The LATAM Airlines Group, formed through the merger of Chile-based LAN Airlines and Brazil’s TAM, is hoping a strategy of downsizing its freighter fleet while carrying more cargo in the bellies of its passenger aircraft, will ensure a profitable cargo operation in 2015.
While the United States suffered through the Great Recession, Latin America’s economy from 2003 to 2010 grew at an annual rate of close to 5 percent. More than 50 million people emerged from poverty while the middle class expanded to a third of the population. However, the forecast for the region is not clear. Both the IMF and the World Bank project growth of only 2.2 percent in 2015 for Latin America. Many governments squandered their windfalls from the boom, and Brazil’s loose fiscal policy will result in an economy that will be hard pressed to grow at all in 2015. Brazil’s trade deficit widened to $1.1 billion in October 2014, the highest-ever for the month. Both imports and exports fell, pointing to weak activity. Also, poverty and inflation added to the problem.
So where does this leave LATAM? Andrea Paz Campos Valdes, head of corporate affairs at LAN Cargo, said that in the past few years the carrier has seen belly and freighter capacity grow in many markets, but at the same time demand has been weak in most markets, pushing cargo rates down. “We have made adjustments in rates where we operate and related to this new market balance,” Campos Valdes said. “However, in the last few months, we have seen demand increase in certain markets and capacity being rationalized. We are permanently monitoring market development in order to make the necessary adjustments in capacity, itinerary and rates. We do not make across-the-board rate adjustments, but [rather] specific to certain markets and commodities.”
Guido Henke, LAN Cargo’s director, Europe, said there is little economic growth in many of South America’s countries, since imports into Argentina, Chile and Peru have slowed down recently. This slowing of GDP growth, combined with currency devaluation in the key Latin American economies, has hurt demand for imports. For 2015, the airline predicts increased stability in the region, and believes stronger GDP growth should bump up imports, especially in the second half of the year.
Prior to the merger, LAN operated a significant freighter fleet, including eleven 767-300Fs and four 777Fs, some in its LAN Cargo subsidiary and some placed with affiliated carriers throughout Latin America. These freighters carried 60 percent of its cargo, whereas TAM had no freighters and moved all of its cargo in the bellies of its passenger fleet. Post-merger, with LAN able to move cargo to and from Europe in TAM’s network, the need for freighters has decreased, and LAN has reduced its fleet by leasing three of the 767 freighters to FedEx. According to Henke, only 35 percent of cargo now moves in freighters, while 65 percent is carried in the bellies of passenger aircraft.
The freighter fleet will not be phased out altogether, though. Certain markets and commodities still need freighters due to seasonality or because of origin and/or destination, Campos Valdes said. “It is true that in the future we will rely more on our belly capacity, but we still have the need for freighters to complement and support [the customer]. This mix of belly and freighter capacity is an important component to our strategy.”
The freighter fleet may be shrinking, but Campos Valdes said this year LAN expects to add one A350-900 and seven 787-9 aircraft to its fleet, adding considerable cargo capacity in the bellies. LAN serves Madrid and Frankfurt, while TAM, based in Brazil, serves London, Milan, Paris and Zurich.