As a consequence, low-cost airlines such as Azul and GOL were growing aggressively in a highly competitive domestic market; everything was looking so rosy, and not just for Brazil…but for Latin America in general. The Latin American Airline Association (ALTA) was reporting continuous airline capacity and passenger growth across the region, month after month, and the average overall GDP growth across Latin America was around a very healthy 5% mark.
Unfortunately, geo-political events from around the world have been hitting the region hard, ever since. The regional GDP outlook has contracted to between 2%-2.5% for this year, 2015, and certain markets have been hit the hardest with some experts even warning the region could be entering a recession.
With a, now, very sluggish Chinese economy, a strong US Dollar and extremely low oil prices, the region has certainly been facing one of its most challenging moments ever since the economic downturn of 2009. Markets such as Mexico, Colombia and Brazil have all seen, over the past 12 months, negative exchange rate variances of up to around 40% which have had a detrimental effect, not just on the most obvious areas of importation and exportation costs, and national budgetary concerns that accompany those specific issues, but also in the spending power of their own citizens which has resulted in a demand for lower air fares and, together with the exchange rates difficulties affecting operations themselves, have produced much lower yields for the airlines.
Shopping excursions to the US for example, a past time previously enjoyed by many Brazilians, have become almost irrelevant given the weak Real, and more and more Brazilians are taking holidays within Brazil these days as a result. Needless to say, this has caused issues for international carriers serving the Brazilian market and airlines are cutting back on capacity to Brazil. Sky Airline of Chile has withdrawn from the market, entirely, citing these low yields in the market and Copa Airlines has pulled back sharply on its own capacity in light of what they claim is a weakening demand and has even departed markets that it had only recently launched, such as Sao Paulo, Campinas – Viracopos. Domestic carriers of GOL and AZUL are also experiencing a difficult moment.
In the case of Venezuela, the nation with the largest oil reserves in the entire region, the extremely low price of oil together with an excessively high inflation has probably been hit the hardest and has caused, not only grave issues from an aviation perspective, but socially, as well.
The serious issue of foreign airlines being unable to repatriate their US Dollars continues to be a headache for all international carriers serving the market. Even more so, now that the government has recently ruled that the local currency, the Venezuelan Bolivar, cannot be used to purchase aircraft fuel – one of the only ways in which the airlines could still utilize the funds that are “stuck” in this South American country.
Whilst Argentina has been going down a similar path to Venezuela in terms of the restrictions upon the acquisition of US Dollars, American Airlines has recently moved quickly to prohibit the sales of its tickets in Argentinian Pesos, attempting to avert a similar scenario to the one it has faced in the Bolivarian state of Venezuela for a number of years, now, resulting in literally millions of dollars of revenue unable to be accessed.
However, despite all of this, these last few weeks specifically have brought about changes, in a political sense, that could start to bring about a real shift in the fortunes of some of Latin America’s poorest performing markets – both from an economic and aviation perspective.
The ultra-socialist governments of Argentina and Venezuela were defeated at the polls and a new dawn beckons for both countries. Argentina’s Peronista party was overcome by the centre-right Republican Proposal party and, in Venezuela, the Movement for Democratic Unity coalition (MUD) gained the majority of seats in the national assembly in the recent legislative elections. A result that already saw a boost in the bonds of state owned oil company, PDVSA – a clear sign that any change in Venezuela will bring about optimism in the oil markets. In Brazil, it is also fair to say that another government that sits firmly on the left is under great pressure to get the country performing again and could suffer a similar fate if it is unsuccessful in doing so.
One hopes that these new incoming governments, or majorities, embrace the idea of liberalization of the Latin American skies, placing all elements of protectionism firmly behind them as the best way to drive growth in the region through increases in tourism and investments, in order to stabilize the most affected economies and for Latin America to return to fulfilling the potential it clearly has in becoming one of the world’s major aviation markets.