When companies make a lot of money, they often look for a place to put it. In the case of U.S. airlines, that place could be Latin America.
On Thursday, Texas-based
announced a 19% increase in profit for 2019, rounding off a bumper year for U.S. full-service carriers. American’s two competitors,
All three companies have been cautious in their forecasts for 2020, given the large uncertainties surrounding global growth and the continuing grounding of Boeing’s 737 MAX jets. But the fact that U.S. airlines overall are close to achieving a full decade of profitability is remarkable in an industry infamous for losing money for investors.
Fourth-quarter earnings point to the growing importance of the Latin American market, which was strikingly strong even as revenue from Atlantic and Pacific routes suffered.
American, the leading U.S. airline in Latin America, said the region’s unit revenue—a measure of prices that adjusts for miles flown and empty seats—rose a staggering 10% in the quarter relative to the same period of 2018, thanks to improvements in Brazil and Mexico. The figures for Delta and United were 2.3% and 6.3%, respectively.
Latin America has been a top performer for the main U.S. carriers for years, but the business is still too small to boost their overall results much. Even for American, it makes up only about 12% of total revenue.
With higher profits giving carriers more legroom to invest, competition to tap the region is heating up—and may continue to.
Last October, Delta—the most profitable of the trio but also the least exposed to Latin America—announced the purchase of a 20% stake in Chile’s
making it the main shareholder in the region’s largest carrier. The Atlanta-based airline paid a steep price—almost $2 billion—but it has managed to reconfigure the entire game board in the region. For starters, it has since divested its stake in Brazilian short-haul carrier
Delta’s move is upsetting American’s dominance in the region, which was cemented in part by being in the Oneworld alliance with Latam. American said Thursday that it would stop code-sharing with Latam, which is leaving the alliance, as early as Jan. 31. Even though its footing in the region remains solid, it won’t be easy to defend: Delta is already beefing up its presence by adding flights in Miami, the key hub from which American flies to Latin America.
Meanwhile, United isn’t staying pat, and is seeking a partnership with domestic airlines
These are all sensible strategies, because they focus on diversifying revenue by building out international routes to Latin America. By contrast, Delta’s earlier investment in GOL or
belief that it could run an Argentine carrier were misguided attempts to tap domestic Latin American markets. These have a record of underperforming, due to recurrent currency and economic crises.
The risk investors should monitor is that the airlines get carried away and take the fight to each other’s hubs. If the battle for Miami leads to capacity getting out of hand, the juicy promise of Latin America could quickly sour.
Write to Jon Sindreu at [email protected]
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