Flight plan: can low-cost carriers take off in Latin America?

Turbulence in the worldwide airline industry since 2001 jolted major carriers in every country on the planet. Low-cost carriers--which are more profitable since they fly larger planes to fewer, more popular destinations and have lower overhead costs--emerged strong and gained a significant toehold in major air markets.

In Latin America, Brazil's Gol is the only true low-cost carrier, and its success is hard to ignore. Gol swallowed a 20% market share in the region's largest country since taking off in January 2001.

Although careful to say it's not a low-cost carrier in the same style as Gol, Mexican regional airline Aerolitoral, a subsidiary of AeroMexico, has been adjusting its strategy to counter the effects of the industry's downturn by adopting some of the low-cost model's cost-saving practices, like changing its fleet to meet its specific market demand.

"We've had to make ourselves smaller," says Raul Saenz, chief executive officer for Aerolitoral. "And part of that has led us to make a conversion of our fleet." The Mexican carrier focused on reducing its cost per seat, and by the end of 2003, it had replaced all of its 19-seat airplanes with new aircraft that hold 33 and 50 passengers, says Saenz. Average airfare between 2002 and 2003 dropped 18%.

Aerolitoral also partnered with its parent company AeroMexico to create a network of integrated flights that will allow the airline to maximize its flying Lime and increase its participation in point-to-point service to its 36 destinations in Mexico and the United States.

Saenz is optimistic about the potential success of the low-cost model in Mexico but believes it could be limited by the region's purchasing power. Aviation analysts agree that there are some big challenges for the low-cost idea in Latin America. The main one: foreign currency exchange. Aircraft leasing and fuel costs, as well as loans from financial institutions, are in U.S. dollars while revenues are made in domestic currencies, making it difficult to attract investors and turn a profit.

It is also difficult for any airline to change established business models. As a start-up, Gol was able to base its operations on the model from the get-go. For some airlines in the region, however, it won't be so easy, says William Loh, managing director at International Aviation Advisors, an aviation consulting company. Governments heavily regulate many markets and, in some cases, also own the airlines, he says.

Overall, however, analysts are confident the idea of low-cost airlines has great potential in the region and could stimulate Latin America's aviation industry, which is currently suffering from a series of airline bankruptcies. Less than 10% of Latin Americans travel on commercial airlines as a result of excessively priced airfare. Cheaper carriers "could create new demand that wasn't there before," says Loh. "They are not taking passengers away from the incumbent."

MICHELLE GUEVARA * MIAMI