Without a Scratch: Major Airlines Slash Service Everywhere Except Latin America. Why? Profits. (Cover Story).

Manuel Schreibmaier hung on to every airline announcement after the terrorist attacks in the United States. Sol melia hotels' executive vice president of sales and marketing for the Americas knew each canceled route was a nail in the coffin of the hotel industry. In particular, he watched Latin American powerhouse American Airlines.

Globally, American Airlines chopped 20% of its service and furloughed 20,000 employees. Continental deleted a fifth of its service and pink-slipped more than 11,000 employees. Delta made similar cuts. United axed 20,000 of its workers and cut departures by almost a third.

"I watched the industry reports very closely. We worried that when American, Delta, United and Continental stopped service, it would have a major impact [on Latin America]," says Schreibmaier.

But he had nothing to fear. The airlines barely touched their Latin America routes, which are so profitable that the planes don't have to fly full. Nor does the region, with the exception of Mexico, Central America and, to a lesser degree Peru, rely heavily on tourism.

"Latin America is not as dependent on the leisure market as the Caribbean, Europe and the United States. And the leisure market is the one that is affected the most right now," says Robert Booth, chairman of Avman, an aviation consulting company focusing on Latin America.

U.S. airlines knifed one of every five flights worldwide, but Latin America emerged with barely a paper cut. Delta halted Atlanta-Los Cabos, Mexico service but planned to reinstate it Dec. 1. Continental, the No. 2 U.S. carrier serving Latin America, cut domestic flights and service to Europe. But the only South American destination it touched was Rio de Janeiro--and only to suspend its nonstop flight from Newark to Rio; the carrier still serves Rio via Sao Paulo. United made no changes at all.

Even the European carriers were gentle with Latin America. British Airways slashed 190 weekly flights--36 to the United States--and cut back the frequencies of its Sao Paulo and Rio de Janeiro service but did not discontinue service in Mexico, Argentina, Chile or Colombia.

"Where most of the U.S. carriers make money is the long-haul routes, especially to Latin America. They would not be making wise money decisions by cutting those routes," says Joan Bauerlein, a U.S. Federal Aviation Administration official on loan to the Inter-American Development Bank. "Those flights were packed before [the terrorist attacks]. They can drop off some and still be OK."

U.S. carriers, which dominate north-south traffic in the Americas, make big money in the region. During the past 11 years, the four main U.S. carriers generated US$40 billion in revenues and $2.3 billion in operating profits in Latin America, according to Avman figures. Last year, the region accounted for a bit more than a fifth of their international capacity but generated more than a quarter of their international profits.

Auto pilot. The industry's latest upheaval showed just how willing the carriers are to leave Latin American service alone. American, the region's No. 1 carrier, sliced a flight each from Panama City, Guatemala City and Bogota. It reduced its frequencies to Buenos Aires, Rio and Sao Paulo, But, weighed against the volume of flights the carrier offers in the region, those cutbacks were negligible. Many were also temporary.

American Airlines spokeswoman Martha Pantin says American held on to some flights, even when demand dropped, because they were part of a now 2-year-old strategy to develop more tourism traffic to the region. "We also have high hopes the region's business will bounce back quickly," she adds.

What makes carriers so anxious to keep their toehold in the region are the lucrative north-south routes. Pete Garcia, Continental Airlines vice president of sales and marketing for Latin America, acknowledges that Latin America contains some of his company's big moneymaking routes, including Houston-Caracas--popular with oil engineers and executives--and New York-Caracas.

Booth and other industry watchers explain that the bulk of air traffic between Latin America and the United States consists of business travelers and a special segment that industry insiders call VFR, or Visiting Friends and Relatives. The latter, mostly immigrants returning to visit their families in Latin America--or vice versa--is a big slice of the region's travel pie.

"The strongest motivator for travel right now is Visiting Friends and Relatives. Families want to be together at times like this," says Rick Still, organizer of the annual La Cumbre trade show on travel between the United States and Latin America. "The [VFR] market is going to be the quickest to come back."

As for business travel, it might have dropped in the first weeks after the terrorist attack but it's not expected to stop. "For Europeans, Japanese and Americans, business travel ... [has] now become a fundamental need," says Francesco Frangialli, secretary general of the World Tourism Organization in Madrid.

Many carriers are offering fare discounts to lure executives back to the skies. And Sol Melia's Schreibmaier says business class travel bookings had resumed among the hotel group's airline partners. "There's still a need for people to travel. There's big talk about videoconferencing but I think there's nothing better than having human exchange, face to face," he adds.

Travel to and from Latin America also absorbed less of a blow because the terrorist attacks occurred during what is traditionally the region's low season. Latin American travel cranks up in December. Analysts say bookings for December, January and February will be telling.

If the fact that Latin American routes and service escaped unscathed is not surprise enough, some carriers based in Latin America even plan expansions into the United States.

Headwind. TAM, Brazil's No. 1 airline, is moving ahead with a strategy to transform itself from a regional carrier into an international player. In August, TAM unveiled a North American headquarters in Miami, overseeing TAM offices in Houston, Chicago, Atlanta, Los Angeles and Orlando, Florida. Despite the World Trade Center attack, it plans to open a New York office in May 2002. TAM changed no routes and laid off no employees after the terrorist attack.

"We have plans to fly to Chicago after we fly to New York. We're starting service to New York from Sao Paulo daily in May," says Joao Ernesto Bratkowski, TAM's managing director for North America. Currently, the carrier's only U.S. destination is Miami, with two daily flights from Sao Paulo and one from Manaus.

Even a weakened real isn't enough to dissuade TAM. "I'm 48 and I've gone through at least five different stretches where we had a strong currency then, a few years later, we had a strong devaluation. Of course it affects you at the beginning, but you cannot stop your business," says Bratkowski. "Brazilians learn to live in crisis."

TAM's competitor yang announced layoffs of 1,700 workers--10% of the employees--but Varig was in financial trouble even before the terrorist attack.

While most of the region's air traffic depends heavily on business travel, Mexico is a notable exception. Some 85% of the 20 million foreign visitors to Mexico annually come from the United States, and most are vacationers. The tourism sector, the country's No. 3 source of income, was sucked into a vortex after flights were grounded for three days and border controls were tightened. The country's Confederacion de Camaras Nacionales de Comercio, Servicios y Turismo said a third of the hotel rooms reserved for September through December were canceled. In vacation resort destinations, led by Cancun, one of every four tourism sector workers lost their jobs within a month of the attacks.

Mexico's two biggest airlines, government-owned Mexicana de Aviacion and Aeromexico, were forced to reduce service to the United States. The four-day grounding of planes already cost them an estimated $16.5 million in lost revenue and, like Brazil's Varig, the Mexican carriers were financially ailing even before the terrorist attack.

Takeoff. But the crisis has not fazed all Mexican carriers. Lineas Aereas Azteca, launched this year, says it will increase service both domestically and to the United States. The carrier recently added service from Mexico City to Guadalajara, Chihuahua and Cancun. It now plans service from Mexico City to El Paso, Texas, in December, followed by Mexico City service to Albuquerque, New Mexico, as well as the purchase of six new Boeing 737s before the end of 2002.

Another small airline, 7-year-old Aerolineas Internacionales, has an aggressive plan to boost its passenger total 600,000--six times what it carried when it opened--and to add new planes. A new carrier, Aerolineas Mesoamericanas, announced it will begin service next year. Another start-up, Vuelamex, is investing $25 million so it can take off before this year is out.

When LanChile took off from Miami International Airport en route to Santiago just three days after the terrorist attacks, it was the first foreign carrier to leave the airport. And it is one of the best examples of how some of Latin America's strong airlines could emerge even stronger. Among them are certain to be American Airline's partners, LanChile, Taca and TAM.

LanChile suspended some flights to Miami, announced its Santiago-New York service would no longer be direct and laid off 650 workers after the terrorist attacks. But, unlike U.S. carriers that threatened bankruptcy without a bailout from their country, LanChile did not face closure.

Pedro Heilbron, CEO of Copa, a partner with Continental, says the region's carriers without a make-or-break dependence on north-south traffic are the ones best weathering the storm. Only 25% of Copas revenues come from U.S. routes and the Panamanian carrier had already made cost cuts in response to slowing regional economies. It did not alter service or cut personnel after the terrorist attacks.

Subsidized U.S. carriers. Carriers around the world are now juggling higher insurance premiums and security-related expenses. Copa added a $5 surcharge on each flight to cover increased insurance costs. The Mexican government in October announced fuel subsidies and a 10% reduction in fees at government-run airports but, even with that, Mexico's 14 commercial airlines were forced to hike international and domestic airfares by 50 pesos, about $5. The Brazilian government has offered some insurance relief to carriers there and Peru is covering insurance liability for its airports. But the bulk of the region's carriers have been left on their own to absorb the hefty costs.

"There's really no way for the bank to provide any assistance to the carriers," says transportation adviser Bauerlein at the Inter-American Development Bank, which was approached by some airlines seeking assistance. The bank has, however, been hammering out details of a funding package to help Latin American governments with additional airport security.

The U.S. government assembled a quick bailout package for its biggest carriers, and European airlines have also benefited from government help. Carriers receiving government aid have already begun discounting fares to lure back passengers. And that's bad news for Latin American airlines.

"Probably one of the main threats right now to the strong Latin American carriers comes from having to compete with subsidized airlines from other parts of the world," says Copa's Heilbron. "There has been little government support throughout Latin America."

Aviation analyst Booth predicts the new financial burdens will open the door to increased consolidation among Latin American carriers. He predicts Brazil will toss out its anti-trust concerns and let carriers there, including Variag, forge new alliances. Colombian carriers Aces and Avianca, whose merger bid has been stonewalled, will also be allowed to join forces, Booth says.

Travel industry observers are cautiously optimistic. TAM'S Bratkowski, for example, notes that some companies that canceled their U.S. and Middle Eastern trade meetings and business conferences have started to eye Latin America as an alternative. "It's not a trend yet." he says, "but it's a hopeful sign."

Schreibmaier at Sol Melia is also keeping his fingers crossed. "Demand is coming back," he says, adding that the big test is ahead. "We'll have to see what happens with Christmas travel."

[Graph omitted]