14 August 2010

LAN + TAM = Latin America Powerhouse. Alliance Anyone?

The blockbuster announcement of the creation of a holding company for two of South America's largest airlines into a single body was predictable but unexpected.

The controlling shareholders of LAN and TAM have agreed to a governance model to jointly manage strategic decisions relating to the alignment of the activities of LATAM group holdings. Mauricio Rolim Amaro, currently Vice-chairman of the Board of Directors at TAM S.A., will serve as Chairman of Board of Directors of LATAMand Enrique Cueto, currently CEO of LAN, will serve as LATAM CEO.

The cross border rationalization in Latin America has been predicted for some time but slow to start. With the intrusion of LAN into several markets it was only a matter of time before the airline would have to address the issue of Latin America's largest aviation market. This is a neat way to address it.

The bringing together last year of TACA and Avianca under a joint ownership but with separate brands was therefore a clue. The possibility of synergies and savings to get to scale was obvious.

All of Latin America's traffic is still smaller than the world's current two largest airlines - Delta and Air France KLM. Therefore cross border mergers are inevitable.

The fragility of the market was underscored in the past 2 weeks with both GOL and TAM reporting losses and the rapid fall of once powerhouse Mexicana.

The new company is not without its challenges. Initially the brands will continue to operate independently sharing back office and common practices. Indeed TAM and LAN have cooperated before with TACA in the purchase of Airbus equipment. The three became known as the Three Amigos in this transaction that has enabled a number of commonalities to occur in the Latin American market.

Once more this throws into contention the issue of the Alliance relationships. LAN is a founding member of OneWorld and TAM is a recent convert to STAR taking over from the defunct old Varig as the anchor in Latin America. Now the map may need to be redrawn.

In their announcement the two airlines stated: The combination would create a new Latin American airline group that would offer seamless passenger and cargo service across the continent and around the world. The new group, to be known as LATAM Airlines Group, would include Lan Airlines and its affiliates in Peru, Argentina and Ecuador; Lan Cargo and its affiliates; TAM Lineas Aereas S.A.; TAM Mercosur and all other holdings of LAN and TAM.

For the other Star Members this creates a set of issues. The LATAM market has played Alliance musical chairs for some time. Already Latin America is getting a little crowded with STAR members:

COPA (who will become part as they are aligned with Continental now a STAR player), TACA who could become part of STAR. TAM was formerly aligned with American.

Avianca - the other international brand of TACA/Avianca group is aligned with Delta but not formally aligned with anyone else.

Mexicana was once part of STAR with United's help. Last year it formally joined Oneworld. However in its troubles the partners there did not lift a finger to assist Mexicana as they had to assist troubled Japanese carrier JAL. With the collapse of the airline and filing for bankruptcy - the alliance membership is likely at the very least in question. The recent downgrade of the Mexico Airspace by the US FAA has resulted in all US carriers pulling code share flight numbers. No US Carrier can put their code on a Mexican airlines' flights until the raising of the category.

About the only stable player in all of this has been Aeromexico with their small but steady participation in Skyteam.

This is going to leave GOL as a much courted partner by all three alliances as they each try to figure out what the new world order map will resemble. And what about the rest? I believe there will be a number of airlines who will now seek to combine together to create more formal groupings to combat the sheer size and market power of the new LATAM group.

For the attendant and dependent players particularly PSS and GDS vendors such as Amadeus and Sabre - there will be a hotly contested market for distribution and Airline IT. In my view, direct distribution now becomes a much more viable proposition with the extensive reach of these airline partnerships. One thing is for sure - the money men will be sharpening their pencils while legacy GDS lawyers run to their contracts and see what they can salvage.


No comments: