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NOVEMBER 2011 - YEAR III

MARKETWATCH LATIN AMERICA&CARIBBEAN

MID-MARKETS:

OPPORTUNITIES IN THE REGION


THE REGION IN

PERSPECTIVE LAC in Perspective - 2011 Facts

% of the world

595 mi people 9,3 $ 5,8 tri GDP 8,4 1,578 Fleet 7,8 135 E-Jets in Service 17

E-Jets Operation in Latin America & Caribbean Copa Colombia

Copa Airlines

SATENA

Air Cara誰bes

TACA

Austral

AeroMexico Connect

Trip

Azul

TAME

IN 6 YEARS:

10 AIRLINES 135 E-JETS IN SERVICE 17% OF THE E-JETS IN THE WORLD

E-Jets at LAC - 2011 72% Market Share* 194 Destinations 329 Intra-LAC Routes 682 Daily Flights 26 Countries 39 Millions of Pax *accumulated net orders, Jets 60 - 120 seats


ABOUT

AIR TRANSPORTATION DRIVERS The main economic and social indicators have been constantly and significantly increasing in strength in Latin America and Caribbean. From an economic standpoint, the region has demonstrated continuous growth, achieving close to 30% growth in GDP from 2004 to 2011. Countries belonging to sub-regions, such as Mercosur and the Andean Community, continue to show different rates, sustaining higher growth than the region as a whole. Other important indicators, such as Industrial Production and Personal Disposable Income, for example, have stood out, with countries in the region showing considerable growth rates. Industrial Production 2011E

Real Personal Disposable Income 2011E

7,5

8,5

5,0 4,3

4,0

4,0

3,9 2,5

8,3

% change (y-o-y)

% change (y-o-y)

6,6

4,7 3,6 1,6

1,5

* USA, Canda, Japan, UK, Germany, France and Italy

Developed Economies*

Peru

Mexico

Ecuador

Brazil

Argentina

Chile

World

Developed Economies*

Colombia

Brazil

Chile

Mexico

Peru

Argentina

0,4

* USA, Canda, Japan, UK, Germany, France and Italy Source: The Economist (2011)

Source: The Economist (2011)

The region’s attractiveness to investors can also be seen from the risk ratings assigned by international agencies. Last year, a number of countries in the region had high scores, reflecting the substantial improvement achieved in the local economic scenario in recent years. From the standpoint of inflow of foreign investments during the last five years (including 2011, estimated up until the end of the year), the average annual growth rate is expected to be close to 20% for Latin America and Caribbean, compared to 8.5% for Asia and -0.1% for Europe. Improved Social Conditions Number of Poors over Total Population* Non-Poors

Poors

600

Population ( million )

500 400 300

- 39 mi

200 100

224 (44%)

185 (33%)

2002

2009

0

* Group of 19 countries in Latin American & Caribbean Sources: ECLAC and The Economist 2011

Besides economic progress, significant improvements in social conditions have also been achieved over the last decade, resulting in a gradual expansion of the middle class in countries of the region. Inequality of income distribution has been reduced, especially in Brazil, Peru and Chile. In addition, more than 39 million people rose above the poverty line in Latin America and Caribbean from 2002 to 2009. Social improvements and an increased middle class have favored domestic consumption: real private consumption, for example, grew 4.4% on average per year, while other regions experienced rates such as 3.5% (Asia), 1.1% (North America) and 0.7% (European Union) in the last five years. The growing middle class is making it possible for an increasingly larger number of people to use air transportation.


A GROWING MARKET The improvement in social and economic scenarios has had a direct impact on air transportation in Latin America and Caribbean, with passenger demand growing consistently in recent years. More recently, in the first half of 2011, demand (measured in RPK – Revenue Passenger Kilometers) increased 17.7% – more than 7 percentage points above the second-fastest growing region, and more than 11 percentage points above the world average. Enplanements per capita vs. GDP per capita

Sources: CAA’s, SABRE and The Economist (2011)

Evaluating air traffic by country, the figures presented by Peru, Brazil, Chile and Colombia show significant progress between 2002 and 2010, as seen by the number of passengers transported per capita in the domestic market (Enplanements per Capita). Although many countries have achieved high growth rates, the average enplanements per capita is still small compared to more mature markets. Countries with the largest air transportation markets in Latin America and Caribbean have an average of 0.25 enplanements per capita, i.e., 8 times lower than in the United States, for example. There is still room for significant growth. Not only has demand for air transportation been favorable, but airlines have demonstrated their ability to take advantage of opportunities in the region. The financial results demonstrated by most of them confirm this statement: Latin America and Caribbean is the only region in the world whose airlines have continuously registered positive EBIT margins since 2007. For the long term, Latin America and Caribbean continues to be the world leader in air transportation growth, with an annual average of 7.2% in RPK for the next 20 years. In the short term, the region is expected to maintain double-digit growth rates.

Fleet Age in Latin América & Caribbean Scheduled airlines, all passengers configuration, jet aircraft

17,7%

10,4% 7,9%

Latin America & Caribbean

Europe

Middle East

6,5% 4,1%

3,6%

Asia/Pacific

North America

World

Source: IATA (2011)


MAIN SCENARIO AND TRENDS Competitive Scenario: Air transportation in Latin America and Caribbean has become more competitive over the last decade when 37 new airlines entered the market while 28 ceased operations. With a net surplus of new companies, against a backdrop of increasing competition, strategic alliances and consolidation processes have occurred throughout the region. New moves are still expected and are pursued for the purpose of keeping airlines prepared for changes in the sector, supporting favorable financial results.

Regional Integration: Specific actions were taken in order to further integrate the region through negotiated bilateral agreements (for example, the Fortaleza Agreement, actions led by CLAC - Latin American Civil Aviation Commission and policies of the Andean Community). Guidelines geared toward strengthening regional integration should help the region maintain even higher growth rates over time. Fleet Age: The average fleet age of commercial jet aircraft in Latin America and Caribbean has dropped significantly since 2000, from an average age close to 16 to just over 11 years old in 2011. With this reduction, airlines have achieved operational efficiency gains by increasing the productivity of their fleets and reducing maintenance and fuel costs, in addition to providing improved levels of passenger service.

2007

2007-2008

2009

2010-2011

2011

2011

LATAM

Sources: Airlines and Embraer

Fleet Age at Latin America & Caribbean Scheduled airlines, all passengers configuration, jet aircraft 17 16

Jet Avg. Age ( years )

Yield: With increased competition, the yields in higher-density and more mature markets tend to be reduced to even lower levels. Business opportunities are arising from the exploration of new markets, especially medium-density ones, which have higher growth potential, as well as higher yields. The exploitation of these markets tends to occur with airlines seeking greater revenue per passenger.

2005

15 14 13 12 11 10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Sources: OAG and ACAS (Aug.2011)

Airport Infrastructure: With an investment deficit in airports in many countries of the region, the allocation of resources for infrastructure needs to accompany the growing air traffic demand. Within this scenario, such investments are expected to start flowing, and new airport concessions are being addressed. Like other countries, Brazil, for example, has adopted a series of actions to better adjust capacity in relation to increasing demand. Another point that deserves attention is the excessive concentration of air traffic in a few airports in the region, which can lead to an unbalanced allocation of infrastructure investments, that is, focusing only on the main hubs. Medium and long-term planning must provide investments in secondary airports, enabling air traffic to be decentralized.


MID-MARKETS: BIG OPPORTUNITIES IN THE REGION Mid-markets (medium density of passengers, with demand typically between 25 and 300 PDEW – Daily Passengers Each Way) represent 83% of the origin-destination markets in Latin America and Caribbean.* Some special characteristics of these markets can be highlighted in terms of providing business opportunities for airlines: Higher Yields: On average, the yields of mid-markets are 28% higher than the average yields of high-density markets. These higher yields allow airlines to earn more revenue per passenger for the same distance traveled. Less Competition: In many cases, mid-markets are still relatively unexplored in Latin America and Caribbean and in many cases may offer only connecting flights. Identifying these markets and including direct flights enable airlines to operate in markets that are not fully served yet, with a reduced level of competition. Better Opportunities, Increased Growth: Offering direct flights in these still relatively unexplored markets allows companies to take advantage of increased passenger demand generated by improved provision of service. Currently, 65% of mid-markets in Latin America and Caribbean are only served by connecting flights or with frequencies below two flights per day. This reduced level of supply of flights is in part due to the relative excess of narrowbodies used in markets where demand is not compatible with the capacity offered. In the region, approximately 50% of the mid-markets have typical passenger demand that could be matched with aircraft of 70 to 120 seats. However, they are currently being served by jets with more than 120 seats.

O&D Demand Profile

Yield Comparison by Type of Market

Intra-Latin America & Caribbean Markets

O-D Markets, Intra-Latin American & Caribbean

83%

Medium Density Markets

325

High Density Markets

0,45

350 320

0,40

300

0,35

275 250

Yield (USD)

196

200 175 150

17%

125

Mid Markets: 28% higher yield in average

0,25 0,20 0,15

100

92

0,10

75

57

200

1-1

110

300

1-1

120

300

>1

0,00 3000

100

1-1

100

2900

00

-10

901

2800

0

-90

801

2700

0

-80

701

2400 2500 2600

0

-70

601

2300

0

-60

501

2200

00

1-5

400

2000 2100

0

-40

301

1900

0

-30

201

1800

0

-20

101

1700

100

51-

1500 1600

50

26-

0,05

1400

16

7

1300

2

1200

2

800

5

900 1000 1100

9

700

8

500 600

22

17

0

400

29

25

300

50

200

Number of Markets

0,30

222

225

Distance (km)

Passengers Daily Each Way (PDEW)

Source: SABRE (2010)

* Very low-density markets, with demand below 25 PDEW, were not taken into account.

Source: Embraer (Aug. 2011)


Relevant Information on Mid-Markets There are 83% origin-destination markets in the region Yields are 28% higher than in high-density markets on average 50% of mid-markets are still being served by aircraft with capacity exceeding 120 seats, therefore at low loads 65% of mid-markets are only served by connecting flights or with frequencies below two flights per day 56% of the new routes opened in mid-markets in Brazil use jets with up to 120 seats Adjusting supply to demand offers genuine business opportunities for a wide range of markets in the region. The typical profile of flights in Latin America and Caribbean, for example, shows that 67% of the flights offered by aircraft with a capacity exceeding 120 seats take off with 40 to 110 passengers on board, demonstrating the low operational efficiency that still exists. The proper use of aircraft with capacity of 70 to 120 seats allows companies to offer a larger number of flights, while maintaining good load factors. As a result, airlines can achieve greater market presence, and in many cases, ensure a competitive edge over rivals. Adjusting the average size of aircraft is especially important when opening new routes where aircraft with 70 to 120 seats can be very efficiently used. In Brazil, for example, 56% of the new routes opened in mid-markets are operating jets with up to 120 seats.

New Routes Opened in Mid Markets, Brazil 2010

Passengers Per Departure

Percent by Aircraft Category

Intra-Latin America & Caribbean Flights (>120 Seats Aircraft Only)

Jet < 120 seats

TurboProp

Narrowbody

67%

14% 11%

24%

10% 7%

7%

56%

4%

5%

13%

12%

7%

5%

4%

2%

3%

1%

2%

>= 150

140 - 149

130 - 139

120 - 129

110 - 119

100 - 109

90 - 99

80 - 89

70 - 79

60 - 69

50 - 59

40 - 49

30 - 39

20 - 29

1 - 19

20%

Passengers per Departure

Sources: SABRE and HOTRAN (2010)

Sources: Embraer, Sabre and OAG (2010)


ABOUT THE E-JETS FAMILY: Four commercial jets with a capacity of 70 to 122 seats: EMBRAER 170, EMBRAER 175, EMBRAER 190 and EMBRAER 195

New York

Dallas

The E-Jets have a range of 2400nm and can operate on routes with more than 5.5 hours of nonstop flight High level of schedule reliability and high completion rate Double-bubble fuselage design with superior comfort ensures plenty of space for passengers and their baggage.

Atlanta Mexico City

Santo Domingo

Panama City

Georgetown

Bogota

Manaus

Quito Lima La Paz

The fleet has more than 800 jets in operation, and more than 1,000 firm orders from 60 airlines in 40 countries.

Brasilia

Santiago Buenos Aires

CONTACT Latin America & Caribbean Commercial Aviation Tel.: + 55 12 3927 3059 E-mail: embraer.latinamerica@embraer.com.br Find more information: http://www.embraercommercialjets.com http://www.embraercommercialjets.com/inservice

Market Watch 2011  

November 2011 - Year III