The fine balance between demand and supply

posted on 20th November 2019
The fine balance between demand and supply

The Americas are enjoying solid growth, but route development could be affected by airport congestion and regulatory restraints, writes Graham Newton.

Aviation’s focus has tended to fall eastward in recent years. The looming giants of China and India are the bedrock of enormous air travel demand in Asia-Pacific while the Middle East’s big three – Qatar, Emirates and Etihad – continue to widen eyes with the level of their ambition, on the ground and in the air.

In contrast, the Americas have veered more towards unremarkable but steady progress. The mature market of North America continues to grow at a reasonable rate and the under-developed Central and Latin America regions are putting aside economic hardships to show some modest profitability.

The International Air Transport Association (IATA) expects North American carriers to post a US$15 billion post tax profit in 2019. Net margins and growth are down on 2018 levels, but consolidation has helped keep load factors well above the 59.5% breakeven.

Latin American airlines will deliver a humble $0.2 billion net profit. IATA suggests “this reflects a moderate improvement from the $0.5 billion loss in 2018, as the recovery of the Brazilian economy is offsetting higher oil prices”.

Airport congestion

There are, nevertheless, challenges to overcome. Infrastructure and regulations could yet dampen longer-term forecasts.

In Latin America, Bogota, Havana, Lima, Santiago and Sao Paulo are among the airports with capacity issues.

“Latin America is projected to have on average an annual growth rate of around 4% over the next 20 years,” said Peter Cerda, IATA’s regional vice president for the Americas. “Many of the region’s hubs are already operating at or over their existing capacities. It is essential that the relevant stakeholders seek joint solutions to ensure that aviation can continue to grow and plays its important role in the social and economic development of the region.”

In Central America, despite the fact that Mexico City International Airport handles some 45 million passengers in a facility fit for about 32 million, a proposed new airport has been put on hold.

Enrique Beltranena, President and CEO of Volaris, recently called for “an urgent decision by the government on how the airport situation will develop”. Beltranena says Volaris is dominant in the domestic market from Mexico City and has the largest share of passengers overall but gets just 14% of the seats. The government’s indecision is affecting fleet planning, he claims.

Airport congestion is also an issue at some of the major North American hubs. There are East Coast and West Coast problems as airports struggle to keep up with demand.

“North America continues to be one of the most profitable aviation markets in the world with a projected healthy passenger growth,” said Cerda. “However, available capacity especially at some of the larger international hubs is becoming increasingly limited. IATA therefore welcomes the projects underway to expand and redesign terminal capacities at hubs like Chicago, New York-JFK and Los Angeles, just to mention a few.”

Chicago’s O’Hare International Airport has an $8.5 billion development programme – known as ORD21 – to ease its capacity concerns. The centrepiece of the development is the O’Hare Global Terminal, which will enable airlines to continue steady growth at the airport.

At 2.2 million square feet, the Global Terminal will more than double the space of today’s Terminal 2. The project is due to break ground in 2023 and will open in 2028. To ensure no gate capacity is lost during construction, ORD21 also includes two new satellite concourses, known as S1 and S2. There will also be significant improvements to Terminal 5, which will add 10 gates and a host of improved passenger amenities. The first completed features of Terminal 5 will be opened in 2021 and a new baggage handling system will come online by the end of 2022.

To facilitate further investment in US infrastructure, there is a proposal to increase the US airport passenger facility charge (PFC). Airlines argue, however, that funding is not the issue and that airports collected $3.5 billion through the PFC in 2018 alone. Furthermore, being owned by public entities in the main, airport access to money is rarely troublesome.

Airlines note that the US ranks 100 out of 136 countries in travel and tourism cost competitiveness, according the World Economic Forum and a PFC hike would reduce the country’s cost competitiveness further. US taxes and fees account for about 21% of a typical $300 ticket.

But it is true that congestion could get worse. Air travel in North America is predicted to grow at 2.4% annually meaning 1.4 billion passengers will need to be handled annually in 2037, 527 million more passengers than today. Latin American markets will only get an additional 371 million passengers by that time but that represents a near doubling of numbers.

Such much-vaunted technologies as biometrics as well as off-airport processes might alleviate some of the congestion, but infrastructure constraints look set to top aviation agendas for the foreseeable future.

Non-global standards

Regulatory concerns also threaten the efficiency and sustainability of the industry in the Americas. Non-global standards are rife in Latin America. Some governments insist baggage fees are included in the ticket price, for example, which limits airline commercial models.

In the US, the Department of Transportation (DOT) imposed three separate sets of consumer rights rules on the industry during the Obama Administration as regulation fought back in what was supposed to be a deregulated market.

Airlines, through IATA and local body, Airlines for America (A4A) continue to campaign against the full fare advertising rule that hides fees and taxes in the overall ticket price, and the tarmac delay rule that can punish an airline for trying to act in passengers’ best interest, such as getting them onboard to take advantage of the earliest possible take-off slot.

In Canada, a new air passenger protection regulation has been proposed that contains punitive measures for overbooking or lost luggage. There are even extraterritorial provisions.

Joint ventures

Airlines remain focused on expansion, nonetheless. Route development has enjoyed a prolific period recently. In the last two years, United has announced 26 new international routes, including nonstop service to Cape Town, Naples, Nice, Palermo, Porto, Reykjavik and Tahiti.

United’s joint venture with Air New Zealand will yield the only nonstop service between Auckland and Newark (New York) due to begin in October 2020. The three-times weekly service will join a Chicago to Auckland nonstop flight on the carriers’ networks. It will use a Boeing 787-9 taking approximately 17 hours and 40 minutes southbound and 15 hours 40 minutes northbound.

“Air New Zealand’s nonstop flight will cut travel time by around three hours, putting New Zealand in easy reach of New York and the east coast United States,” said Jeff McDowall, Air New Zealand’s acting CEO at the route’s announcement. “It’s terrific we can make a seamless journey a reality for Kiwis wanting to experience New York and for US travellers who have added New Zealand to their bucket list and we look forward to partnering with United Airlines to grow travel in both directions.”

New Zealand visitors will get access to more than 90 US destinations from United’s New York hub.

The Delta-Aeromexico joint venture (JV) has similarly lofty aspirations. As of May 2019, the JV had transported more than 14.4 million passengers since its approval two years earlier. Eight new routes and two new joint destinations in Mexico have been announced and 80 per cent of the differences in service have been eliminated.

The airlines offer more than 1,100 weekly flights on 64 routes between 11 cities in Mexico and 33 in the US.

Another joint venture between United Airlines, Panama’s Copa Airlines and Colombia’s Avianca probably won’t get approval until 2021. The three Star Alliance carriers announced their intention to cooperate in November 2018 but getting the regulatory green light is a lengthy process. Avianca has also had financial trouble and a new management team is reviewing the strategic plan. The airline’s Bogota hub operation will be a prime focus with higher-yielding destinations and connections on the cards.

Delta Air Line’s decision to acquire a 20% stake in LATAM and take the airline out of Oneworld alliance will add a further dynamic to the Latin American market although it is too early to say how this will pan out.

Party time

There are also reports that Brazil’s Azul Lineas Aereas will join the party. United owns about 8% of Azul. The Brazilian carrier was previously rumoured to be considering a tie-up with American and the move may push American to consider GOL instead.

Azul enjoys a monopoly on the majority of its routes and offers well over 100 destinations. In the summer it added its 12th international connection, flying between Sao Paulo and Porto. Azul will end 2019 with 21 new aircraft and has begun operating the new 136-seat Embraer E195-E2 variant.

Azul’s fellow Brazilian airline, GOL, is also performing well. It continues to lead the domestic market and has benefitted from the withdrawal of Avianca Brazil. GOL has been at the forefront of low-cost carrier (LCC) operations in Latin America, a business model that is nowhere near as developed as it is in North America.

Although Argentina, Chile and Colombia are also seeing strong LCC performance, it remains to be seen whether their LCCs can be profitable in the long term given the economic volatility of the region.

Overall, aviation in the Americas seems set to continue on an upward if unspectacular trajectory. Infrastructural and regulatory pain points will apply brakes to the industry and the future economic situation is anybody’s guess. Airlines in the region have come through tougher times, however, and the emphasis on route development demonstrates a degree of confidence in the years ahead.