Low-cost carriers in Latin America will grow significantly over the next several years, though U.S. and Latin American full-service carriers likely will remain dominant in the region as they tighten ties with one another.
Over the past decade, LCCs have grown to represent the majority of domestic traffic within Brazil and Mexico, where they now control 65 percent of seats, according to ICF. Their presence on international routes, however, remains limited. For example, full-service airlines American, Latam, Avianca, United and Delta fly more than three-fourths of the seats on routes between the U.S. and upper South America, according to CAPA Centre for Aviation. The top four LCCs serving those routes—Spirit, JetBlue, Azul and Gol—combine for just 17 percent of seats. Full-cost carriers also dominate routes to lower South America.
For international routes, LCCs will "continue their expansion as new aircraft models with the capability of operating on longer routes and benefitting from improved cost performance create opportunities for expansion into markets previously not viable," according to CAPA. "However, it appears that expansion will occur at a measured pace, as most operators in the region are using new-generation narrowbodies to drive cost efficiency."
Even so, LCCs are causing "the same evolutionary process seen in North America and Europe" as full-cost carriers "have woken up to new competition around them," said ICF principal Carlos Ozores. In recent years, for example, Latam has adapted the LCC model on its short-haul routes, employing branded fares that unbundle such amenities as seat selection and checked baggage while keeping full-service capabilities on longer routes. Copa introduced its own LCC for Colombia. Avianca, meanwhile, is now "the only carrier in Central and South America that offers a full business class product on one-hour domestic segments," Ozores said.
At the same time, Latin America's full-cost carriers are tightening ties with U.S. carriers. Avianca, Copa and United announced a joint business agreement late last year, and Latam and American Airlines are awaiting approval on their own joint business agreement. Delta got approval for its joint venture with Aeromexico in 2016. However, Mexico President Andres Manuel Lopez Obrador has canceled the in-process construction of a new airport meant to replace the current one, which is operating well above its designed capacity. His decision will "have a material impact on Aeromexico's execution of their business model to become more of a hub-and-spoke carrier," Ozores said.
LCCs are a part of crossborder partnerships, too. Delta has an investment in Brazilian LCC Gol, and Brazil's decision last year to allow 100 percent foreign ownership of Brazilian airlines—previously, foreign investors were capped at 20 percent—could propel more investment in the nation's airlines, Ozores said.
Latin America already is attractive for airline investors, according to Ozores. Large players like Indigo Partners—a private equity firm that controls Chilean LCC JetSmart and has a stake in Mexican LCC Volaris—and Irelandia, which has the Viva brands in Colombia and Peru, are investing in new aircraft and routes in the region, as well.
As the full-service carriers adapt, the region is positioned to absorb that growth, Ozores said. "They're not taking traffic away," he said. "They're exploiting the fact that large portions [of travelers] have not flown and have been traveling long distances domestically by ground."