LATAM: Weathering many storms

posted on 8th December 2021
LATAM: Weathering many storms

Bankruptcies by three of the largest airlines in Latin America – LATAM, Avianca and Aeromexico – are turning back the clock to a time of fewer flights and choices

LATAM Airlines, the largest carrier in Latin America, has enjoyed tremendous growth during the last decade, only to be forced below water by an almost complete travel closure on the Latin American continent during 2020 and most of 2021.
Now, 18 months later, the airline is soon to re-emerge from bankruptcy into a new competitive landscape and with renewed purpose to show its dominance. It will be smaller, like all its battered competitors in the region. While all major airlines in the US have received billions of dollars in government bailouts to prop them up during these difficult times, handouts in Latin America never appeared.
Meanwhile, as major players reorganised, their troubles has opened the doors to new competition from low-cost carriers Sky Airlines and JetSmart.
Times were not always so turbulent. The proudly merged LAN Chile and TAM led the region in flights, destinations and consistently well-received onboard service for decades. However, the merged carrier suffered severely during the Covid-19 pandemic. It was forced to file for bankruptcy in May 2020 after most countries in South America shut down or severely restricted cross-border travel to protect people from the virus.
However, LATAM has now shed some aircraft and debt, and expects to emerge with a healthier structure in 2022. LATAM said in its 5 October 2021 bankruptcy filing that it “has received several non-binding financing proposals, each for over US$5 billion, the funds of which would be used in part to refinance the DIP [Debtor In Possession] financing, and eventually other liabilities, and to have sufficient going forward liquidity”. Reports have also emerged that Brazilian carrier Azul is preparing a bid for LATAM if the merged carrier fails to reach an agreement on restructuring.
Avianca, which was reorganised after a 2004 bankruptcy, also filed for bankruptcy – again – in May 2020 and is seeking to eliminate US$3 billion in debt. When this issue of ARGS closed for press (in old parlance), the carrier was still in bankruptcy but had plans to emerge sooner than LATAM, after 99% of Avianca’s creditors approved its late October restructuring plan.
Avianca expects to eliminate 37 aircraft and emerge as a lower cost airline with only 12 widebody aircraft and 98 narrowbodies. United Airlines is expected to keep an ownership stake in Avianca of roughly 16%.

Avianca restructures fleet
Avianca took an unusual step during bankruptcy: it merged with Chile’s Sky Airlines, a low-cost carrier with a 25-aircraft fleet of newer Airbus A320neo and A321neos.
Aeromexico, formerly the fourth-largest airline in Latin America, filed for bankruptcy just after Avianca in June 2020, and expects to exit shortly with $1.7 billion in financing. It has dropped in size and is currently the seventh-largest airline in the region.
For LATAM, the second quarter of 2020 was the low point. During April 2020, it only operated 24.9% of its 2019 capacity.
The capacity chart above shows how devastating Covid-19 has been to Latin American airlines. In late 2021, most airlines in the region are half the size they were two years ago. Hardest hit was Copa Airlines, which, during October 2021, operated only 25% as much capacity (in seat miles) as the prior 2019 period, owing to a near cessation of traffic between North and South America.
The last 18 months have seen very small rises from that nadir. For December 2021, the LATAM group estimates an operation (measured in available seat miles) of between 65% and 70% compared to 2019 levels, driven primarily by domestic and regional routes and the resumption of long-haul routes to Barcelona, London and Milan from São Paulo/Guarulhos.
LATAM flew approximately 970 domestic and international daily flights during September, connecting 117 destinations in 16 countries. Meanwhile, its cargo division scheduled 990 flights in freighter aircraft during the period, 16% more than in September 2019.
Passenger traffic across Latin America still remains at half of what it was during the same 2019 period. LATAM, the largest carrier in the region since 2012, cut 50% to 70% of regional flights to nearby countries in September. Like all carriers in Latin America, LATAM struggled through the last 18 months while governments assisted many of its competitors based elsewhere. Codeshare partner American Airlines received more than $7.5 billion in aid from the US government, for example; United Airlines and Delta Air Lines got similar amounts.
As borders were virtually closed between Brazil, Argentina, Colombia, Chile, Peru, Ecuador and Bolivia, Latin American carriers grounded planes and made redundant the majority of their staff.

Fleet changes
One consequence of airline bankruptcy is a renegotiation of the entire fleet. Some aircraft will exit the fleet, and some destinations may not remain in the airline’s flight schedule. The core of this, in LATAM’s case, is to eliminate its new long-haul Airbus A350 fleet in favour of fewer Boeing 787s going forward.
While we do not yet know the end result of this process, we do know that 95% of LATAM’s desired fleet changes have been approved. These include:
– Terminating its orders for four B787s and one B777 Freighter
– Selling nine B767s to aircraft lessor and trader Jetran International
– Receiving two remaining new B787s by early 2022
– Eliminating Airbus deliveries in 2020 and 2021
– Retiring the entire long-haul A350 fleet; cancelling the last two A350 deliveries
– Agreeing to retain 70 A320neo aircraft through 2028
The result for North America and Europe will be a limited long-haul fleet of roughly 24 B787s and a declining fleet of B767s. The airline has 40 aircraft parked and not flying as of late October, according to
Because of Latin American sovereignty rules, LATAM and others have been forced to create country-specific airlines, and register aircraft under those countries. This has led to complexities that other airlines from outside the region do not face, and it has also made bankruptcy more complex.
LATAM has already shut down its Argentina subsidiary, though it still has eight others to maintain including staff accounting systems. Each country requires planes flown by a subsidiary airline to be registered in that country, which creates an administrative headache.

Cargo boost
LATAM is the only major airline in the region to have a dedicated cargo fleet. For decades LATAM, and before that LAN Chile, operated regular South-North B767s filled with Chilean blueberries, fish, precious metals and other commodities. LATAM Cargo Chile, LATAM Cargo Colombia, and LATAM Cargo Brasil are the airline’s freight subsidiaries. The organisation has a fleet of 11 dedicated freighters, “which will gradually increase to a total of up to 21 freighters by 2023”, the airline said in a bankruptcy document.
Cargo has remained the bright spot for the carrier through the pandemic, up 16% in the two years after September 2019. LATAM may be more likely to launch additional cargo routes even before passenger traffic comes back.

After bankruptcy
LATAM is still expected to be the dominant Latin American airline after it navigates bankruptcy. While reports suggested it was ready to exit bankruptcy during October or November 2021, a court petition was accepted to continue negotiations into 2022.
The airline said in court documents filed in late October 2021 that while it has held frequent talks with creditors, there is still a “massive economic gulf” between the two sides. Unanswered questions include how many aircraft contracts it can change or shed, and what the post-bankruptcy holdings of the largest shareholder (the Cueto family) will be, as well as those of Delta Air Lines and Qatar Airways.
Delta purchased a 20% stake in LATAM as recently as September 2019, spending $1.9 billion in the process. Delta also acquired four A350 aircraft from LATAM and the future orders for 10 more. Delta has a seat on the LATAM board.
Qatar purchased a 10% stake in LATAM for $613 million in 2016 and increased its ties with an additional $300 million loan as part of a multi-company investment. Qatar has said it would like to match Delta’s stake in LATAM.
In early November 2021, LATAM received permission to access a $750 million credit line provided by Apollo Global Management and Oaktree Capital Management.
There has always been interest in LATAM, either for codesharing, investment, cargo expertise, or its deep penetration into all of South America’s turbulent economies. Its future may be left up to bankruptcy judges and creditors, all of whom expect some return on their investment.