LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

LATAM Airlines Group continues

to build network utility as
currency pressure remains an
overhang
Published on 7-Jun-2015
Currency pressure continues to be the norm for LATAM Airlines Group
as the company faces currency devaluation in many of the countries
where it retains a significant presence. The challenges created by the
currency devaluations are now well documented, and are pressuring
the companys unit revenue results.
LATAM is obviously working to combat the pressure created by
devaluations in most of the South American countries where it
operates, including attempts to change point of sale mix and a focus
on regions where stronger demand can offset some of the weaker
areas within its network.
Brazil remains a challenging market for LATAM and numerous other
airlines, particularly due to the decline in the countrys corporate
demand. But despite the continuing weakness in the countrys
domestic and international markets, LATAM continues to flesh out
its Brazilian network, and plans to build a new hub in the countrys
Northeastern region.

LATAM faces double digit currency declines in

many markets
During 1Q2015 LATAM endured a 13% and 23% depreciation in the
Chilean and Colombian currencies respectively. Argentinas currency
dropped 14%, and Brazils currency, which has been under pressure
for roughly a year, fell 21.4% year-on-year during 1Q2015. The
currency pressure drove down the companys consolidated unit
revenues by 14.7% year-on-year during 1Q2015 (measured in USD).
Data from CAPA and OAG show that for the week of 8-Jun-2015
to 14-Jun-2015 Brazil is LATAM Airlines Groups largest country
measured by international seat and ASM deployment. Chile and Peru
are the companys second and third largest countries measured by
seats and the US and Chile represent LATAMs second and third
largest international markets measured by ASMs.

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LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

LATAM Airlines Group S.A. international capacity by country (% of

seats): 8-Jun-2015 to 14-Jun-2015

Source: CAPA - Centre for Aviation and OAG

LATAM Airlines Group S.A. international capacity by country (% of

ASMs): 8-Jun-2015 to 14-Jun-2015

Source: CAPA - Centre for Aviation and OAG

In 1Q2015 LATAMs unit revenues in its Spanish speaking countries

Chile, Peru, Argentina, Colombia and Ecuador fell 4.1%. However,
the company concluded that yields in those market generally showed
positive trends during the quarter when measured in local currencies.
Capacity in those markets increased 3.7% year-on-year.
Unit revenues in LATAMs international markets, long-haul and
regional, dropped 8% year-on-year during 1Q2015. Capacity
increased 2.4%, most of which was deployed to the Caribbean, said
LATAM. The currency pressure affected yields as local demand for
international travel was soft. To combat the weakness, LATAM stated
it was adjusting point of sale mix to markets with stronger demand.

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LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

Corporate demand in Brazil could be starting a

slow and long recovery
Brazils well known challenges economic weakness and currency
pressure continued to weaken LATAMs domestic performance in
the country. In 1Q2015 the companys unit revenues in the Brazil
domestic market fell 19.3% on a 1% increase in capacity. Brazils
GDP is projected to contract 1% in 2015 and the BRL is trading at
BRL3.14 against the USD (as of 7-Jun-2015).
Corporate demand in Brazil has been suffering since the World Cup
Soccer tournament held in the country during 2014. The company
explained that even with its capacity reductions in Brazil, it has
however maintained its corporate market share. LATAM executives
recently stated that during the first part of 2Q2015 some signs of a
pricing recovery emerged, but there was no real change in demand
patterns.
LATAM estimates that 35% to 40% of its corporate international
travel for Brazil stems from point of sale in other regions, versus
roughly 10% on its competitors, so that obviously gives the company
some leverage.

LATAM seeks a new Northeastern hub in Brazil

to optimise trans-Atlantic flights
Despite the unfavourable operating conditions in Brazil, LATAM has
outlined plans to establish a new hub in the Northeastern region
of the country, to expand operations between Europe and South
America. Fortaleza, Natal and Recife are are candidates for TAMs
new hub.
TAM CEO Claudia Sender recently told news outlet Bloomberg that
the move should give customers more direct access across the transAtlantic, and also result in faster turnaround times that would cut
operating costs. The bulk of TAMs trans-Atlantic flights are operated
from Sao Paul Guarulhos, the countrys busiest airport located in the
Southeastern region of Brazil.
Ms Sender told Bloomberg that TAM estimates 1.5 million passengers
would travel on the routes from the new hub, which could include 10
European destinations. LATAM aims to name the new hub by YE2015
and operations are expected to start in Dec-2016.
Among the three airports under consideration, TAM is the largest
airline in Fortaleza with a 43% seat share (8-Jun-2015 to
14-Jun-2014). It is the second largest at Natal and Recife behind Gol,
holding seats shares of 37% and 29%, respectively.

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LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

Fortaleza Pinto Martins Airport capacity by airline (% of seats):

8-Jun-2015 to 14-Jun-2015

Source: CAPA - Centre for Aviation and OAG

Natal Aluzio Alves International Airport capacity by airline (% of seats):

8-Jun-2015 to 14-Jun-2015

Source: CAPA - Centre for Aviation and OAG

Recife Guararapes International Airport capacity by airline (% of seats):

8-Jun-2015 to 14-Jun-2015

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LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

Source: CAPA - Centre for Aviation and OAG

Recife is the largest metropolitan region among the three candidates,

and the airport is among the busiest outside Sao Paulo Guarulhos
and Rio de Janeiro. No airline operates a great deal of trans-Atlantic
flights from those airports, with the exception of TAP Portugal, which
operates to Lisbon from all three facilities.
It is tough to say if LATAM is opting to establish a Northeastern
hub as a means to fortify itself as its rivals are reportedly interested
in acquiring a more than 60% stake in TAP. Reuters has stated
that Azul chairman David Neeleman and German Efromovich are
pursuing the airline. Mr Efromvich heads Synergy Group, which
controls Avianca Brazil.
The establishment of the new hub is also likely part of TAMs network
evolution after the merger with LAN to create LATAM. In 2012
LATAM started to revamp TAMs long-haul network to centre most of
TAMs trans-Atlantic flights at Guarulhos, cutting service from Rio de
Janeiro to Orlando, Frankfurt and Paris.
LATAM is also making a push from Brasilia in 2015 adding 11
domestic destinations from the airport. Previously, LATAM has
explained that Brasilia is attractive given its central location in Brazil,
and that Brasilias GDP per capita was higher than other South
American cities.
See related report: LATAM Airlines Group sticks to 2015 capacity
targets as Latin Americas economy remains shaky
With a strong hub in Brazils southeast, and a growing presence
in Brasilia, establishing a stronghold in the countrys Northeast to
leverage more favourable service to Europe seems like a logical step
in LATAMs long-term strategy in Brazil.
The company is stressing that the establishment of the hub will
be supported from its current fleet plan, and require no additional
aircraft deliveries. LATAMs fleet projections show it will operate 322
passenger aircraft at YE2016 compared with 311 at YE2015.

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LATAM Airlines Group continues to build network utility as currency pressure remains an overhang

LATAM

Airlines

Group

fleet

projections:

2014

to

2016

Source: LATAM Airlines Group

LATAM leverages its combined hubs for new service additions in 2015

The evaluation of a new hub in Brazils Northeast and the push

from Brasilia are part of LATAMs larger strategy of leveraging hubs
throughout the combined networks of LAN and TAM Lima,
Santiago, and Sao Paulo. New long-haul flights the company is
adding in 2015 include Lima-Orlando and Sao Paulo-Barcelona.
During late 2014 TAM added service from Sao Paulo to Cancun. TAM
is also introducing service from Brasilia to Orlando in 2015
LATAM is planning a system capacity increase of 2% to 4% in 2015,
with flat growth in the Brazilian domestic market and 4% to 6% in
both international and Spanish speaking markets.

LATAM is working to build network utility for

the long term, despite short term pressure
At this point currency pressure is not a new challenge to LATAM, as
most of its major markets in South America during the last couple
of years have endured weak conditions and, in many cases, sagging
economies. The lingering currency pressure could continue to be a
challenge for LATAM in the short to medium term.
But its network moves show that LATAM is working to leverage the
combined networks of LAN and TAM to exploit the strength each
airline brings to the company. With hubs in Sao Paulo, Lima and
Santiago, growing strength in Brasilia and a soon to be revealed
hub in Northeastern Brazil, the logic for the merger remains sound,
and LATAM appears to be moving patiently as it works to exploit its
position as Latin Americas most powerful airline group.
2015 Centre for Aviation

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