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Why Are Latin American Airlines Declaring Bankruptcy?

By Alicia Arizpe | Thu, 05/28/2020 - 12:38

In just two weeks, the two largest airlines in Latin America have filed for bankruptcy. While airlines across the globe are suffering due to the COVID-19 crisis, the Latin American aviation industry seems to be faring worse. Here we analyze why that might be the case.

The impact of the COVID-19 crisis in the aviation industry has been profound and is expected to last a long time. The International Civil Aviation Association (IATA) warned that airlines across the globe would lose US$314 billion in revenue during 2020 as governments closed their borders and urged citizens to stay home. Measures to avoid the spread of the virus have also hurt the tourism, hospitality, retail and manufacturing industries, leading the world to a widespread recession that, in turn, is expected to slow down more the recovery of the aviation industry. IATA reported that 69 percent of recent travelers had indicated that they would postpone travel until their financial situation stabilized, so there is no clear timeline for the recovery of the sector.

Airlines in all regions in the world are expected to see a significant contraction in their revenue, as demand has fallen almost uniformly in all five continents. IATA reports that the sharpest drop in demand was expected in Europe, with 55 percent less revenue passenger kilometers (RPK), which refers to the number of revenue-paying passengers multiplied by the distance they traveled. Middle East and Africa are tied in second place with 51 percent less RPKs. Next is Asia pacific with a reduction of 50 percent, followed by Latin America with 49 percent less and finally North America with a 36 percent reduction.

While airlines across the globe have been hurt, Latin America has stood out as its two largest airlines declared bankruptcy within weeks of each other. Avianca, the second oldest airline in the world and the second largest in Latin America, filed for Chapter 11 protection in a US court in May 10. The largest airline in the region, LATAM Airlines, followed suit 16 days later. While Avianca had a troubled 2019 that was worsened by COVID-19, LATAM Airlines took the world by surprise as it had reported a stable financial position prior to the announcement of bankruptcy filing. “LATAM entered the COVID-19 pandemic as a healthy and profitable airline group, yet exceptional circumstances have led to a collapse in global demand that has not only brought aviation to a virtual standstill, but has also changed the industry for the foreseeable future,” said Roberto Alvo, Chief Executive Officer of LATAM.

The reasons behind the seemingly worse fare of airlines in Latin America might be closely related to the response of governments in the region to the crisis. As the outbreak began to heavily hinder the aviation industry, IATA warned governments that failure to support the industry in these troubled times might have irreparable consequences for the industry. “Time is of the essence. Governments cannot take a wait-and-see approach. We have seen how dramatically the situation has deteriorated globally in a very short time. They must act now and decisively,” said Alexandre de Juniac, President and CEO of IATA. The measures urged by the organization in support of the aviation industry focused on financial support to address the reduced revenue caused by measures to contain the spread of COVID-19. IATA suggested loans or loan guarantees and tax relief in the shape of suspended payroll taxes and deferral or reduction of income taxes. Airlines, airports and local industry organizations also joined their voices to the request for support for the industry. However, the answer to their plight has varied widely.

While some countries have rushed to the industry’s aid, others dragged their feet. Others have flat out denied support and many Latin American countries have fallen in the last category. The North American region has showed the most support by providing a total of US$66 billion in promised aid, according to IATA, which represents 25 percent of what the industry made in revenue during 2019. In contrast, Latin America has showed the least support for the industry. Governments in the region have contributed only US$0.3 billion, the smallest amount out of all regions in the world. This figure represents only 0.8 percent of the revenue airlines in Latin America made during the past year and the limited support has raised tensions in the industry. Headquartered in Chile, LATAM Airlines requested support from the local government but was denied. The country’s Economy Minister, Lucas Palacio, told media that “we are prioritizing people and I think it is rushed. I think it is wishful thinking for one company [LATAM Airlines] to be asking something of that nature.” The airline also requested support from the governments of Brazil, Colombia and Peru but so far has not received it.

Industry organizations fear that were this situation to continue more airlines in the region would be affected. “States play a key role in implementing measures that will relieve fixed costs and enhance cash flow, allowing companies in the industry to sustain themselves and recover once the skies open again,” said Luis Felipe de Oliveira, Executive Director and CEO of the Latin American and Caribbean Air Transport Association (ALTA). Mexican airlines might also face trouble ahead. De Oliveira told A21 that Mexico would be among the countries more severely hit by the impact of COVID-19 in tourism and aviation. IATA had also warned that Mexican airlines are at risk of losing up to US$5.3 billion in revenue during the year. For that reason, ALTA, IATA and local associations such as CANAERO have joined forces to request support for the local aviation industry.

Alicia Arizpe Alicia Arizpe Senior Writer