. LATAM has added 327,000 seats this year so far versus last year, equivalent to an extra 1,500 seats every day, spreading across domestic and international markets. Chile’s LCC, Sky Airline, is also in growth mode with 44,000 more seats for the same period. Sky Airline has grown substantially in the domestic market with 9% more capacity (+71,328 seats), but pulled back on its international position (-27,732 seats).

Airport terminal development at SCL, due for completion in 2020, will increase capacity from 30 million passengers per annum to 45 million. Reflecting the attractiveness of investments in Chile at this time, the original bid for the development attracted a large number of investors. The city is also gaining reputation as a tech start-up location, dubbed ‘Chilecon Valley’, and supported by state investment. More broadly, the national economy has been growing steadily and is expected to continue doing so, which will support further growth in air travel.

LAN NETWORK AT SANTIAGO (SCL) – JULY 2016


CHILE GDP GROWTH PROJECTIONS

2017 2018 2019 2020 2021

2.1% 2.7% 3.0% 3.2% 3.4%


11

Argentina – steady growth The population of Buenos Aires, Argentina’s capital city, is expected to reach 17 million by 2030. The city is the hub of the country with a third of the total population living in or near the city. The country has experienced steady economic growth for years and prospects are for a continuation of the same.

Both of Argentina’s Buenos Aires airports, EZE and AEP, appear in the South American Top 20. Across these airports, carriers have added 259,000 seats in the seven months to July 2016 versus the previous year. The growth is not uniform however with AEP, serving mostly the domestic market, recording a drop in capacity whilst EZE, serving mostly international destinations, recorded 12% more seats for January to July 2016 than the previous year. Argentina’s national carrier, Aerolineas Argentinas, has the largest share of international capacity with 23% of seats but LATAM is not far behind with 19% of capacity. Both carriers are growing with Aerolineas Argentinas adding 23% more seats for this period whilst LATAM is operating 10% more, or 58,000 seats.

ROUTE NETWORK AT BUENOS AIRES (EZE) – JULY 2016


ARGENTINA GDP GROWTH PROJECTIONS

2017 2018 2019 2020 2021

2.8% 2.9% 2.8% 2.8% 2.9%


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12

LATAM flexes its muscles LATAM is heavily exposed in the Brazil market with 49% of all its seats in July departing from a Brazilian airport but unlike GOL, with 97% of seats departing from Brazilian airports, it does have a more diversified network across the continent. Just six years ago, Brazil’s GDP growth reached 7.5% but the IMF predicts it will be -4% this year: this sort of change in the operating environment clearly calls for a radical response.

Whilst LATAM has made a concerted effort to reduce overall capacity, commenting in its most recent investor report that it reduced Brazilian capacity in Q1 of 2016 by 8.4%, and planned to end the year 10-12% down, consolidation has also enabled the LATAM group to shift capacity away from Brazil. A total of 918,000 seats have effectively moved with LATAM placing it in markets where growth is possible, primarily to Peru, Colombia, Chile and Argentina where the combined LATAM position adds 896,000 seats. No other South American carrier has demonstrated this kind of resilience.

A consequence of creating a single brand, indeed a single business, across a number of country markets in South America is that LATAM has been able to shift large volumes of capacity quite quickly away from where the business is hurting and into growth markets. This is good news for the primary airports in each of those country markets along with a number of second-tier airports which are seeing capacity and traffic increase. Moreover, the painstaking work of creating more effective hub activity at primary airports may be paying off for LATAM now and will surely create an even stronger business model for the future.

LATAM STATS – JULY 2016

July 2016 July 2015

Scheduled Seats 7,162,879 7,576,287

Frequencies 41,555 45,296

Countries Flown To 25 25

Routes Operated 292 299

Airports Served 139 141


(Airline codes used by LATAM: 4M-LanArgentina, JJ-LATAM Airlines Brazil, LA-LATAM Airlines Group, PZ- LATAM Airlines Paraguay, XL- LanEcuador)

13

Land of opportunity

With economic growth expected to speed up next year in many parts of the continent, there should be plenty of opportunities for new and additional air services. In particular, there are opportunities to develop and enhance connectivity around the cities repositioning themselves, much as India’s Bangalore and Hyderabad have done over the past decade, into innovative technology hubs.

Airline booking data for June 2016 also gives an inkling of where new capacity could be deployed. A look at the routes with the largest volume of passengers travelling via a third point shows where flights could be added, larger aircraft put to work or where new airlines could enter the market.

TOP 20 SOUTH AMERICA AIRPORTS – TOP UNDERSERVED ROUTES – JUNE 2016

Rank AirportTop underserved

routeJune 2016

Indirect two-way bookingsJune 2016

Passengers each way per day

1 GRU GRU-MCO 7,957 132

2 BOG BOG-MCO 5,575 93

3 CGH CGHBSB 7,059 118

4 LIM LIM-SFO 6,595 110

5 SCL SCL-PUJ 11,317 189

6 BSB BSB-CGH 7,059 118

7 GIG GIG-BSB 6,844 114

8 AEP AEP-PUJ 4,402 73

9 SDU SDU-SAL 6,895 115

10 EZE EZE-MIA 12,211 204

11 CNF CNF-CWB 12,670 211

12 VCP VCP-BEL 2,742 46

13 MDE MDE-CUN 6,936 116

14 CCS CCS-SCL 3,984 66

15 UIO UIO-JFK 8,947 149

16 CLO CLO-SMR 9,344 156

17 GYE GYE-JFK 9,093 152

18 CTG CTG-CLO 6,069 101

19 CUZ CUZ-SCL 4,162 69

20 VVI VVI-MIA 3,280 55

Source: traffic analyser

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14

The largest indirect routes at Santiago (SCL), Buenos Aires (EZE) and Belo Horizonte in June had over 11,000 indirect bookings, in addition to direct traffic. This is equivalent to more than 183 passengers in each direction every day on each of these routes. Over half of the Top 20 airports in South America have one route or more which had in excess of 100 indirect passengers each way in June.

The likely winners for the race to take advantage of the looming opportunity are low-cost carriers (LCCs). Allowing for the fact that LATAM identifies its business model as close to an LCC in domestic markets, penetration of LCCs is generally low across the continent, though – as is often the case – Brazil is the exception. So air service development is likely to emerge through new entrant LCCs and expansion by nascent LCCs active in each market and the beneficiaries may well be the larger secondary cities in each country, which is good news for the likes of Medellin, Cartagena, Cusco and Arequipa.

15

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Ivonne BuchhalterSales Manager

Mari AlvarezSenior Sales Manager

Carolina MaitreHead of Florida, Latin

America & Carribean Region

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