LAN Airlines is adding freighter capacity in Latin America this year, and carrier officials seem a bit alarmed that other airlines are doing the same.
Encouraged by continuing strength in many Latin American cargo markets, LAN expects to take delivery of two Boeing 777 freighters in the second half of the year. During a quarterly conference call with stock analysts in February, however, the Chilean airline’s chief financial officer also said the cargo market in Latin America is attracting airlift from around the world.
“Weakened cargo markets globally have driven additional competition to South America, especially Brazil,” said LAN CFO Alejandro de la Fuente Goic on the February 1 conference call. Nevertheless, “our target for cargo capacity growth in 2012 is between 7 and 9 percent, driven mainly by the addition of two 777 freighters in the second semester. … We continue to see a healthy cargo market in the region.”
LAN and other airlines may have to fight harder for cargo business in Latin America this year if the robust regional market attracts more freighter and belly capacity, including
surplus lift from other parts of the world. The International Air Transport Association reported that available cargo capacity in Latin America last year expanded from the
2010 level by 5.6 percent, slightly faster than cargo traffic grew.
Interviews with executives of leading U.S. air cargo carriers in Latin America suggest that capacity expansion could outpace traffic growth in Brazil and other important markets again this year, perhaps by a wider margin. Tom O’Malley, the Miami-based executive who oversees air cargo in Latin America for UPS, says increased competition from Middle Eastern air cargo carriers has reduced the volume of Asia-made products transshipped to Latin America through Miami and other U.S. entry points.
UPS, the leading cargo carrier at Miami International Airport, faces increased competition “from carriers into the Brazil market with cargo coming from Asia,” O’Malley says. More shippers are “routing cargo from Asia over Europe into Brazil, versus over the United States into Brazil. That’s impacting the carriers in Miami, as they do business in the Asia-Miami lane,” including UPS itself, which has seen “a reduction in volume through Miami into Brazil,” he says.
O’Malley cited the introduction of increased cargo capacity in Brazil by Emirates SkyCargo and Qatar Airways as a major force in shifting the flow of Brazil-bound Asian goods outside the United States. “Emirates and Qatar are new carriers in the Brazilian
market, and they are flying from Europe and the Middle East into Sao Paulo,” he says. “Emirates is also flying into Rio de Janeiro.”
Undaunted, UPS in February became an all-767 freighter operator in the South Americas region. This move meant increased cargo-carrying capacity to the Ecuadorean markets of
Quito and Guayaquil and to Bogota, Colombia. “We’ve also increased capacity into Santo Domingo and added a flight into Guatemala,” O’Malley says. “So we are identifying those countries where we see growth, and we are adding capacity.”
Despite the flurry of recent activity, Latin America, of course, remains a small regional market for air cargo compared to such behemoths as Europe, North America and the Asia-Pacific region. But in recent years, the Latin America market has experienced
enviable growth rates in air cargo traffic that have ranked among the best in the world.
Air cargo traffic in Latin America last year grew at an annual rate of 5.5 percent, the second-fastest pace among six regions of the world, second only to the 8.2 percent growth rate in the Middle East. IATA has also found that air freight volume last year increased by 1.5 percent in both North America and Europe, while it declined by 1.2 percent in Africa and by 4.8 percent in Asia/Pacific.
Air cargo carriers also benefit from relatively balanced U.S.-Latin America air trade. At the Miami airport, the biggest platform for airborne trade between the United States and Latin America, perishable-heavy imports outweigh exports, but not by much. Imports accounted 54.5 percent of international freight tonnage at MIA during the 12 months that ended in January, down from 56 percent in the prior comparable period.
Latin America has been a solid cargo market in recent years not only for many airlines offering scheduled service, but also for charter-flight operators. William Flynn, president and CEO of Atlas Air Worldwide, said on the company’s February conference call with analysts that the financial performance of the Atlas charter unit improved from the third quarter to the fourth quarter, “reflecting increased demand and improved block-hour rates as well as continued strength in South America.”
Flynn said on the February 15 call that management expects worldwide demand for air cargo service to “pick up in the second half of the year, with new high-tech product launches and continued solid demand in regional markets, such as South America.” In
contrast, regional business conditions in Europe may sag this year because “the euro zone debt crisis is still a lingering economic concern, and consumer confidence in key markets is only beginning to brighten.”
A shift in manufacturing activity from China to Mexico is another trend adding luster to Latin America’s air cargo market, says Salil Chari, managing director of marketing for the Latin America and Caribbean unit of FedEx. “The U.S. is the biggest consumer
for Mexico and for a lot of what comes out of China, and proximity has its benefits,” says Chari, citing differences in transportation costs and wages in the two countries. Some
manufacturers that had moved to China from Mexico moved back to Mexico “when oil prices peaked about two years ago,” he says. “I think with the wage inflation that has happened in China, Mexico is becoming more competitive.”
Federal Express is becoming more competitive there, too. In June, FedEx will upgrade to a Boeing 757 freighter from a 727 on its five-times-weekly trunk flight to Queretaro, a
Mexican hub of automotive and aerospace business, located inside the socalled “Golden Triangle” of commerce formed by Mexico City, Monterrey and Guadalajara. Chari says FedEx will redeploy the 757 freighter to Mexico “from another market outside Latin America.”
American Airlines, a major passenger and belly-freight carrier in Latin America, has steadily added capacity in the region and plans to add more. “We’ll be getting our first deliveries of our new 777-300 aircraft in November, which have about 38 percent more capacity than our current version 777s,” says Dave Brooks, president of cargo operations at American Airlines. American plans to put one of the first two 777-300s delivered in November into service between Dallas and Sao Paulo.
But Brooks also is wary of increased competition in Latin America due to lean business conditions in other regions of the world. “I think our industry is expecting there to be a shift in freighter capacity from Asia, which is has an oversupply of capacity, to deep South America,” he says.
Brazil and Argentina and, to a lesser extent, Chile are likely to see “more capacity coming in from freighters serving Europe and the Middle East,” Brooks says. “Operators are going to be looking for the best places to fly them, and because of the attractiveness
of Latin America, we might very well see the capacity wind up there.”
When that added capacity ends up in Latin America, AA Cargo will be there despite American’s current restructuring situation. Brooks says the cargo unit of American Airlines so far has been unaffected by the November bankruptcy filing by AMR
Corp., the airline’s parent company, “because we’re still in a very early stage of making our way through this horrible process.” He says that while the airline’s service levels “have never been higher,” the bankruptcy process has created “a planning challenge. …
We’re not quite sure how it’s going to work out.”