Airlines Flood Latin American Leisure Markets: Tulum Overload?

U.S. airlines have significantly increased their flights to short-haul leisure destinations in Latin America, but this strategy has begun to show weaknesses in the first half of 2024. United Airlines Chief Commercial Officer Andrew Nocella mentioned on the United earnings call that there was a notable weakness in near Latin American markets. Both United and Delta have reported declines in revenue per available seat mile (between 12% and 13%) and yield (between 10% and 12%) in Latin America.

Delta is expected to see another double-digit decline in Latin America unit revenue in the current quarter due to pressure in short-haul markets. However, both Delta and United executives remain optimistic about the long-term outlook. American Airlines, with the largest presence in the region, is expected to reveal the biggest impact from market saturation when it reports earnings.

Despite these warning signs, the rush to Latin American beach resorts continues. The big three carriers have all launched services to the newly opened Tulum International Airport from major hubs, including Atlanta, Charlotte, Chicago, Dallas, Houston, and Miami. Tulum offers an alternative to the highly developed and sometimes crowded Cancun. The average fare to Cancun fell about 11% between January 2023 and January 2024, leading to increased interest in Tulum.

Delta has been leading growth in both the Caribbean and South America, aiming to challenge American’s dominance in the region. U.S. carriers have significantly increased capacity in Caribbean resort destinations, with Delta adding 246,011 seats (32% growth) and American adding 239,606 seats (13.5% growth). In South America, Delta boosted capacity by 32%, while American and United saw more modest growth rates due to their already high presence in the region.

Overall, capacity to Cancun and Tulum grew by about 20% between the first quarters of 2023 and 2024, with all ten U.S. carriers flying to Cancun increasing their capacity. However, Tulum is just getting started, with about 4,000 seats in the first quarter compared to Cancun’s two million.

In an April 11th report, Bank of America analyst Andrew Didora noted that weakness in Latin America routes could limit American Airlines’ revenue growth compared to Delta and United. Latin America is seen as a headwind for American, with risks to its EPS guide due to various factors, including its high domestic capacity growth rate, fewer premium seats, a smaller transatlantic network, and outsized exposure to Latin America, especially in the short-haul market.