Jetrader - January/February 2011 - 10

CHART 1

Increasing Strength by Combining Services
Merger activity has been brisk in the region as one of the strategies employed by carriers to extend their cross-border and regional network and expand the scope of their service. “The most signiﬁcant one has been the merger between TAM and LAN,” Gallard said. “They are two large and proﬁtable players in the marketplace, and LAN speciﬁcally has footprints in different local markets in the region. That makes it very powerful when it comes to local distribution of trafﬁc. LAN is a big cargo player, so if you move that capacity and know-how to TAM, that will make TAM’s Brazilian marketplace much more powerful thanks to the TAM and LAN alliance.” Also in merger news has been the alliance between Taca and Avianca. “It’s not a large as the LAN/TAM merger, but it will be extremely signiﬁcant for Central America and the northern end of Latin America,“ Gallard added. “You’re likely to see another huge hub develop out of Colombia, and possibly El Salvador, moving trafﬁc back and forth to Europe and North America.” The region’s extraordinary growth has attracted much attention from the world’s aircraft ﬁnancial community, with investors, including the world’s export credit agencies, more than willing to fund new aircraft acquisitions. However, while Boeing has begun holding its regional bankers roundtable events in the region, the local ﬁnancing market is nascent. “It is still an evolving market, particularly because their domestic cost of capital is very high because the governments, correctly, are trying to manage inﬂ ation,” explains Boeing’s Zolotusky, who’s optimistic that government inﬂ ation control plans are bringing interest rates down. “As those countries continue to run healthy economies and are able to control inﬂ ation, we will see central banks responding with lower interest rates, which in turn will create a local aircraft ﬁnance market. But for now, Latin American airlines dominate the preferred customer lists of global aircraft ﬁnanciers,” Zolotusky said. The region’s governments are also considered prime targets to be included in the global Cape Town Treaty for mobile assets, and its Aircraft Protocol, under which air carriers in ratifying countries would be beneﬁciaries of discounts on export credit ﬁnancing from such sources as the U.S. Ex-Im Bank. While there are still the likes of DC-9s and early 737s and A320s plying its skies, they continue to vanish as the carriers seek to become more efﬁcient, in part to compete with carriers from Asia, Europe, the Middle East and North America. Nearly 70 percent of Latin America’s current ﬂeet are new-generation or in-production airplanes. For the world’s aircraft traders, while there will be a remaining market for older planes, Gallard offers that savvy players will wisely follow the carriers’ trend. “Just like the airlines, the traders also will need move up through the airplane food chain. You would expect to see them trading in some newer classic and next-generation airplanes, even though they may be of an older vintage of those models. And to continue trading in Latin America, they’ll have to move up,” Gallard said. Thanks to Boeing for supplying editorial content for this article.

Single-aisle airplanes will dominate the 2,180 new airplane deliveries to Latin American airlines over the next 20 years. The short distances within the region and the continued rise of low-cost carriers brought about by liberalization will provide the impetus for 1,800 single-aisle deliveries, more than any other airplane type. Liberalization, as well as fragmentation and new mid-size, longrange airplanes such as the 787 and the 777 will increase the need for intermediate twin-aisle jets. As a result, 350 twin-aisle airplanes will be delivered to Latin American carriers during the forecast period. Ten large airplanes will be delivered, and regional jet deliveries will amount to 20. In dollar terms, the Latin American region will invest $210 billion in new airplanes. More than half of these dollars will be in the singleaisle segment ($140 billion), 33 percent in the twin-aisle segment ($70 billion), less than 1 percent in RJs ($1 billion) and the remaining 2 percent ($4 billion) in large aircraft like the 747 and A380.

the innovative strategies being employed by carriers to meet travel demand. Kostya Zolotusky watches the region’s progress in his role as managing director for capital markets development at Boeing Capital Corporation, the manufacturer’s aircraft ﬁnancing and leasing arm. “Much of the ﬂeet growth has to do with the way they achieved it,” Zolotusky said. “The airline industry there has done some incredible things in ﬁne-tuning the airline model for Latin America. And all of these changes were in response to extraordinary economic and political developments across the region. If you look at Brazil, it used to be dominated by a government-owned airline. Now you have private airlines like GOL, TAM, Azul, and LAN and Copa outside of Brazil, whose efﬁciency and business acumen can be favorable compared with the best airlines in the world.” Gallard shares the view that Latin America has moved rapidly into the ranks of world-class markets thanks to a combination of moves by their carriers. “By Wall Street’s deﬁnition, they’re showing proﬁts. Their stock continues to grow in value,” Gallard said. “Their level of service now competes with the airlines of the world—American and European—and for passengers there’s nothing to be lost when ﬂying with their airlines. At the same time, they’re developing people within the airlines that can carry this business model forward for years to come. I can easily see the Latin American airlines moving outside of the region to go into different world markets, like Europe and Africa.”

10 The ofﬁcial publication of the International Society of Transport Aircraft Trading

Jetrader - January/February 2011

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