Alliance Development Will Consolidate Historically Fragmented Airlines in South America

by Kenneth Currie

Airline capacity in South America has historically been extremely fragmented as result of there being numerous airlines and restrictive, capacity limiting, bilateral agreements between the several countries which make up the region. However, consolidation has now begun around the three global airline alliances. This trend started over a decade ago when large South American airlines LAN Chile (now LAN Airlines) and VARIG joined oneworld and Star, respectively. Since then, trade barriers between South American countries have been reduced, allowing several airline groups, including AVIANCA/TACA, COPA and LAN to become carriers serving broad areas of South America, rather than remain simply national flag carriers.

In a process similar to airline consolidation in Europe, each of these airline groups has announced its intent to join an airline alliance. AVIANCA/TACA and COPA have recently declared their plans to join the Star Alliance. LAN is a founding member of the oneworld Alliance, but following its proposed acquisition of Star Alliance member TAM, leading to the development of a merged group, “LATAM”, it has indicated that it will re-evaluate its current alliance membership. LATAM’s re-appraisal of its position, coupled with the potential impact of Brazil’s other airlines joining alliances, may have a profound impact on global alliance market share in South America, and proves that, as in many other regions, alliance memberships are not set in stone.

As shown on the pie chart above, TAM and Gol have the largest market shares in South America ( 23% and 21%, respectively). This reflects the fact that Brazilian domestic capacity represents 52% of total South American capacity, of which TAM and Gol each operate approximately 40%. Domestic capacity in other South American countries represents an additional 23% of the total, while international capacity within South America represents 8%, and intercontinental capacity between South America and other regions represents the remaining 17%.

The Star Alliance including TAM, as well as prospective members AVIANCA/TACA and COPA has the largest capacity share in South America of 38%. The oneworld Alliance including the LAN Group offers the second largest share of South American capacity at 16%. The SkyTeam Alliance, including prospective member Aerolineas Argentinas, offers 7%. The only unallied airlines, with capacity shares of at least 1.5% in South America, are Brazilian domestic airlines Azul (3%), webjet (3%), and Trip (2%). All remaining airlines collectively offer 10% of South American capacity. Each alliance also has strengths in various flows in and out of South America which supplement the dynamics within the continent (American from the U.S., All three from Europe, Star from Africa, oneworld from Australia, etc.).

Should TAM shift to the oneworld alliance following a successful merger with LAN, oneworld’s share of the market would increase to 39%, at the expense of the Star Alliance share, which would decrease to 15%. Star Alliance’s recent acceptance of AVIANCA/TACA and COPA implies that it is preparing to defend itself against this possibility. The three carriers, working within a single alliance, create clear potential synergies; most notably in the overlapping Colombian domestic marketplace. AVIANCA operates a subsidiary in Brazil (formerly known as Oceanair) which has slots at key constrained airports. AVIANCA could increase market share organically or acquire it through purchasing one of the smaller Brazilian airlines. (In Brazil, AVIANCA offers 3% of domestic capacity, compared to Azul, 7%, webjet, 5%, and Trip, 5%).

Conversely, should LAN shift to the Star Alliance, following a successful merger with TAM, Star’s share of the market would increase to 50% while oneworld’s share would decrease to 4%. Should that happen, oneworld, in order to bolster its market position in the region, would have a strong incentive to enhance existing joint marketing arrangements with Gol, to full alliance membership.

However, given that access to Brazil’s domestic market is the largest prize in South America, it is possible that Gol could take an approach similar to Virgin Blue in Australia, and create various code share agreements that access traffic from more than one alliance.

Similarly, under any circumstances, the SkyTeam Alliance would benefit from upgrading its joint marketing arrangements with Gol to full alliance membership, and/or by attracting LAN and TAM away from oneworld and Star. At present, SkyTeam has the smallest market share in South America, though its members from Europe and the United States have been expanding aggressively in the region over the last several years, and the alliance has recently announced the addition of Aerolineas Argentinas. Futhermore, AeroMexico is a member of SkyTeam, which gives the alliance a stronger market position when Mexico (one of the big three Latin economies) and Central America are considered in addition to South America.

Until recently, most new immunized agreements and joint ventures have taken place largely outside Latin America due to a greater number of truly liberalized agreements between major economies. However, based on the recent press between the New United and AVIANCA/TACA and COPA, the development of these advanced revenue sharing partnerships could elevate alliance relationships to a new level in the region.

Whatever the outcome of the current realignment in South America, it is clear that the market will consolidate around the global airline alliances. Given the significance of the Brazilian domestic market to the region, Brazilian flag airlines will be among the leaders in size and growth. Brazilian airlines have large numbers of aircraft on order with which to accommodate increases in demand for air transportation driven by economic growth. This represents a tremendous revenue upside for each alliance. Understandably, they will be among the most coveted prizes in the airline alliance consolidation game.

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