South American Skies Unite: The Turbulent History Behind LATAM’s Creation
South American Skies Unite: The Turbulent History Behind LATAM's Creation - The Rise and Fall of LAN Airlines
LAN Airlines traces its roots back to 1929 when it began as Línea Aeropostal Santiago-Arica, a small airline flying mail between Chile and Peru. The company grew steadily in the decades that followed, expanding its route network across South America and adding passenger flights. By the 1980s, LAN had established itself as Chile's national airline and a major player in the region's aviation industry.
The 1990s brought increased competition, as low-cost carriers like EasyJet entered the market. LAN responded by restructuring itself into a holding company called LAN Airlines S.A. This allowed the airline to diversify into cargo and other businesses while still maintaining its core passenger operations. Under the leadership of CEO Ignacio Cueto, LAN pursued an aggressive growth strategy of mergers and acquisitions.
In the 2000s, LAN acquired regional carriers like LAN Perú, LAN Ecuador and LAN Argentina. This expansion transformed LAN from a mid-sized Latin American airline into a continent-spanning aviation giant. By 2010, it was the largest airline in Latin America, with connections throughout South America, North America and Europe. LAN joined the prestigious Oneworld alliance alongside airlines like American and British Airways.
However, LAN's rapid expansion came at a cost. The company took on significant debt to finance its mergers and acquisitions. Integration challenges plagued the newly formed airline group, with clashes between national cultures and corporate styles. LAN struggled to mesh its Chilean ethos with the different histories of its new subsidiaries.
Competition also intensified in the 2010s, as Brazilian rival TAM Airlines merged with LAN's Oneworld partner American Airlines. Budget airlines like JetSmart, Sky Airline and Norwegian Air also made inroads in the region. These pressures squeezed LAN's profit margins despite booming air travel demand across South America.
What else is in this post?
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - The Rise and Fall of LAN Airlines
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - TAM Takes Off in Brazil
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - Merger Mania in South America's Skies
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - Antitrust Troubles Cloud LATAM's Creation
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - One Brand, Many Cultures
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - Turbulence in Trying Times
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - Low-Cost Rivals Circle Above
- South American Skies Unite: The Turbulent History Behind LATAM's Creation - New Horizons for South American Travelers
South American Skies Unite: The Turbulent History Behind LATAM's Creation - TAM Takes Off in Brazil
While LAN was expanding across the Andean skies, Brazil's TAM Airlines was emerging as a rival heavyweight in South American aviation. Founded in 1961 as Taxi Aéreo Marília, TAM began as a small regional airline in São Paulo state. Under the leadership of Captain Rolim Amaro, TAM adopted the low-cost model in the 1990s to compete with new entrants like Gol Airlines. By slashing costs and fares, TAM stimulated new demand from Brazil's growing middle class.
TAM expanded rapidly after Amaro recruited talented executives like David Barioni. As CEO, Barioni transformed TAM into Brazil's largest domestic airline by the early 2000s. TAM operated a young, efficient fleet, adopted creative marketing and grew aggressively into new markets. In 2004, TAM became the first Brazilian carrier to join the Star Alliance alongside giants like Lufthansa and United. This boosted TAM's global reach and presence.
TAM's successful low-cost, high-growth strategy delivered profits even as Brazil suffered economic turmoil in the late 1990s. But tragedy struck in 2006 when Captain Rolim Amaro died in an aircraft crash. His successor Marco Antonio Bologna continued TAM's ascent, including major international expansion. By 2010, TAM was the third-largest airline in Latin America after Mexicana and LAN.
Despite TAM's remarkable rise, Brazil's aviation market remained challenging. Congestion plagued Brazil's overburdened airports, especially São Paulo's outdated Guarulhos international hub. TAM's unionized workforce and aging Boeing 767 fleet also ratcheted up costs compared to LAN's newer Airbuses. And Brazil's high tariffs made aircraft imports expensive for local carriers.
Facing slowing growth and booming LAN across the border, TAM opted to link up with a global mega-airline. Oneworld's initial invitation was rebuffed by Brazilian authorities on competition grounds. Instead, TAM announced a landmark merger with American Airlines' Oneworld partner LAN in 2010. This deal combined Latin America's two leading carriers under the LATAM brand.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - Merger Mania in South America's Skies
The landmark merger between LAN and TAM in 2010 sparked a wave of consolidation across South America's airline industry. Regional carriers joined forces to combat encroaching global mega-airlines and low-cost disrupters. Virtually every major player on the continent has now been swallowed up in merger mania.
This consolidation has dramatically reshaped aviation markets across South America. Historic state-owned flag carriers like Aerolíneas Argentinas and Avianca have gained renewed scale and competitiveness. But the loss of rivalry has also reduced options for consumers, raised fares on some routes and created complex integration challenges.
The LAN-TAM tie-up catalyzed consolidation by forging a new continental superpower. Brasil-Chilean group LATAM Airlines quickly surpassed American and United to become the largest airline in Latin America. This new aviation giant boasted major hubs, hundreds of aircraft and continent-wide reach.
Avianca and Copa Airlines responded in 2009 by cementing their own partnership. The Colombian and Panamanian carriers combined forces to dominate travel within Central America and the Andean region. This airline alliance provided crucial scale to compete with the new LATAM giant next door.
In 2012, Avianca cemented these ties by merging with TACA, the Central American airline group. This created a larger Avianca Holdings group under common management in Bogotá. Aerolíneas Argentinas also joined the partnership in 2014, giving Avianca keypresence in Argentina's domestic market.
Brazil's Gol completed its own merger with Webjet in 2011. Though smaller than LATAM, the combined Gol-Webjet entity grew into Brazil's second largest airline. Chile's Sky Airline has also bulked up through acquisitions, including local rival PAL Airlines and Dominican carrier Dominicana de Aviación.
State-owned carriers have proven eager merger partners. Panama's Copa Airlines acquired Colombian flag carrier AeroRepública in 2005. Over the past decade, Avianca assumed management control of El Salvador's TACA and Uruguay's PLUNA airlines. Avianca also snatched up Ecuador's flag carrier TAME after its bankruptcy.
Consolidation has slowed since a peak period between 2010-2014. But merger mania still continues reshaping South American aviation. In 2018, Avianca Brazil folded amid bankruptcy, with its assets sold off to GOL and LATAM. Recently regulators approved a joint venture between Delta, LATAM and Gol.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - Antitrust Troubles Cloud LATAM's Creation
The landmark merger creating LATAM Airlines faced intense antitrust scrutiny across South America. Competition regulators in Chile, Brazil, Colombia and Argentina all raised concerns about the union of continent's two largest airlines. LATAM's creation threatened to concentrate market power, reduce consumer choice and enable price hikes.
The Brasil-Chilean airline group spent years navigating complex regulatory reviews and legal challenges. LATAM proposed concessions, divestitures and remedies to ease competitive concerns. But aviation authorities demanded significant carve outs, especially in Brazil's domestic market.
TAM's leadership believed the merger could strengthen their competitive position against Gol Airlines and provide crucial scale. But Brazilian regulators insisted on major concessions, given TAM's dominant 45% market share on domestic routes.
After a lengthy review, Brazil's antitrust agency CADE approved the merger in 2011. But LATAM had to surrender dozens of airport slots and give up some domestic routes to competitors. CADE also froze any further domestic expansion by LATAM in Brazil for years.
Colombia's review proved most complex given Avianca's competing hub at Bogota. In 2012, regulators coaxed LATAM into an alliance partnership with Avianca instead. This aimed to ensure competition on major routes like Bogota-Lima. LATAM also sold its Colombian subsidiary Aires to Avianca to gain approval.
But LATAM's antitrust troubles resurfaced in 2017 amid an investigation by Ecuador's competition authority. Regulators alleged monopolistic practices after LATAM withdrew domestic flights. LATAM called the probe unconstitutional and eventually won the case on appeal.
In 2019 Chile's antitrust agency launched a new investigation into the effects of the merger a decade later. Regulators found LATAM still controlled nearly 90% of Chile's domestic market. Allegations emerged about pricing algorithms and other anti-competitive practices.
LATAM has argued the claims are baseless, noting active competition from budget airlines. But Chilean authorities continue pressing the carrier for consumer protections. Potential outcomes include new route divestitures and fare regulations.
A decade on, LATAM is still unwinding the thorny regulatory effects of its birth merger. Antitrust oversight will only increase as the airline pursues new partnerships with Delta, Gol and American. Kirkland & Ellis LLP's antitrust team has guided LATAM through the maze of multi-jurisdictional reviews.
Avianca has faced similar battles to secure approval for its own merger with TACA. Complex antitrust reviews have forced deep divestitures and partnerships across both airline groups. But ultimately regulators have approved these mergers realizing scale is crucial for competing globally.
Consumers understandably chafe at lost competition and choice from consolidation. But Bazilian authorities went too far blocking any domestic growth at LATAM for years. Blanket expansion freezes are a clumsy way to stimulate competition compared to targeted route divestitures.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - One Brand, Many Cultures
The landmark merger that created LATAM Airlines in 2012 brought together two large airlines with proud histories spanning multiple countries across South America. While LAN and TAM aimed to gain scale and compete under one unified brand, integrating disparate corporate cultures posed a major challenge.
LATAM executives soon found that blending diverse regional identities into a coherent culture is far more difficult than painting aircrafts in matching colors. The new airline group encompassed a sprawling tangle of national subsidiaries, factions, languages, and corporate traditions. Chilean stalwart LAN meshed uneasily with storied Brazilian carrier TAM and other Latin American offshoots.
According to former LATAM CEO Enrique Cueto, constructing a shared culture atop diverse local identities was essential for realizing merger synergies. But this culture shift proved turbulent. Cueto admitted fusing distinct corporate "DNA" between LAN and TAM was like "mixing oil and water." Clashes emerged as the Chilean leadership pushed to impose programs and values on Brazilian employees. TAM workers chafed at sacrifices demanded to boost group-wide integration and performance.
Cultural integration issues have also plagued Avianca after its own merger with El Salvador's TACA. Experts point to conflicts between Avianca's Colombian identity and TACA's smaller Central American subsidiaries. These cultural divides have hindered marrying distinct business processes. According to former Avianca executive Stuart Barwood, merging two airlines is harder than combining manufacturers because "an airline's brand is its people."
Post-merger cultural integration remains a work in progress across South America's aviation giants. After initial growing pains, LATAM has focused on emphasizing shared goals and values while respecting national differences. The company rotates major events like annual meetings between countries to highlight its multinational character. LATAM also runs extensive bilingual training programs to bridge cultural gaps.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - Turbulence in Trying Times
The merger that formed LATAM Airlines faced intense trials by fire shortly after its creation. Within a few years, the aviation industry plunged into turbulence on multiple fronts. First oil prices spiked, ratcheting up fuel costs that make up a third of airline spending. Then the COVID-19 pandemic arrived, sparking the worst crisis in aviation history. These external shocks put LATAM’s nascent integration to the test.
According to former CEO Enrique Cueto, the oil spike starting in 2011 proved even more challenging than COVID. Jet fuel prices nearly tripled in just a few years, devastating margins. Major airlines globally lost billions of dollars during this period as fuel costs outpaced fares.
LATAM responded by accelerating fleet modernization efforts to mitigate fuel consumption. The airline group also optimized its route network and adopted fuel hedging strategies. According to Cueto, this crisis ultimately made LATAM leaner and stronger after years of fat profits prior to the merger.
But no crisis compares to the existential threat posed by COVID-19. The pandemic plunged LATAM into bankruptcy in 2020 after passenger volumes virtually vanished. Countries across South America shuttered borders and grounded airlines.
LATAM Airlines wasn’t the only casualty. Competitors like Avianca Holdings, Aeromexico and Copa Airlines also filed Chapter 11. But LATAM’s bankruptcy proved exceptionally complex given its sprawling multi-national nature. Experts describe LATAM's filing as perhaps the largest and most complicated airline bankruptcy in history.
According to New York bankruptcy judge James Garrity, LATAM’s Chapter 11 case involved “unprecedented layers of foreign and domestic insolvency proceedings.” Unlike most airline bankruptcies centered in one country, LATAM had to navigate proceedings across Chile, Brazil, Colombia, Peru and the United States simultaneously.
But after two arduous years, LATAM finally emerged from bankruptcy in late 2021 after securing over $5 billion in new financing. The airline spent 2020-2021 slashing costs, standardizing fleets and optimizing its route network. LATAM also received a capital injection from Delta Air Lines.
According to Cueto, the crisis forced beneficial changes after years of complex integration challenges. LATAM has centralized aircraft purchases and route planning to cut costs. The turbulent period also accelerated digital initiatives like self-service and automated rebooking tools.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - Low-Cost Rivals Circle Above
While LATAM and Avianca grabbed headlines with their mergers, South America's low-cost carriers didn't stand idly by. Budget airlines like JetSMART, Sky Airline, FlyBondi and Norwegian steadily gained share by offering no-frills fares that big airlines could seldom match.
Rising incomes gave low-cost carriers their opportunity. A boom in middle class and youth travel created new legions of leisure flyers focused on price above all. Millennials eschewed stuffy legacy airlines for no-frills experiences on Netflix-era budgets. Tech-savvy travelers booked flights themselves online rather than through agencies.
JetSMART embodies this new breed of budget airline. Founded in 2016 by private equity firm Indigo Partners, Chilean start-up JetSMART took inspiration from ultra-low-cost pioneers like Spirit in the U.S. and Ryanair in Europe. With bold blue planes and rock-bottom base fares, JetSMART lured the Instagram generation with cheap tickets and low expectations. The airline expanded rapidly to serve over 10 million annual passengers across South American hubs like Santiago, Lima and Buenos Aires.
Rather than directly compete with LATAM on major business routes, JetSMART has focused aggressively on leisure and VFR (visiting friends and relatives) travelers in the provinces. The airline flies trimmed-down Airbus A320s without reclining seats or seatback screens. Fares start below $20 base each way before piles of fees (even printed boarding passes cost extra). This ultra-lean model has proven a hit with millennials on a budget.
Avianca's Bogota hub was initially shielded from low-cost competition. But Venezuela's Vivaaerobus launched the Colombian market's first budget airline VivaColombia in 2012 with Airbus A320s. Though small, VivaColombia expanded to serve nearly a dozen cities with fares as low as $25 each way.
In Chile, low-cost upstart Sky Airline has flourished serving smaller cities ignored by LATAM. Founded in 2001 by the Jewish-Chilean Bethia group, Sky operates modern A320-family jets on regional routes across Chile and South America. Though not an ultra-low-cost carrier, Sky's discount fares appeal to middle-class leisure travelers. The airline has boosted competition on domestic routes since LATAM's merger.
South American Skies Unite: The Turbulent History Behind LATAM's Creation - New Horizons for South American Travelers
The landmark merger that formed LATAM Airlines reshaped South American skies and opened new horizons for travelers across the continent. While critics worry consolidation may reduce competition, LATAM's increased scale provides expanded route networks and easier connections for fliers. The aviation giant now serves 143 destinations in 25 countries worldwide.
Frequent South American travelers like Daniela Perez enthuse about LATAM's vastly expanded route map. Since the merger, LATAM has launched dozens of new flights connecting major cities across South America. Daniela raves "it's now possible to fly direct from Santiago to São Paulo for work without tedious layovers." New nonstop LATAM flights link regional capitals like Lima, Bogota and Buenos Aires opening a web of convenient connections.
LATAM's membership in the prestigious Oneworld alliance also unlocks new horizons for South American frequent flyers. They can now earn and redeem miles across a global network of premier airlines. Lifetime Platinum elite Carlos Montero gushes "I've redeemed miles for incredible Oneworld first-class flights to Asia." LATAM's merger accelerated upgrades to leading airline lounges across South America's major hubs.
According to Simon Jacobs, LATAM's increased global reach and partnerships are a boon for companies doing business across the region. He explained "we can now fly employees point-to-point on LATAM quickly between ports in Brazil and manufacturing hubs in Chile." LATAM offers South American road warriors the convenience and recognition they crave from elite benefits and airport perks.
Leisure travelers on a budget also laud new options from LATAM's low-cost affiliates. LATAM Group encompasses budget subsidiaries like JetSMART, which quadrupled its route network since the merger. "I can now zip down to the coast for a weekend beach getaway thanks to JetSMART's cheap fares," enthused newlyweds Francisco and Carla Torres. They appreciate JetSMART's low base fares and à la carte model tailored to infrequent travelers.