Why Big Latin American Airlines Chose Bankruptcy During Pandemic While U.S. Airlines Didn’t
Airlines around the world have seen dramatic drops in revenue due to the pandemic. This has caused airlines to re-evaluate their longer-term fleet plans, growth projections, and networks. It also has made them recognize that if fewer people use air travel for business, a leisure-based revenue structure would not cover current industry costs. This is why low-cost carriers who have always relied on leisure travel are considered to be in a strong relative position. In the U.S., this restructuring is happening without bankruptcy and all the major airlines are expected to recover.
In Latin America, however, three of the largest airlines — LATAM, Avianca and AeroMexico — have filed for bankruptcy protection as they grapple with the travel demand reduction. This different approach to restructuring compared to the U.S. is mostly due to three major issues.
Not Directly Affected By The 9/11 Attacks
Back in 2001, the 9/11 attacks were, at the time, the biggest disruption the U.S. airlines had ever seen to their business. Revenues dropped not unlike at the start of this pandemic, but recovered fairly quickly as the response to the attacks was visible. Airlines lost access to capital, and, like today, had to restructure their costs in response.
After these attacks, many major airlines of the day — Delta, United, American, Northwest, and US Airways — filed for bankruptcy protection as they addressed the many changes needed. Using the tools offered by the bankruptcy code, these airlines drastically reduced their retiree liabilities by pushing these to the Pension Benefit Guaranty Corporation (PBGC), a government owned corporation. Then, they changed to defined contribution plans that were not as valuable to employees but lowered the airlines’ costs greatly. In addition, fleet and network changes were made. US Airways rejected its lease obligations at Pittsburgh’s airport, effectively closing that hub. Many employees were furloughed or fired, as airlines re-sized their operations.
Latin American airlines did not see the same impacts on revenue as the U.S. carriers did, and while Avianca did file for bankruptcy during this time most of the continent’s airlines did not. While adopting many of the same security features that became normal after 9/11, the Latin American airlines did not have the urgency to fix issues like fleet, labor inefficiencies, network redundancies, and real estate excesses. The U.S. carriers became more efficient after 9/11, and this led to both consolidation and a decade of profitable operations before the pandemic hit. Latin America never went though this then, so they have to now.
Newer Low-Cost Carrier Competition
Since Southwest was a low-fare airline in the 1980s and 1990s, large U.S. airlines have had to face low fares in many of their markets. In fact, the science of Yield Management was developed in the 1980’s by American Airlines as a way to match Southwest’s low fares but not make them available to customers willing to pay more for American’s nicer product features. America West was also low-cost and low-fare, and ValuJet (which later became AirTran) brought low fares to Atlanta and the Southeast. Spirit pioneered the ultra-low-cost airline category (ULCC), and first brought low fares into many close-in international markets in the Caribbean.
In Latin America, this trend came much later. Volaris was the first low-cost airline in Mexico, and they began in 2003. Viva Colombia first brought low fares to Colombia in 2012. Sky Airline in Chile was low-ish in price, but fares really dropped when JetSmart began in 2017. Because of the relatively late start of well-structured and disciplined low-cost, low-fare airlines in Latin America, the larger airlines never developed the skills, efficiency, and strategies to compete effectively. The need to re-structure after the pandemic for these airlines is not only because of lower overall demand, but also to emerge as stronger competitors to the new breed of low-cost airlines in the region. Bankruptcy lets them address some of these cost issues head on.
Historical Reliance On Lower-Cost Labor
I remember one of my first trips to South America. My wife and I went to Chile and we noticed immediately how many workers there were in every restaurant and in the hotels. Years later, when I worked for Taca in El Salvador, the company clearly had a strategy to use people to solve all problems since labor was relatively inexpensive. This reliance on people rather than technology and overall efficiency was common in Latin America. U.S. Airlines have worked for decades to increase labor productivity, have used outsourcing in places to help this, and developed many consumer self-help technologies and automation to reduce dependency on mostly high-cost labor. The availability of lower-cost labor made some of these developments less important for large Latin American airlines.
Why Bankruptcy Helps The Latin Carriers Now
Coming into this pandemic, U.S. airlines were well-run, generally efficient, and highly profitable as a group. When the pandemic struck, the problem it created wasn’t one that could be obviously solved through bankruptcy. No bankruptcy judge can command people to start booking air trips again. This loss of revenue wasn't immediately solvable with bankruptcy, so U.S. airlines instead worked to increase cash reserves, cut back service, and “ride it out.”
By comparison, larger Latin American airlines were a decade behind the U.S. in terms of fixing their structural costs and organization. When faced with a reduction in demand due to the pandemic, they couldn’t just ride it out and not address key issues affecting their ability to compete even after the pandemic. In a sense, they are combining the pandemic and 9/11 into one bucket for re-structuring purposes, while the U.S. was able to do this in two steps. This will work if they use the tools that bankruptcy provides well, and set benchmarks based on global efficiency standards, not just those in Latin America. Upon emerge from both bankruptcy and the pandemic, these carriers have the opportunity to be much more efficient, structurally sound, and provide stronger competition in global airline environment.
This article originally appeared on Forbes