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Low-cost carriers takes off in Latin America
10/22/2005
The low-fare, low-cost model that has transformed the global aviation industry has been slow to take off in Latin America.
Regulated markets, volatile economies and entrenched flag carriers have put up tough barriers. But the malaise gripping Latin American aviation for the past decade is taking its toll.
Legacy carriers are collapsing and new airlines are rushing to take their place. The low-cost carrier's time has come.
This optimistic air traveller's view is supported by the success of Gol, the Brazilian low-cost carrier. Gol caters to both business and tourist travellers, and has helped spur growth in Brazil's industry. The airline is about to launch a joint venture in Mexico and already offers international flights, helping the low-cost model to spread across the region. But in many respects Latin American aviation remains set in its ways.
The big recent success in Chile, for example, is Sky Airline, which has grabbed 18 per cent of Chile's market in three years. Yet it has done so mainly by being more flexible than LAN Chile, the dominant carrier, rather than competing on price. LAN has been expanding into neighbouring countries such as Argentina, which has five domestic routes. But LAN stressed when it began operating this year that it would not start a price war. Other LAN operations follow the same policy. But the forces for change are powerful.
In Argentina, the passenger market has shrunk by 48 per cent since 2000, said Airbus, the European aircraft maker. The country's financial collapse in December 2001 left airlines stuffed with dollar-denominated debts and running costs and an income stream in devalued pesos.
Mexico's airlines, which collapsed following the country's financial crisis in 1994, are expected to be sold this year through Cintra, a private holding company. There are five carriers vying for space in the market.
In Brazil, the biggest market, two of the previous big four airlines have stopped flying. Varig, the flag carrier, is under bankruptcy protection and may be sold this month.
In geographical terms Latin America is an ideal market for low-cost carriers, with vast distances between population centres and little alternative to precarious long-distance coaches for budget travellers.
But it poses problems. Fuel costs, for example, are 25 per cent higher than in the US and Europe. Many markets remain tightly regulated and change is slow.
More fundamentally, the turbulence of many Latin economies means economic growth has typically been in fits and starts and airlines have found themselves cut off from financial markets.
But Latin America is going through a period of stability and growth, to the industry's benefit. It is the world's fastest-growing aviation market, with passenger numbers climbing 13 per cent in the first half of this year compared with the same period last year.
For those with the necessary backing and expertise, the region offers great opportunities.
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