Colombia aviation: taxation to hurt national competitive stature
16-Apr-2018 10:30 PMColombia aviation: taxation to hurt national competitive stature
Colombiaâs domestic passenger levels fell in 2017, driven in part by a pilot strike at the countryâs largest airline Avianca. But the country has posted impressive growth in its domestic air travel market during the past seven years, with passenger levels expanding by more than 60% from 2011 to 2017.
The countryâs aviation sector has changed during the past couple of years as LATAM Airlines Colombia has debuted a new pricing structure and Copa Colombia has transitioned to a low cost airline, Wingo. Those changes have occurred as Latin Americaâs airlines are adapting to low cost airline growth in the region.
Thereâs still much runway for passenger stimulation in Colombiaâs domestic and international markets, but similarly to many countries in Latin America, Colombia could risk jeopardisin g air passenger growth through a passenger fee proposed by BogotÃ¡âs mayor, which would levy a new tax on passengers to fund investments in road infrastructure.
- Despite a contraction in domestic passenger growth in 2017, Colombiaâs domestic market has grown significantly during the past few years
- Market share levels in Colombiaâs domestic market have remained stable despite business model evolutions by LATAM and Copa
- Proposed taxes on BogotÃ¡âs air passengers threaten the competitiveness of Colombiaâs air transport industry
Colombia's domestic passenger growth dips, but remains solid in the long term
Colombia posted a rare 3.3% decline in domestic passenger growth in 2017, driven in part by a 51 day pilot strike at the countryâs largest airline Avianca.
The airlineâs domestic passenger numbers fell 6.4% year-on-year (according to Colombiaâs DGAC), but Avianca maintained its dominance in Col ombia, holding a 58% share of the countryâs domestic passengers. LATAM Airlines Colombiaâs passenger levels were flat year-on-year, while VivaColombia grew its passengers by 2.5% to 3.2 million.
Although the smaller carriers EasyFly and Satena hold smaller shares of Colombiaâs domestic passengers, those airlines logged passenger growth of 2.8% and 5.3%, respectively.
|LATAM Airlines Colombia||19%|
Even as Colombiaâs passenger levels fell in 2017, passenger growth in the countryâs domestic sector has grown significantly during the past seven years. During 2011, Colombiaâs airlines transported 16 million passengers.
|2012||19 mill ion|
With Wingoâs transition, the establishment of another Viva franchise in Peru and a new ULCC JetSMART debuting in Chile, LATAM Airlines Group has adopted product segmentation in six South American domestic markets â" Chile, Peru, Brazil, Argentina, Ecuador and Colombia. The project began in 2017, the company offering basic economy-like fares in those markets that are 20% cheaper and projecting 50% passenger growth on domestic routes in its South American countries by 2020.
Colombia represents approximately 4% of LATAMâs revenue-based point of sale (according to company data for the 12M ending Sep-2017), but with VivaColombia continuing to grow its market share, LATAM needs a strategy to capture passenger growth in Colombiaâs dom estic market. LATAM Airlines Colombiaâs traffic grew 6.6% in 2017 on 3.3% capacity growth, and its load factor increased from 80.8% to 83.4%.
Copaâs goal with Wingo was to transform its loss-making Colombian operations, and the company is pleased with the results. Wingoâs operations are titled toward international operations, and Copa executives have stated that while the new low cost brand represents just 2% of its revenues, the airlineâs performance has exceeded Copaâs expectations both financially and operationally.
Proposed taxes on BogotÃ¡ passengers could hurt Colombia's competitiveness
With the country having a population nearing 49 million, and 26 million passengers travelling on domestic flights in 2017, there is a lot of upside for growth in Colombiaâs aviation market. Colombiaâs trips per capita in 2016 were 0.7 â" sligh tly above Brazilâs, Mexicoâs and Peruâs 0.6 trips per capita. In contrast, trips per capita in the mature US market during 2016 reached 2.9.
But Colombian airlines could face a setback from a proposal by BogotÃ¡âs mayor to levy a USD2.88 tax on domestic passengers traveling through El Dorado International airport, as well as a USD5.00 fee for international passengers, to fund road infrastructure.
The Latin American airline association ALTA has warned that the move could jeopardise the competitiveness of Colombia in Latin America. The association has said that El Dorado is the third largest airport in the region, handling more than 30 million passengers per year. âIncreasing the airportâs taxes would negatively affect competition and the potential [of El Dorado] to become a regional hub compared to airports in nearby countries such as Panamaâ, the association stated.
The World Travel & Tourism Council (WTTC), in a recent study, calculated that interna tional spend represents 41% of BogotÃ¡âs tourism revenue, and has concluded that the city has a greater reliance on international visitors than several other cities in Latin America, including Buenos Aires, Rio de Janeiro, Lima, Santiago, and BrasÃlia.
ALTA noted the success Colombiaâs government had achieved in driving benefits for the countryâs air passengers, including Aeronautica Civil de Colombiaâs role in reducing airport taxes at Cartagena in 2015. âWith this tax reduction, the city of Cartagena got a great jump in air traffic and tourism development,â said ALTA. âResulting in more supply and demand, more opportunities for more people to fly, and direct benefits to Colombian economy.â Cartagenaâs passenger numbers increased by 15% and 12% in 2015 and 2016, respectively.
VivaColombia has publicly opposed the proposal to levy taxes on passengers traveling through BogotÃ¡, warning the fees could reduce passenger levels by 902,000 per year. The a irline has reiterated IATAâs statement that âColombia is the third country in Latin America to have the highest amount of taxes on air tickets after Venezuela and Argentinaâ.
Latest moves in BogotÃ¡ shows Latin America's stubborn stance on taxation
Similarly to many markets in Latin America, much untapped passenger potential remains in Colombia as it has reached new levels of political and economic stability. The country continues to log solid growth in international visitors, with international passengers growing 6% year-on-year in 2017.
But high taxation on the countryâs airlines and air passengers threatens to weaken Colombiaâs aviation industry and its economic contribution to Colombiaâs GDP. The latest proposal to levy taxes on BogotÃ¡âs air passengers shows significant challenges remain in convincing governments in Latin America about the benefits that aviation can contribute to the region.