CEO Interview: LATAM - Revenue Generator
Enrique Cueto, CEO LATAM Airlines Group, explains the rationale behind the merger
Who first conceived the idea to combine LAN and TAM?
This is actually a very old idea that goes back many years. We started talking about it with Commandante Rolim Amaro, TAM’s owner and Chairman in 2001.
Even prior to that, in 1997, TAM, LAN, and TACA worked together to place a large order of Airbus A320 family aircraft and at that time we started talking about the long term outlook for the carriers.
The conversations that led to the merger started around seven years ago and obviously in the last two to three years, with the consolidation in the industry, we decided to focus more strongly on the idea. This eventually led to the merger agreement.
What persuaded you that this merger made sense?
We believe this is a very strategic merger focused on growth. LAN has a strong presence in many of the Spanish-speaking countries in South America—Argentina, Chile, Peru, Ecuador, and Colombia. And half of South America is Brazil, where TAM’s position is very solid. The overlap between the airlines is less than 3%.
We are going to connect TAM’s domestic and international networks with LAN’s networks in all the countries where the company operates (Chile, Peru, Ecuador, Colombia, and Argentina) and create a large amount of synergy. There are some cost synergies, but mainly we have very strong revenue synergies. That makes it a bit different than some of the other mergers in this industry. This is more like the British Airways-Iberia merger.
How will the company be structured?
We will continue with both companies, LAN and TAM under the LATAM Airlines holding company. Both brands will continue. We can achieve 95% of the synergy while continuing to operate separately, although obviously we will work together in scheduling, reservations systems, financial, and other administrative functions.
The TAM people continue as TAM, the LAN people continue as LAN. So for 95% of the people working in these airlines, nothing changed after the merger. We are part of a bigger organization though, and both staffs, LAN’s and TAM’s, understand there are more opportunities now. We are stronger and we are going to be more stable in the long term. We will be one of the ten biggest airline groups in the world. Our people seem to be proud and happy with this agreement, and in general they all remain doing the same job as they did before the merger.
Can you provide more information on the value of the synergies?
When the merger was announced, we told the market that the airlines expected to achieve $700 million in annual synergies by the fourth year of the merger. Around 60% of the synergies are from the revenue side and around 40% are from the cost side.
Around one-third is related to new revenue opportunities created by connecting our hubs. For example, TAM has a flight from Sao Paulo to Milan. If the schedule is arranged to connect with LAN flights from Santiago, Buenos Aires, Lima, Quito, Guayaquil, and Colombia, then passenger numbers as well as revenue on the Sao Paulo-Milan flight are going to increase without any additional costs.
We also have synergies in the cargo business. LAN has a very strong cargo operation and we can improve the belly operation in TAM aircraft, so there is the potential for new cargo revenues on those routes too. For the cargo business there will be one organization in charge.
Here is another example: There is a LAN flight from Lima to Brasilia. LAN is very strong in Peru because LAN Peru is there, but the airline was very weak in Brasilia. Today, with LAN and TAM in these countries we are very strong on both sides. There is better revenue on those flights, plus it will create new flights. The same happened with the fact that there wasn’t a direct flight from Cordoba, in Argentina to Sao Paulo in Brazil, because LAN Argentina was not strong enough in Sao Paulo to make it work. And TAM was not strong enough in Argentina. Now, with the merger, we are strong in both markets. So, this merger will allow us to create more flights and be more efficient.
We see a huge opportunity for new flights to be created, especially since we are by far the main player in the region and even the home carrier in some of the markets where we operate. If we can connect all of these networks it will create a lot of revenue.
TAM is in Star Alliance, LAN in oneworld. How do you resolve the alliance issue?
That is a very good question. There are some antitrust restrictions in the merger but we have a big opportunity. LATAM Airlines can’t be in the same alliance as AviancaTaca, so with AviancaTaca in Star Alliance, obviously TAM must leave Star.
Now we are looking for an alternative. Obviously, our main concern is network connectivity and our connections to networks in the United States and Europe. We are trying to negotiate to get the best partner in the United States and Europe. We think at the end of the year we are going to announce how we are going to deal with this issue.
Of course, LAN could be in one alliance and TAM could be unaligned. But this would not be the best arrangement.
What do you think about having separate brands versus a common brand identity?
To get most of the synergies we don’t need to be in one brand. We think that in the future we need to move to one brand or to a better mix of brands but today around 27% of the total revenue of LATAM Airlines Group is the domestic market in Brazil, where the TAM brand is very strong. Then we have the LAN Peru and LAN Chile domestic markets where LAN are very strong. In cargo, who cares about the brand?
Looking at the international networks, for the next three to four years we will have different onboard products, different aircraft. We are going to connect, we will have a codeshare, but it is more risky to try to work with one brand under those circumstances.
We could continue with two different brands probably for the next three to four years and then we are going to try to move to one brand. But in the short term we feel comfortable working this way.
How has the merger changed your competitive position?
We think our position broadly compares with Europe or the United States. In Europe, for example, you have the Lufthansa Group, then you have British Airways-Iberia and Air France-KLM. You have three relatively equal groups.
Here, we are going to be by far the biggest airline group in South America. Probably we are going to carry four out of every 10 passengers in Latin America. So we are going to be the strongest, but in a very small market. Europe represents 23% to 24% of global traffic but Latin America only has 6%. So we need to consolidate more than any other part of the world.
In this region, you don’t have the same hubs in terms of passengers that you have in the United States and Europe so we have to create a network with hubs in different countries. In Europe and United States, you can have hubs in the same country, but in Latin America, you need Sao Paulo and Santiago, Buenos Aires, and Lima to create a network of hubs that allows you to offer passengers the best international connections.
Is consolidation the answer to aviation profitability and sustainability?
I think the consolidation is part of the solution for a number of reasons, especially in this part of the world. We are a huge continent, but a small continent traffic-wise compared to the United States, Europe, and Asia. You need to have a network and the question is how we create a stronger network to improve the offer to our passengers.
How can the industry work together to help bring the safety in Latin America up to world levels?
We have been working very closely with the Latin American and Caribbean Air Transport Association. We are exchanging safety information. We are helping smaller airlines to become registered on the IATA Operational Safety Audit (IOSA), which is important, because small carriers are responsible for a disproportionate share of accidents. We believe working with the authorities to expand IOSA and exchanging safety information will be the solution in this part of the world.
Additionally, we are talking with the government about improving the infrastructure. It is particularly important to work with the safety authorities to reduce the rate of approach and landing accidents because this is a major concern in this region.
When you look at the Latin America region, do you think that governments are doing enough to work with industry on infrastructure improvement?
Over the past 10 to 15 years, the region has been growing so strongly and many of the airlines in the region, such as COPA, AviancaTaca, GOL, TAM, and LAN are flying with new fleet. We are expanding the domestic market to many cities and we have been creating a lot of traffic. In most of these places, the airports, the air traffic control, and the infrastructure is not keeping up with this growth.
In general, the authorities are not investing enough in airport and air traffic control infrastructure. At the same time, there is a trend toward privatization and the winners think that they need to charge a lot to the airlines. They think airlines are wealthy. But this is counter-productive. We need a very efficient airline industry to generate more tourists and business with the rest of the world. So we need to be more efficient and the way that the government has been dealing with the infrastructure is not the right way in my opinion.
Has the industry got its environmental strategy right with the four-pillar program and the commitments that have been made?
We are aligned with the IATA solution to this issue. We also think the European Emissions Trading Scheme is not the right solution for the industry because it is a unilateral solution. It is quite unfair. We are very far from Europe and the charges will apply to the entire flight so there is a sovereignty issue to address.
The second point is that we really have been working hard to improve our environmental performance. We have a very new and efficient fleet and we have really been working to reduce our emissions.
For more information, please visit www.latamairlinesgroup.net