Global alliances in Latin America: a high stakes chess matchThe alliance battle in Latin America is nearing conclusion with a monumental decision by LATAM expected soon.
LATIN AMERICA HAS EMERGED AS THE CURRENT BIGGEST BATTLEGROUND FOR THE GLOBAL ALLIANCES. The forthcoming selection by the newly merged LAN-TAM will have huge ramifications for the industry in the region and globally. The alliance selected by LATAM, the parent company for oneworld’s LAN and Star’s TAM, will be guaranteed a leading position in the increasingly important Latin American market. LATAM will need to make its selection fast, as Chile’s antitrust court TDLC has stipulated the merger will only be approved if the group chooses a single alliance, shutting the door on the split alliance option which LAN and TAM were previously considering.
The more likely outcome is a oneworld victory; LAN is one of its earliest members and LATAM CEO-designate Enrique Cueto has been one of oneworld’s biggest proponents for more than a decade. By contrast, TAM only entered Star last year, but the stakes are such that Star is unlikely to give up without a fight.
The stakes are particularly high for oneworld because a new member recruitment drive in the region ended late last year with Avianca-TACA and Copa selecting Star and Aerolineas Argentinas opting for SkyTeam. As a result, oneworld, which has counted LAN as its only Latin American member since the collapse of Mexicana in Aug-2010, crucially needs LATAM to retain relevance in the region.
A oneworld victory would result in its share of capacity in the region increasing to more than 30% compared to about 16% for Star and 11% for SkyTeam. If Star wins, oneworld’s market share in the region would drop to only about 5% while Star’s share would reach about 40%, with SkyTeam, which is not expected to be a serious contender in the battle for LATAM, retaining 11%.
oneworld will likely pull out all the stops to woo the new group. American Airlines parent AMR and IAG, the parent company for British Airways and Iberia, could potentially offer an equity exchange to help cement the deal. A LATAM-IAG tie-up under the oneworld banner may even lead to a partial merger between the two groups.
With one of the highest market caps in the industry, LATAM will have the cash to pursue merger and acquisition opportunities outside South America. The US for now remains off limits due to that country’s foreign ownership regulations. As a result, Europe-Latin America offers the most likely combination for cross-ocean mergers. Among European companies, IAG and TAP are the logical targets for LATAM given the close business and ethnic ties between Latin America and the Iberian Peninsula.
TAP, which is in the process of being privatised by the Portuguese Government, would be a good fit for LATAM, as the new entity will only be the fourth largest player in the South America-Europe market. The Portuguese carrier has more capacity across the South Atlantic than LAN and TAM combined and is now the largest European carrier serving Brazil, with an unrivalled network of 10 Brazilian destinations. Securing both TAP and LATAM would be a major coup for oneworld, giving the alliance a powerful presence in South America.
For Star, the prospect of losing TAP and LATAM could provoke Lufthansa into action. Lufthansa buying TAP would ensure Star continues to have a major presence across the South Atlantic. But losing only LATAM would not be the disaster for Star that it would be for oneworld.
With Avianca-TACA and Copa, Star will have a dominating share of the Central American market regardless of the LATAM outcome, with hubs in all three of Central America’s largest airports. Star will have strong local presences in at least two South American markets, Colombia and Peru, with a third – Ecuador – to be added if Avianca-TACA Ecuadorean subsidiary AeroGal joins the alliance. Adding LATAM to the mix would result in Star having the two largest carriers in Peru and potentially Ecuador plus the three largest carriers in Colombia – an enticing proposition but potentially too much overlap.
The anti-competitive implications of having LATAM and Avianca-TACA in one alliance raised concern at the TDLC. The court, in approving the LAN-TAM merger, proposed a measure which would prevent Avianca-TACA and LATAM from being in the same global alliance. TDLC also proposed prohibiting LATAM from codesharing with Avianca-TACA or Gol as well as on certain routes with other carriers outside the alliance it selects. If this part of the ruling isn’t overturned by Chile’s Supreme Court, Star would be forced to withdraw its campaign at LATAM or not proceed with Avianca-TACA, which seems improbable as Avianca-TACA is already more than halfway through the 18-month joining process.
Unlike oneworld, which has no alternatives in any of the five South American markets where LAN has passenger airline affiliates or subsidiaries, Star has an alternative in Brazil should it lose TAM. In approving Avianca-TACA as a new member last year, Avianca Brazil was excluded because the carrier is not formally part of Avianca-TACA Holding. But ownership of Avianca Brazil is expected to shift into Avianca-TACA Holding over the next several months, opening up the opportunity for Avianca Brazil to join its sister carriers in Star. Losing TAM would add urgency to bringing Avianca Brazil into the Star fold.
Avianca-TACA is only the sixth largest carrier in Brazil with a 3% domestic market share. But it is the fourth largest carrier at Brazil’s main international gateway, Sao Paulo Guarulhos, where it offers connections to most major domestic destinations. Avianca Brazil is big enough to give the 10 Star members now serving Brazil the feed they need. Avianca Brazil is also growing fast and the addition of feed from Star members would likely help support an acceleration of its expansion plan.
TAM moving to oneworld and Avianca Brazil joining Star could even force Gol’s hand. Gol has been keen to remain non-aligned and work with all non-Star carriers, taking advantage of the need for Brazilian feed from oneworld and SkyTeam members and non-aligned carriers. But American and Iberia would have to drop their codeshares with Gol in favour of new deals with TAM should LATAM select oneworld. Avianca Brazil going into Star would also block any Star carriers from pursuing codeshares with Gol to replace existing relationships with TAM, leaving Gol with only SkyTeam and non-aligned carriers as potential partners. Gol already has close bilateral relationships with SkyTeam members Aeromexico, Air France and Delta and recently signed a codeshare agreement with Aerolineas Argentinas.
Securing Gol, Latin America’s second largest airline group, would give SkyTeam about a 27% share of the Latin American market and three of the region’s six major airline groups (Aerolineas Argentinas and Aeromexico being the other two). Having Gol as a potential consolation prize could persuade SkyTeam against mounting a surprise campaign for LATAM, similar to its ultimately unsuccessful Delta-led attempt in late 2009 to woo oneworld member Japan Airlines (JAL).
The alliance battle over JAL, which otherwise has no similarities to the LATAM situation (LAN and TAM are highly profitable while JAL was restructuring following bankruptcy), showed Delta’s willingness to be an active participant in global consolidation. Delta has since acquired a minority stake in Aeromexico. An equity tie-up with Gol, which like Aeromexico has a strong relationship with Delta that includes an MRO partnership, could be Delta’s next move in the region.
It is logical for US carriers to look southward as they shed their insular roots and ponder investments in foreign carriers. It is also logical for Latin American carriers to look northward as the region’s international market remains US-dominated with a relatively small amount of international capacity to Europe compared with North America. Equity tie-ups and – if US ownership regulations are relaxed – mergers will likely follow alliance lines.
Latin America’s alliance jigsaw puzzle should soon be complete. By the middle of 2012, more than half of the region’s capacity will fall into one of three global alliances and if Gol also decides to make the plunge, less than 30% of capacity to/from and within the region would remain non-aligned. Latin America has gone through rapid change from an alliance perspective; only 18 months ago more than 70% of Latin America’s capacity was still non-aligned. The final lines in the sand are being drawn in one of the world’s key growth markets. There will be no turning back.