Why are airlines losing so much money in LatAm?

From lack of infrastructure to under-equipped low-cost carriers, airlines in LatAm are not profiting from a growing number of passengers worldwide and cheap fuel.

This year, airlines in LatAm have had it extremely tough, all of them, bar Mexico’s most profitable carriers, have posted significant losses. Those owned by state governments, such as Aerolineas Argentinas, have been subject of extraordinary bailouts and massive subsidies, those running independently have been looking for strategic alliances or for potential buyers. Whether this dire situation is a product of circumstance, or the airlines did it to themselves is a matter of debate.

The fact of the matter is that people in LatAm are simply not flying. They don’t fly not because they don’t need to, the need for faster long distance travel is as necessary in LatAm as it is everywhere else, they don’t fly because in most cases it is just too expensive. Counter-intuitively then, high prices are holding profits back for LatAm’s carriers.

The prices can be ridiculous. The distance between Lima and La Paz is roughly the same as that between London and Berlin. Whereas a flight between the English and German capitals goes for around $70 USD, a flight between the Peruvian and Bolivian capitals goes for $550.

Elsewhere in the world, airlines are booming because passengers have taken to the skies with enthusiasm, the higher demand for flights has held prices low and airlines in constant expansion. This has not happened in LatAm mainly due to the absence of full-fledged low cost carriers (LCCs).

LCCs have put air travel at arms-reach for the vast majority of the population in developing countries, although they are yet to take off in Africa, in Asia they are proof of the existing demand for cheaper, albeit less comfortable, flights. Major airlines in Asia have lost a big part of their market shares to LCCs that have become hugely profitable, Air Asia, Tigerair and Indigo have become absolute powerhouse carriers.

In Brazil, airlines like Azul and Gol have begun to set a precedent for LCCs in LatAm, but despite their growing presence, tickets between Brazil’s cities are often as expensive as flights to Europe.

In other cases, the introduction of LCCs has been limited by jealous governments, eager to protect their airlines from competition. A plethora of regulations and bureaucratic procedures has impeded them from setting shop in countries such as Venezuela, Bolivia and Argentina.

Besides government hoops, LCCs also battle against a serious lack of infrastructure. In Europe, LCCs keep their tickets cheap by making use of smaller secondary airports which charge airlines much less for their services. In LatAm, saying that secondary airports are few and far between is an understatement. Forcing LCCs to make use of major airports makes it very hard for them to keep their operating costs low.

Slowly, however, this reality is being subject to change. President Mauricio Macri of Argentina has already announced a plan to withdraw a $500 million subsidy for Aerolineas Argentinas, which should encourage them to lower their prices to attract more customers. In Brazil, legislation allowing for foreigners to own up to 100% of airlines operating locally may mean that investment in LCCs is on the way.

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