Grounded

Airlines operating in Latin America continue to file for bankruptcy, will any survive the pandemic?

The next six to twelve months will be defining for the Latin American airline industry. TAME and Liat have ceased operations, LATAM, Aeroméxico and Avianca have filed for bankruptcy and the balance sheets of many other carriers are deteriorating rapidly.

State aid has not been forthcoming either. A bailout of any private company is extremely unlikely in Mexico for ideological and financial reasons, “The government has emphatically refused to support the lines and has said that whoever has to go bankrupt should go bankrupt,” says an executive at Aeroméxico, despairingly. Colombia offered a bailout to Avianca but it has been held up by a legal challenge and Brazil offered support to Azul but the airline has not yet decided if they will take it.

“The [Mexican] government has emphatically refused to support the airlines and has said that whoever has to go bankrupt should go bankrupt.”

Executive, Aeroméxico

To survive, the airlines that have filed for bankruptcy protection have mostly focused on reducing routes and frequencies and our sources agree that there must be changes to services and the way that they are offered, either free or paid for.

Reducing prices to boost demand isn’t a practical option for most airlines according to an executive at Aeroméxico, “In reality, it is hard to offer lower prices to attract people, between the TUA and sustaining costs, there isn’t much room. This might be easier for low-cost airlines but they aren’t immune either.”

This is partially true, the Aeroméxico source referenced Interjet, who were already in trouble before the pandemic due to high debt levels from the purchase of planes and a conflict with SAT (the revenue service of the Mexican federal government).

In contrast, Mexico’s other low-cost airline, Volaris, has fared rather better – all of its aircraft are leased, they have plenty of cash and no short-term debt due. They are one of the few airlines still adding routes.

A former senior executive at Interjet explains, “Volaris has an extremely low unit cost and has seen a rapid recovery as 70% of their network is on visiting friends and relatives (VFR) and leisure routes, which were the first segments to recover. They also have a strong digital presence including a WhatsApp chatbot that has reduced call centre costs.”

“Azul are doing exceptionally well, they moved rapidly into cargo.”

Senior manager, Avianca

A senior manager at Avianca describes another relative outperformer, “Azul are doing exceptionally well, they moved rapidly into cargo. Before the pandemic cargo accounted for 5% of Azul’s income, at its peak this grew to 60%!”

As Charles Darwin said, “It is not the strongest of the species that survives, nor the most intelligent; it is the one most adaptable to change.”

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