LATAM Airlines Group cuts capacity across network with overall seat availability down 5.5%; traffic for 2016 down 1.1%; now serves Africa

LATAM Airlines Group cuts capacity across network-1

Roberto Alvo, Senior VP ‎International & Alliances, LATAM Airlines Group; Fabrice Brégier, Airbus President and CEO; Enrique Cueto, CEO, LATAM Airlines Group; Rafael Alonso, President, Airbus Latin America & Caribbean; and Jose Maluf, VP Fleet & Engines, LATAM Airlines Group welcomed the latest A350 and first A320neo for the group in August. Overall during the past 12 months both operating carriers within the LATAM Airlines Group (LATAM Airlines and LATAM Airlines Brasil) have seen capacity cuts, with LATAM Airlines experiencing a 0.5% drop in capacity while LATAM Airlines Brasil has seen its capacity cut by 9.5%.

The LATAM Airlines Group was founded in 2012, a takeover/merger deal between LAN Airlines (Chile) and TAM Airlines (Brazil). The two carriers signed a non-binding agreement on 13 August 2010, a binding agreement on 19 January 2011, and papers to close the merger on 22 June 2012, with TAM Airlines shareholders agreeing to the takeover by LAN Airlines. The two airlines within the group, LATAM Airlines (formerly LAN Airlines) – which covers the LATAM subsidiaries of Argentina, Chile, Colombia, Ecuador and Peru – and LATAM Airlines Brasil (TAM Airlines) – covering the subsidiaries of Brazil and Paraquay, currently operate under the LATAM Airlines brand and are oneworld members.

Since the formation of the LATAM Group, it has not been plain sailing. The company has racked up repeated revenue decreases year-on-year since its formation in 2012. In 2013 its operating profit was $13.3 million (US), an increase of 0.3% on 2012’s total. However in 2014 it dropped 6% to $12.5 million and by year-end 2015 it was down by nearly 19% to $10.1 million. It’s not just profits that have been falling at the carrier since the coming together of LAN Airlines and TAM Airlines, but also traffic carried.

LATAM traffic down 1.1%

Taking a look at Q1 and Q2 traffic data for 2016, the total number of passengers carried by the LATAM Group has fallen by 1.1%, with the two airlines within the group carrying 32.6 million passengers between January and June this year. Taking the quarterly decreases in traffic from the data that has been able to find from the group’s website, it has seen its traffic decrease at a quarter-on-quarter rate of 0.7%, with the period from April 2014 to June 2016 seeing an average decrease of 3.3%. The worst time for the LATAM Group during its recent history was between July and September 2015, when traffic dropped by just over 10% when compared to the same three-month period of 2014.

Chart: LATAM Airlines Group January 13 - June 16 Quarterly passengers carried (millions) and year-on-year change

Source: LATAM Airlines Group.

What can be seen from the group’s quarterly figures is the seasonality of its traffic flow, with its peak months being from the beginning of Q4 (October) to the end of Q1 the following year (March). This is of course in relation to this period being the summer months in the southern hemisphere.

Capacity cuts across both carriers

LATAM Airlines and LATAM Airlines Brasil have both seen seat capacity cuts during the past 12 months, with the former seeing a shrinkage of 0.5% and the latter 9.5%. In total, taking both airlines combined capacity together, LATAM Group’s overall capacity is down by 5.5%.

Chart: LATAM Airlines Group October 15 v October 16 Monthly one-way seat capacity and year-on-year change

Source: OAG Schedules Analyser data October 2016 v October 15.

In relation to the capacity cut in Brazil, the main market for LATAM Airlines Brasil, the group stated that it had made this business decision due to the nation’s weak economy. It cut capacity in Brazil’s domestic market by 2.5% last year and expects to reduce it by another 8% to 10% this year according to Enrique Cueto, LATAM Airlines Group CEO. Brazil’s economy is forecast to shrink by 3.9% this year, after contracting by 3.8% in 2015, and the Brazilian Real lost about 30% of its value against the US Dollar last year. That combination hit demand for travel and pushed up local currency costs explained Cueto. The reason for the capacity decrease from LATAM Airlines is partially due to the carrier currently going through a fleet renewal, along with its Brazilian counterpart, with fleet reductions and welcoming newer aircraft having a knock-on effect on its capacity.

Traffic decrease and capacity cuts result in increased load factor

One positive note for the LATAM Group however is that even though passenger traffic has decreased, the cut in capacity has helped to grow the group’s average load factor. In Q1 of 2013, the LATAM Group was reporting an average load factor across its network of a little over 79%. However by Q2 of 2016 it had grown to nearly 83%. Nonetheless in Q1 of 2016 the average load factor was 84%, meaning that between Q1 and Q2 this year the company’s average load factor has decreased by 1.5%. Overall since the LATAM Group was formed, the average quarter-on-quarter growth in its load factor is under 0.1%, with it fluctuating between 79% and 85% between January 2013 and June this year.

Sao Paulo Guarulhos and Santiago top airports

With Sao Paulo Guarulhos being the main hub for LATAM Airlines Brasil, and Santiago being the largest airport for LATAM Airlines, it comes as no surprise to see them both being the number one and two airports for the LATAM Group. Guarulhos is home to a little over 10% of the group’s monthly seats, while Santiago occupies 9.3%. Guarulhos has seen its majority stake of seat capacity decrease by 0.2% during the past 12 months, while Santiago’s has grown by 0.9%. The group’s number one airport has seen its capacity cut by 7.3% during the past year, representing a net loss of nearly 53,000 seats, while Santiago has seen its seat capacity grow by 4.1%, showcasing a net increase in seats of just under 24,000. As of October this year, LATAM Airlines occupies 47% of the group’s overall capacity, with LATAM Airlines Brasil making up the remaining 53%.

Chart: LATAM Airlines Group's top 12 airports Monthly one-way seat capacity in October 16 [Seat capacity change October 16 v October 15]

Source: OAG Schedules Analyser data October 2016 v October 2015.

Highlighted in light green above are airports within the LATAM Group’s top 12 that have not seen cuts during the past year. What is evident from those that have seen cuts (dark green) is that all airports bar one, Bogota in Colombia, are in Brazil.

Now serving Africa

Of the 134 airports which are served by the LATAM Group, 68 have seen cuts in capacity, with a further 12 having not seen any change over the past year. According to OAG schedules, three airports have been added to the joint LATAM Airlines and LATAM Airlines Brasil route map during the past year. They are Jaen, Washington Dulles and Johannesburg – the group’s only destination in Africa. Along with these gains, the following airports have been dropped by the oneworld carriers; Mendoza (temporarily due to the airport being shut for runway works until December), Juazeiro do Norte, Toronto Pearson, Sao Jose Dos Campos, Ciudad del Este, Caracas, Villavicencio, Neiva, Rosario and Ibague.

LATAM Airlines Group cuts capacity across network

LATAM Airlines Group covers 134 airports across five continents, with the latest addition being Africa when LATAM Airlines Brasil commenced flights between Sao Paulo Guarulhos and Johannesburg. According to OAG schedules, the LATAM Group has seen a net loss of seven airports from its network during the past 12 months.


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