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Latin carriers have quarter to forget


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Latin carriers have quarter to forget
Profits during seasonally weak three months further hit by currency weakness, industrial action and rising fuel costs
Latin American airlines felt the pain of currency depreciation and higher fuel prices in the second quarter, as weakness in certain pockets of the region compounded the difficulties in an already seasonally challenging period.
Combined operating profits across Latin America's seven listed airlines tumbled 80% to around $44 million, down from $255 million in the second quarter of 2017. On a net basis, four Latin American airlines ended the second quarter of 2018 in the red: Azul, Avianca, Gol and LATAM.
Latin American airline executives pointed to currency weakness in Argentina, Brazil and Mexico, which has impacted demand for international travel from those countries. The Argentinian peso fell to a new low against the US dollar, and airlines with substantial operations out of the South American country saw that translate into fewer Argentinians travelling abroad.
LATAM, the region's largest carrier, which has an affiliate in Argentina, says demand for flights to the Caribbean was hit by the weakness from Argentina, an important source market for the Caribbean. Argentina contributes about 11% of LATAM's overall revenue. The observation of weaker Caribbean demand was mirrored by Avianca chief executive Hernan Rincon, who said the airline also saw weakness in Caribbean flights from Brazil via its Bogota hub.
Argentina and Brazil recorded declines in unit revenue in the low teens for Panama's Copa Airlines, which saw its operating profit shrink 27% to $57 million in the second quarter, even though the airline was the most profitable among its peers in the period.
Copa acknowledges its troubles in Argentina are partly self-inflicted, following a significant growth in capacity in the country after the airline industry was liberalised. Copa added Mendoza in late 2017 after an eight-year wait for route authorities, and will add its fifth Argentinian destination later this year, when Salta comes on board.
The depreciation of the Mexican peso contributed to a challenging environment for the country's carriers, although Aeromexico fared significantly better than Volaris, whose international network relies heavily on the US-Mexico transborder segment.




While Volaris recorded foreign exchange gains based on its US dollar monetary assets, which helped it produce a small net profit of Ps38 million ($2 million) in the second quarter, the airline reported an operating loss of just under $30 million.
Besides currency concerns, labour strikes clouded Latin American airline profitability in the second quarter, with Brazil's airlines bearing the brunt of a fuel truck drivers' strike in May that cut off supplies to many airports.
LATAM estimates that the trucking strike, along with a cabin crew strike in Chile, resulted in a $38 million impact on its operating result. Gol sustained R8 million ($2.1 million) of incremental operating expenses, and a R29 million impact on operating revenue. Azul, which has the largest network in terms of destinations in Brazil, says 37 airports it served ran out of fuel during the strike, causing a R57 million impact on its operations. The bulk of this – around R51.2 million – was due to lost revenue, while the remaining R5.8 million was additional expenses incurred.
At Avianca, labour disputes also left a mark on second-quarter financials. The impact of a pilot strike has continued to linger, with the Star Alliance carrier incurring additional one-off expenses of $28.9 million in the period. Its operating profit declined 66.5% to $20.8 million in the period.
A number of Latin American carriers took the proactive step of adjusting capacity for the remainder of the year, in a sign of prudence amid higher fuel prices and uncertainty over currency exchange.
Avianca, Azul, Copa and LATAM all announced plans to trim capacity for 2018, while Aeromexico and Gol say they have reduced growth for 2019.
Despite the less than stellar second-quarter results, Latin America's airlines appear more optimistic about the third quarter. Carriers with larger international networks, such as LATAM and Avianca, point out that they have continued to see strength in demand for flights to Europe and North America.
Azul says near-term demand in Brazil, the region's largest economy, is promising in the second half of the year.
"We feel good about the demand environment," said the airline's chief revenue officer, Abhi Shah, in early August.
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