In 2009, the picture looked rosy for both Chile’s LAN Airlines and Brazil’s TAM Lineas Aéreas. LAN hadn’t had a loss since the second quarter of 2002 and was one of the few carriers to have an investment-grade rating. TAM, while not quite at the same financial level as LAN, was the largest airline in Latin America’s most populous country. With the Brazilian real standing at 1.94 to the U.S. dollar, the future looked bright for both carriers, and a merger to create a single dominant Latin American carrier made perfect sense.
The merger was formalized June 23, 2012. Latin American carrier LATAM was born. But the cargo business has been anything but perfect at LATAM since then.
Cargo was a big part of the new company’s post-deal plan. LAN operated a large fleet of 767 and 777 freighters, and, prior to the merger, cargo generated 28 percent of LAN’s revenue – far more than the 5 percent contribution cargo made to the big North American carriers, and in fact more than the 15 percent to 20 percent contribution to the big European combination carriers. TAM did not operate any freighters, but its belly freight operation was significant, generating 9 percent of annual revenue. And both carriers were seeing strong year-over-year growth in their cargo traffic.
With LAN gaining access to TAM’s vast domestic cargo network in Brazil and strong connections to Portugal, and TAM gaining access to LAN’s main-deck and belly freight network throughout the Americas and parts of Europe TAM didn’t serve, the stage seemed set for the development of a cargo operation that could claim a place on the global stage.
But, as the poet Robert Burns once said: “The best laid schemes o’ mice an’ men, gang aft aglay.” Translating from Scottish to English, this means something like “don’t count your cargo chickens before they hatch,” and it applies directly to LATAM’s post-merger cargo business. Brazil’s economy tanked, and its exchange rate fell to 3 reais to the dollar. Intra-Latin American trade declined, demand for imports dried up, competition increased and strong growth in cargo traffic soon became a thing of the past.
Cargo traffic stagnated in 2012 and remained stubbornly flat through 2013. Things got worse in 2014, with LATAM reporting a 3.3 percent drop in cargo traffic. But that was just a prelude to this year, when the bottom fell out of demand, and LATAM’s first-half cargo traffic was down 11 percent, compared to the first half of 2014. Cargo revenue has fallen even more steeply than traffic, with LATAM reporting cargo revenue down 8 percent in 2014, and down 16.3 percent in the first quarter of 2015 (the carrier’s most recent reporting period as we went to press).
Despite the challenges thrown in its path, LATAM is still looking confidently toward the future. It has dealt with the tough times of the last three years by cutting costs wherever possible, and reducing the size of its freighter fleet while adding new cargo-friendly 787 and A350 passenger aircraft. As Alvaro Carril, LAN Cargo’s senior vice-president, sales and marketing, pointed out, when cargo demand does return to the region, LATAM will be well-placed to take advantage of it. He said LATAM’s network is unparalleled in the region. “We can combine our domestic operations in Brazil, Chile, Argentina, Peru, Ecuador and Colombia with our backbone of international and freighter flights serving the key hubs in North America and Europe.”