Analysis: Why LATAM Is Most Delicately Positioned Among Brazilian Airlines

RIO DE JANEIRO, BRAZIL – Chile-based LATAM has always been a reference for the Latin American air sector, even before it became LATAM, with the merger between the Chilean and Brazilian groups in June 2012. The company’s history began in 1976, when Regional Air Transport (TAM) emerged under the control of Commander Rolim Amaro.

Since then, the company’s trajectory has fluctuated between ups and downs, marked by historical events, as well as by serious accidents, but which hardly removed its pioneering spirit. The company, founded in Marília, SP, 450 kilometers northwest of the capital, is one of the most remarkable milestones in the country’s aviation industry: the pioneering of the frequent flyer program, the large international network, going public on the São Paulo and New York Stock Exchanges, among other landmarks.

However, the novel coronavirus pandemic paralyzed the sector’s activities and abruptly interrupted air traffic worldwide. To suddenly halt a gigantic machine that was in full operation is not one of the easiest tasks.

In April, LATAM was forced to suspend all international flights and operated only in its countries of origin – Brazil and Chile – but with a 95 percent reduction in supply. The loss was close to an impressive R$5 billion (US$890 million) in the second quarter of 2020, considered the worst in the company’s history. It should be noted that Azul and Gol also recorded losses, but in significantly lower figures compared to the Chilean-Brazilian – R$2.9 billion and R$1.9 billion, respectively.

Today, LATAM is faced with the burden of having a very large operation in hand. LATAM’s greatest disadvantage, specifically in the coronavirus crisis, is the high number of international flights that the company offered. If last September the demand for domestic flights recorded a 55.2 percent drop compared to the same period in 2019, the air passenger transport in international flights decreased 90.7 percent, suggesting a slower rebound in the number of outbound flights, according to the Brazilian Association of Airline Companies (ABEAR).

Evidence of this uncertain international context was the federal government’s decision, published last Monday, November 16th, to close Brazil’s land borders for 30 days, with the exception of the borders with Paraguay. The restrictions do not include airspace, but suggest that the drama of a company that mainly operates passenger flights to other countries is far from over. Even the increase in the number of Covid-19 cases that afflicts European countries and the United States has repercussions.

Despite the extremely complex and delicate scenario, the chance for the company to replicate Avianca and close down operations in Brazil is remote, according to analysts in the sector. “I don’t believe in closing because LATAM’s asset itself is very valuable, one of the options is a merger with Azul or a structural change, but to stop operating is very difficult,” says André Castellini, an aviation specialist and partner at Bain & Company. Until the full resumption of flights, which should only occur after the arrival of the vaccine, LATAM should continue cutting costs.

“To sustain operations, all companies must review their commitments, such as payment of debts, debentures and reduction of payroll. The difference is that some conduct this process under legal protection, such as Avianca and LATAM and others operate outside the courts,” he says.

The damage inflicted by the pandemic has also affected the fleet and the company’s employees. Before the crisis, the company had 158 aircraft in Brazil. Currently, there are 144, but only 85 are in operation, because of the still reduced air network. In the labor scope, LATAM established a temporary wage reduction with its crew – based on MP 936, which allows contracts to be suspended – but the maintenance of jobs proved to be unsustainable.

Since July, 2,700 employees have been dismissed, out of a total of 7,000. If other positions are considered, there were approximately 6,000 dismissed employees, which represents almost 30 percent of the total workforce, 21,000 people before the pandemic. LATAM also claims that there is a surplus of 1,200 crew members, which led the company to open negotiations with the National Aeronautics Union (SNA) for a permanent reduction of salaries, a scenario contrary to that of its competitors, which signed temporary agreements with their workers.

LATAM’s reason for this adjustment lies in the fact that the company pays its crew a higher salary when compared to its competitors. The union, in turn, says that RASM (Revenue per available seat mile) and CASM (Cost per available seat mile) should be analyzed jointly, since they represent the result of the operations of air passenger transport.

“The proportion of CASM, which includes the number of seats offered by the company in relation to the company’s costs, shows that the highest crew cost is not LATAM’s, but Azul’s,” says Ondino Dutra, president of the SNA, based on an economic analysis study conducted by the union based on official data from the National Civil Aviation Agency, ANAC. “The proportion of the cost of crew wages in relation to the cost of services provided by LATAM is also not the largest in the market. In this segment, Gol is the leader.”

Dutra also stated that negotiations are in their final stages, and that the proposal offered by LATAM should secure a 20 percent reduction in the company’s payroll. Before taking the terms of the agreement to an assembly, the union will call on the Superior Labor Court (TST) to rule on the legality of the process. “We regret that LATAM did not accept the temporary reduction and we hope that this negotiation will succeed in preventing further layoffs,” he concludes.

LATAM said it is taking all the necessary measures to emerge from the crisis as a more agile, efficient and competitive company. “LATAM is the largest and oldest of the three companies operating in Brazil and pays the crew better both on domestic and international flights. That’s why the company needs to equate itself to the sector’s practices and review its current pay model,” it said in a note.

The company also points out that it has signed an agreement with ten unions representing airline workers, covering special benefits for those who have joined the Voluntary Resignation Program (PDV) and the Non-Remunerated Leave (LNR). “The company’s focus is to expedite negotiations with the SNA and move forward so that the new proposal can be approved as soon as possible.”

Although it is negotiating the notorious ‘air rescue’ with the National Bank for Economic and Social Development (BNDES), which until now has not been adhered to by any company, LATAM Brasil has already shown that it is willing to deeply reorganize itself. In July, it entered the group’s bankruptcy protection proceeding in the United States – which should run from 12 to 18 months. The move secured access to the US$2.45 billion loan granted by shareholders Cueto and Amaro families, Qatar Airways and the Oaktree Capital fund.

Another significant factor for the company’s economic recovery is in the air network. In October, it reached the mark of 274 daily flights, still far from the 750 that it used to reach, but that provide some leeway to the operation. In addition, almost 3,000 flights were added for the December 2020 and January 2021 high seasons. Better results are expected with the coming summer season. Demand has begun to rise more strongly in the Brazilian domestic market among leisure travelers, a fact that sustains some optimism for the company that used to rule the Latin American market.

Source: Veja

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