The future of tourism in Latin America and the Caribbean

Introduction: The destruction of the tourism industry

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The second quarter of 2020 was far and away the worst ever experienced by the tourist industry in Latin American and the Caribbean. With bewildering speed, the coronavirus pandemic had begun to spread throughout the world, prompting a range of sudden and drastic emergency measures starting in March and gaining momentum in April-June. Governments imposed curfews and ‘shelter at home’ orders. They closed borders and airports and announced a range of health-related travel restrictions. Travellers were stranded in different parts of the world, many aboard cruise ships, which seemed particularly vulnerable to contagion.

COVID-19's crushing impact on international tourism

Change in international tourist arrivals from January through June 2020 vs. 2019

A wide range of data points and estimates have been produced to try and capture the size of the downturn both at the global level and within LAC. A crude summary is that many tourism-related activities and indicators have shrunk by around half. According to the International Civil Aviation Organisation (ICAO), before the coronavirus outbreak the global travel and tourism industry had a turnover of US$2.7tn and supported 65.5m jobs. The World Tourism Organisation (WTO) calculated that global tourism, measured by visitor arrivals, was halved during the first five months of 2020. Later it estimated that international tourism arrivals could drop massively by between 58% and 78% for 2020 as a whole. In April the WTO had estimated LAC would see the loss of 5.9m tourism related jobs (4.7m in Latin America and 1.2m in the Caribbean) and a revenue drop of US$110.2bn (US$83.8bn in Latin America and US$26.4bn in the Caribbean. In September the World Travel and Tourism Council (WTTC) came up with larger estimates of losses, although these incorporate both travel and tourism. By its reckoning LAC would suffer financial losses of US$230bn and job losses of 12.4m.

The UN’s Economic Commission for Latin America and the Caribbean (Eclac) said international arrivals to the region, which had been growing by around 10% per annum since 2016, fell by around 50% in March 2020 and by nearly 100% at the beginning of April. By its calculations tourism accounts for 35% of total employment in the Caribbean and 10% in Latin America. In an assessment conducted in July 2020 Eclac calculated that the collapse in tourism could reduce economic growth in the Caribbean by eight percentage points, and by one percentage point in the rest of Latin America. Because of the tourism crash, overall employment could likewise fall by nine percentage points in the Caribbean and by two points in the rest of Latin America.

Latin America and the Caribbean (selected subregions) annual variations in monthly international tourist arrivals, January 2016–April 2020 (Percentages)

Source: Economic Commission for Latin America and the Caribbean (ECLAC)

Snapshots across Latin America and the Caribbean

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Bad timing for Mexico: In Mexico, the biggest tourist destination in the region, the crisis came at the worst possible time. The country normally receives 40m tourist arrivals every year and was preparing for the traditional wave of spring break visitors from the United States. A lockdown was introduced on 24 March. Air travel was restricted and most of the country’s borders were closed. Various sectors of the economy were temporarily closed with members of the public required to stay at home or work remotely. Rodrigo Conesa Labastida, a lawyer advising tourism operators, said flights and hotel reservations were abruptly cancelled with hotel occupancy rates plummeting.

Later data produced by National Statistics Institute, Inegi, showed that Mexican tourism GDP fell by 43% in the second quarter compared to the first. This was the third consecutive quarter of decline, and the worst quarterly drop since the start of the data series in the early 1990s. Significantly, the second worst quarterly drop, a fall of 8%, had happened in Q2 2009, in the middle of the 2008-2009 global financial crisis. The 2020 fall was particularly acute in the ‘tourism services’ sub sector, which includes transport, lodging, restaurants, commerce, second homes, and timeshares.

Mexico sought to be quick off the mark re-opening the tourism sector. Interestingly, Travel Off Path, a trade website, described Mexico as the world’s top travel destination during the pandemic. The website said it had assessed countries around the world that had received the World Travel and Tourism Council (WTTC) ‘safe travel global safety stamp’, did not impose a 14-day quarantine on new arrivals, and followed safety protocols. Mexico did well because of its “easy entry requirements and extra precautions…to protect travellers”. The Caribbean resort of Cancún had been the first city in the world to receive the WTTC Safe Travel Stamp. Other countries from the region on the list were the Dominican Republic (placed 3^rd), The Bahamas (4^th), Jamaica (5^th), and Costa Rica (6^th).

A two-thirds drop in the Caribbean: Because of high levels of tourism-dependence, the impact across the countries of the Caribbean was severe. According to the Caribbean Tourist Organisation (CTO), arrivals to the region fell by 63.7% in January-August 2020. This meant that 14.3m fewer trips were made, compared to 2019, the preceding year. Tourist arrivals from the US, the Caribbean region’s biggest market, were down by 65.3%. Arrivals from Europe fell by 62.5%, while those from Canada dropped 50.8%. Cruise ship arrivals dropped by 58.4%. Neil Walters, the acting CTO secretary general said that despite the beginnings of a recovery (32 Caribbean destinations had re-opened by late November 2020) it was still expected that arrivals for 2020 as a whole would fall by somewhere between 50% and 70%. The Caribbean Development Bank (CBD) estimated that the collapse in tourist arrivals could lead to GDP falls of 15%-30% among the Caribbean countries in 2020, with public debt rising by 15%-60%.

Walters nevertheless tried to focus on some potential upsides. He said that while the pandemic was having a severe impact, “it allows for a reset, since travel and tourism is affected globally, and every major region has lost its share of international arrivals”. In other words, the Caribbean might have an opportunity to increase market share. He noted that in 2019 international arrivals to the Caribbean had grown faster than global arrivals. Walters added: “The efforts made by Caribbean destinations to control the virus with some success, have created a marketable position as a healthy region”. He also argued that for many years the Caribbean tourism industry had been in need of an overhaul but had frequently put it off, to concentrate instead on tending to business as usual and rising short-term demand. The crisis was therefore an opportunity for the regional tourism business to re-think and reposition itself in the emerging 'new normal'.

Argentina’s lost long weekends: Strict national quarantine measures were imposed in Argentina on 20 March. They lasted for an initial 37 days, after which different provinces began to ease them back on a region-by-region basis. It took significantly longer to re-open the country to international travel. Faced with second wave infection spikes, various different restrictions remained in place for most of the year. It is estimated that the national tourism industry lost 11.6m overnight travellers and 11.5m same-day tourists during the six long holiday weekends that fell between March and August this year, representing financial losses of ARS78bn (around US$980m). In March-June hotel and restaurant activity is estimated to have fallen by between 31% and 66% relative to year-earlier levels.

As in other countries, re-opening Argentina’s tourist economy has proved longer and more complicated than shutting it down at the beginning of the pandemic. At the end of November for example, the province of Mendoza, famous for its Andean mountain ranges and temperate vineyards, was hoping to formally re-open as an international tourist attraction but was awaiting federal government approval of its plans. Provincial tourism minister Mariana Juri said the target was to attract mainly Chilean and Brazilian tourists arriving by road and by air. Re-opening the road crossing on the Argentina-Chile border – which the federal government had not yet authorised - was crucial. Provincial minister for government Víctor Ibañez said Mendoza had been working for most of the year to achieve a balance between protecting lives and livelihoods. After reaching a plateau, coronavirus contagion rates had begun to decline. Juri said the province had opted for a cautious, step-by-step reopening strategy. “We are looking for ways to make the tourist comfortable” she said, adding “that’s why we are thinking about opening outdoor attractions, like our national parks, about gastroeconomic tourism, and about cultural activities”. The province’s vineyards and wineries have adopted social distancing and other health protocols to minimise contagion risks.

Brazil’s troubled re-opening: Brazil, LAC’s largest country by both size of population and by value of economic activity, was particularly hard hit by the pandemic. The federal government under President Jair Bolsonaro sought to minimise the severity of the health threat and to prioritise a rapid re-opening of the economy. Most quarantine measures were imposed and later relaxed by state-level governments. Rather like the United States, where a similar policy was followed by President Donald Trump, the result was rapid contagion and a high death rate.

Brazil was one of the region’s first countries to fully re-open its borders at the end of July. By early November Rio de Janeiro had lifted all restrictions on the use of its famous beaches, as well as on bars and discotheques. Newly arriving tourists must now show they have purchased health insurance. They are not however required to undergo mandatory testing or to self-isolate. The rapid re-opening was partly intended to boost tourism’s contribution to economic recovery. According to Embratur, the country’s tourism institute, at the time of opening the country had 45,000 hotels with an occupancy rate of only 45%. On a voluntary basis many hotels introduced health protocols, such as temperature checks for arriving guests and contactless room keys. According to CNC, the Brazilian tourism and commerce industry association, the industry had its worst month in April 2020 when its revenues fell to BRL4bn (US$704m), down by nearly 80% on year-earlier levels. By September 2020 revenues had recovered to BRL12.8bn (US$2.25bn), although this was still 35.6% down on the comparable year-earlier performance.

Despite this improvement, the contagion rate remains high in some states including Rio, suggesting restrictions could be re-imposed, or that visitors, concerned for their safety, may simply decide to give Brazil a miss. The (southern hemisphere) summer season Carnival in Rio, an event which normally attracts millions of visitors, is in doubt. In September the city authorities said the Samba schools’ parade, due to be held in February 2021, had been postponed indefinitely. It is not clear if the associated street parties will take place regardless. The authorities in nearby São Paulo, meanwhile, have said they are postponing the samba processions there from February to October 2021.

On 10 November the Brazilian government launched a package of measures designed to re-start the tourism industry, still crippled by the effects of the Covid-19 pandemic. Tourism minister Marcelo Álvaro Antonio said they were based on four pillars: support for companies and employment; structural and quality improvements at tourist destinations; introduction of bio-security protocols; and travel promotion and incentives. The programme will run until end-July next year. There were however few details on the overall value of the programme or how the funding will be distributed between public and private sectors. The government has committed to make BRL5bn (US$937m) available in credit lines for tourism companies. Among examples of other types of assistance on offer were support for bio-security training and infrastructure investment. The minister said one of the aims was to encourage domestic tourism, through a programme called “Rediscover Brazil” and through a “Responsible Tourism” quality seal, designed to promote health and safety standards.

Brazil’s tourism sector is estimated to account for 8.1% of GDP and to directly and indirectly support 7m jobs. The minister said the industry had performed well in 2019, with 2.6% growth (double the average for the economy as a whole) and increased employment. That performance had been cut brutally short in early 2020 by the pandemic, which forced Brazil to close its frontiers, and triggered state-level lockdowns. According to the government’s estimates tourism revenues dropped by 37.2% in the first half of 2020, with job losses surging to a total of 364,044.

Opinions on the speed and strength of the likely recovery in Brazilian tourism differ. International media coverage of the continuing spread of the coronavirus in Brazil, and of President Jair Bolsonaro’s ongoing rejection of scientific advice on the pandemic, as well as his climate change denials, cannot be positive for the country’s image. In fact, international tourists might think twice before choosing to visit a country with the world’s second highest coronavirus death count (over 170,000 at the end of November, behind the US at 260,000-plus).

Limited re-opening of Peru’s Machu Picchu: One of Latin America’s most iconic attractions, the ruins of Machu Picchu, the Inca city in the Peruvian Andes, re-opened at the beginning of November, after a seven-and-a-half-month closure. Prior to its closure Machu Picchu had always been crowded, handling up to as many as 5,000 visitors a day. Under new health protocols visitors are limited to 30% of formal capacity, or 675 per day, 75 per hour. The use of face masks is obligatory, and tour groups are limited in size to no more than seven, who must maintain social distancing of at least two metres.

The Peruvian government had introduced a rigorous lockdown in March but, despite some initial signs of success, infection rates soared and the economy crashed – estimates for GDP in 2020 suggest a contraction of up to 12%. Before the pandemic national annual tourism revenues in Peru were running at around US$5.5bn. Peruvian tourist operators hope that the re-opening of Machu Picchu will begin a sustainable recovery for the industry, starting with domestic visitors and then bringing back international travellers. Peru began gradually re-opening international flights in October, with visitors now required to show they have tested negative for the virus 72 hours before flying. Visitors to Machu Picchu usually also go to the ancient city of Cusco and other attractions in the Andes.

Chile struggles with the complexities of re-opening: In Chile the tourism sector was hit by Covid-19 just as it was beginning to recover from deep disruption caused by anti-government protests that swept across the country in the last quarter of 2019. Here too the impact was unprecedented. According to tourism association Fedetur a total of 300,000 tourism jobs have been lost during the course of 2020, with a further 150,000 temporarily laid off under a furlough regime, with their future uncertain in the longer term. Fedetur executive vice-president Helen Kouyoumdjian says shifting regional quarantine regulations across the country have created a “terribly complex” situation for the industry, with some areas still closed to domestic and international tourists. It was not until late November that inward international tourism was authorised, initially only through one point of entry, the Arturo Merino Benítez international airport in Santiago.

Kouyoumdjian says Chilean operators have been following official guidelines and preparing for a new normal. “Tourism is going to change. Social distancing around tourist destinations is going to be different. We are working on new protocols for restaurants, for tour routes, for guides, and for adventure tourism. The aim is to reassure the tourist that the activity is safe,” she says. Yet at the same time she adds that the industry is puzzled by inconsistencies in the new rules. For example, shopping malls are open and operating with much less restrictive regulations than those imposed on tour operators, while national parks, easily adaptable to social distancing protocols, remain closed. Fedetur fears tourism may be suffering from unfavourable treatment relative to other sectors of the economy.

Measuring the crash

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In a research paper for the InterAmerican Development Bank (IDB) published in June 2020, economists Henry Mooney and María Alejandra Zegarra discussed the impact of the Covid-19 crisis in LAC. They make the point that the pandemic has been an “extreme outlier”, in other words, an unusual, severe, and largely unprecedented event. Of course, all economies and business sectors are vulnerable to unexpected shocks of different kinds. But the authors identify six significant events over the last two decades and conclude that in terms of the impact on tourism none have had the intensity or likely durability of Covid-19. The six include the 9/11 terrorist attacks in the United States (September 2001), the SARS outbreak in 2002-2003, the global financial crisis of 2008-2009, the H1N1 global flu pandemic of 2009-2010, the Ebola outbreak of 2013-2016, and finally, the Zika virus outbreak of 2015-2016.

The authors conclude that only one of these events, the global financial crisis of 2008-2009, led clearly and directly to an overall reduction in tourism flows in the LAC region, as measured by an index of tourism arrivals. Another event, the 9/11 terrorist attacks, may have also caused a direct downturn, but the authors argue that this case is less clear-cut since the fall in arrivals experienced between 2000 and 2002 started before the attacks, and was linked to global economic conditions rather than to a single event. Working on the basis that tourism arrivals fell to near-zero in the second quarter of 2020 and using three different shock scenarios for reductions in the following quarters during that calendar year, the report concludes that “the shock to flows could be in the range of between 40% and 70%, making the Covid-19 crisis’ implications for tourism an extreme outlier when compared to all available historical data”.

Historic Precedents? Shocks to Tourism Arrivals in Caribbean Countries (tourism arrivals per year in the LAC region, indexed in 2000 (=100))

Source: IADB, (2020) Extreme Outlier: The Pandemic’s Unprecedented Shock to Tourism in Latin America and the Caribbean

The IDB argues that the Covid-19 shock had two major ‘transmission channels’ to adversely affect the tourism sector in each country in the region. The first was through the domestic impact of the virus and associated preventative measures such as quarantines, industry shutdowns and closed borders, all of which damaged output, government revenues, employment, and productivity. The second transmission channel was external, coming through the disruption of physical trade and financial flows originating outside each country. This had an “almost absolute” impact on tourism, with the report noting that “even when travel restrictions can be removed safely, the impact of the crisis on incomes will likely have a prolonged adverse effect on tourism demand”.

The seriousness of the impact depends on the degree to which individual LAC countries are dependent on tourism, relative to other economic activities such as agriculture, mining, or manufacturing and other services. In an attempt to capture this, the report authors compiled a tourism dependency index measuring the extent of tourism's contribution to export revenue, GDP, and to employment. As might be expected, the index reveals very high tourism dependency across the Caribbean, with Aruba leading the ranking as one of the world’s most tourism-dependent countries: tourism there represents around 75% of export earnings and 90% of both total GDP and employment. However, it also reveals that tourism plays a highly significant role in the larger Latin American economies. In 2014-2018 tourism accounted for an average of 16% of both economic output and employment in Mexico, and about 10% in Uruguay, Argentina, and Chile. In Brazil tourism represented around 8% of employment; since the country has the largest population in the region, this is equivalent to millions of jobs.

Tourism Dependency Index: Latin America and the Caribbean (35 countries) (2018, with rank vs. all 166 other countries for which the index was calculated)

Note: The Tourism Dependency Index (TDI) is calculated using 5-year averages (2014- 2018) for the total contribution of tourism to export receipts, GDP, and employment for each country. The range is from zero to 100, with 100 representing total dependence on the sector. TDI for 35 countries in Latin America and the Caribbean for which data was available displayed. The digit preceding the country name represents its rank out of 166 countries around the world for which data was available.

Source: IADB, (2020) Extreme Outlier: The Pandemic’s Unprecedented Shock to Tourism in Latin America and the Caribbean

The general macro-economic health of Latin American countries (and emerging economies in general) is often measured through two ratios, the fiscal and current account deficits, measured as a proportion of GDP. A fiscal deficit – government expenditure exceeding income - is hard to sustain over time as it usually requires borrowing at increasing rates of interest. A current account deficit means that a country is spending more foreign currency than it earns. This kind of shortfall also implies currency depreciation and higher foreign borrowing, increasing the burden of foreign debt and ultimately undermining investor confidence. The important point about the current account deficit is that hard currency tourism revenues can play an important role in keeping it under control. If they are abruptly taken out of the picture – as they were during the second quarter of 2020 – they can have a major adverse effect on the current account. Using data from 2018, Mooney and Zegarra show that, to take one example, Colombia had a current account deficit equivalent to 4% of GDP, and tourism earnings of 3% of GDP. In other words, if the tourism dollars stopped flowing – as happened in 2020 – other things being equal, the current account deficit would be likely to widen suddenly, up from 4% to 7% of GDP. The effect is more dramatic for highly tourism dependent Caribbean islands. For example, the data suggests that, without tourism, the current account deficit in Barbados might jump from 10% to 47% of GDP.

Tourism Receipts vs. Current Account Balances in LAC (percent of GDP )

Notes: (*) Data for 2017 for Aruba, and (**) 2016 for Barbados , and 2018 for all other countries.

Source: IADB, (2020) Extreme Outlier: The Pandemic’s Unprecedented Shock to Tourism in Latin America and the Caribbean

Tourism and debt relief – the case of Belize: The drastic fall in tourism revenue could tip some Caribbean economies into defaulting on their foreign debt. Getting their economies back onto a sustainable growth path could also require some form of debt relief or debt write-down. That is certainly part of the challenging economic situation facing Johnny Briceño, who took office as the new Prime Minister of Belize on 12 November after his Peoples’ United Party (PUP) won a landslide electoral victory. The outlook for his small country is particularly difficult. Tourism accounts for roughly 40% of GDP. Because of the effects of the lockdown – shutting down the tourism sector almost completely for half of the year – the economy is expected to contract by 16% in 2020. Things were made worse by the impact of Hurricane Eta in early November, with storm damage and flooding reportedly affecting 60,000 people or 15% of the total population. And only days after taking office the new prime minister himself tested positive for the coronavirus and had to begin a two week of period of self-isolation.

Briceño said that an initial meeting with finance ministry and central bank officials had revealed that Belize’s financial position was worse than the outgoing government had acknowledged. The previous administration had “unsustainable fiscal and debt positions” and had been borrowing at a rate of BDZ30m (US$14.7m) a month, just to pay wages and other current expenses. As a result, the debt-to-GDP ratio had surged from 97.7% to 132.9%. Mr Briceño said the previous government had “maxed out the credit card” and that the country was not earning enough to pay its bills. He also accused his predecessor of lacking a coherent plan to combat the coronavirus.

The main credit agencies have already downgraded the country’s rating to junk bond status. In August, after talks with creditors, US$27m of interest payments on the country’s 2034 sovereign bond falling due up to May 2021 were rescheduled, providing some temporary relief. But it is likely that the country will struggle to meet its debt servicing commitments after that date, increasing the probability of a distressed debt exchange. Mr Briceño may also have to turn to the IMF which in its last report on the country (in late 2019, before the start of the pandemic) called for fiscal consolidation and reforms to broaden the tax base.

The new government said it had ambitious plans to boost tourism, including building a new airport in Placencia, investing in other infrastructure, trying to revive cruise tourism, and rebuilding traveller confidence after the pandemic. But how such investments might be funded was not clear. One positive for the country has been the resumption of American Airlines flights to Belmopan from four US cities – Miami, Dallas, Charlotte, and Los Angeles. Anthony Mahler, the new tourism minister, said: “Our priority is to support the tourism business and jobs, and restore traveller confidence. We must stimulate demand for travel to Belize in spite of Covid-19. And we must remain optimistic.”

The airlift problem

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The modern tourism industry – or at least the industry as configured before the pandemic – has come to rely critically on airlift. In other words, the industry thrives when competitively priced airlines are available to get the tourists to where they want to go and back again, as quickly and as efficiently as possible. Without that critical airlink, many tourist destinations are simply unable to function. There are of course exceptions with tourists opting to staycation (holiday at home) which often involves using other means of transport – such as roads, rail, ferries, and cruise ships. But air travel has become an essential part of the international tourism equation. What the pandemic has shown is that medical protocols to help fight the virus, such as rigorous social distancing, are hard to observe on a long-haul flight. The initial suggestions that were made included leaving empty seats aboard an aircraft, for example by blocking off the middle row, so that passengers can fly in a more socially distanced manner. However, in most cases this has meant that load factors (the percentage of occupied seats on a flight) drop to unprofitable levels. The industry has focused on other measures to try and make travel safe, such the use of much more intensive cleaning and disinfecting procedures, contactless documentation and ticketing, and the adoption of airport testing for the coronavirus.

The pandemic also showed that shutting down air travel is much easier done than restarting it. The initial lockdown in March-April saw the number of daily international flights drop drastically as governments closed borders and initiated travel bans. However, given the complex, patchwork way in which quarantines began to be eased or tightened as the speed of contagion ebbed and flowed, getting aeroplanes back in the air has turned out to be a much more time-consuming process. Governments have tried to manage shifting lists of safe or unsafe destinations based on changing data on virus prevalence in different countries. Some have tried to set up safe travel ‘corridors’ or ‘bubbles’. Airlines have had to restart or stop services at short notice, increasing their costs at a time of financial crisis.

Latin America and the Caribbean (selected subregions): daily flight departures, 1 March–12 June 2020

Source: Economic Commission for Latin America and the Caribbean (ECLAC)

How the airline industry will emerge from the pandemic is still open to debate and depends in no small degree on the evolution of the battle against coronavirus over the next 1-2 years as well as on timelines for new vaccines and track and trace procedures. One estimate is that in the decade before the pandemic an air travel boom created an international network of 47,756 commercial air routes, of which more than half were concentrated in the US, Western Europe, and Northeast Asia, but that in the first six months of the pandemic, a lethal combination of border closures, lockdowns, and a generalised loss of public confidence in travel health safety led to the rapid loss of one-third of that total. In the week starting 2 November the number of routes had shrunk to 33,416 according to OAG Aviation World Wide. An early estimate from the International Air Transport Association (IATA) was that because of the Covid-19 crisis airlines around the world would have combined losses of US$314bn in 2020, US$18bn of which would hit Latin American carriers.

Clearly, how the air travel industry recovers will be of enormous importance for the future of tourism. The more extreme scenarios range from an unlikely complete return to business as usual to a perhaps also unlikely permanent decline. One suggestion between those extremes is that future business and holiday trips will cost more, require more airport stopovers, involve longer journey times, and incorporate more alternative modes of transport. According to Subhas Menon, director general of the Association of Asia Pacific Airlines, “It will take a good four or five years for connectivity to return to the same level we saw at the end of 2019; some of these routes may never be put back.”

Peter Cerda, an International Air Transport Association (IATA) executive in the Americas region, expects many regional airlines to emerge from the pandemic operating fewer routes. He estimates it will take until 2023 for domestic routes to recover, and to 2024 for the international ones to do so. The recovery will start with short-haul flights as travellers prioritise visiting family and friends. Long-haul business and holiday travel will take longer to become profitable again. Stephen Trent, a researcher at Citi, says the recovery will be stronger for Mexico, Central America, and Colombia, because they are within short-haul distance from the United States. Long haul flights to South American destinations will be slower to come back.

The crisis had a particularly big effect on major airlines operating in Latin America. In March research by JP Morgan suggested that in a scenario in which all flights remained grounded the region’s two largest carriers, Latam Airlines and Avianca, would have only three to four months before running out of cash. As it turned out these were indeed the first to file for bankruptcy and were followed by Aeromexico. Ecuador’s TAME and Caribbean carrier Liat also went out of business. Among other carriers the report suggested the most exposed were two Brazil-based carriers, Gol (five months) and Azul (six months). Panama-based Copa, widely seen as one of the financially strongest airlines in the region, would have ten months.

Latam, which had been created in 2012 as a merger between Chile’s LAN and Brazil’s TAM, shut down its operations during the lockdown phase of the pandemic and sought Chapter 11 bankruptcy protection in US courts. It also announced significant job losses and the permanent closure of its Argentina-based subsidiary. In early November the company said that in the third quarter of 2020 it had registered US$573m in losses. Revenue was down by 80.8% on year-earlier levels. Chief executive Roberto Alvo said the fall showed the deep impact of Covid-19 on demand for air travel, but that sufficient financial reserves were in place to help it weather the storm. These totalled US$3.3bn, of which US$866m was cash in hand and US$2.45bn was available through the Chapter 11 rescue plan approved by the US court.

Latin America’s Major Carriers

Source: SEC, Latam, Avianca, Gol, Copa, Azul

Alvo said the company’s priorities were to continue restructuring its operations as outlined in the rescue plan, to strengthen its alliance with the US carrier Delta, and to push ahead with a long-term plan to digitalise its operations. The company had earlier announced a further increase in its flights after the reduction to near-zero in the second quarter. Before the pandemic Latam had a fleet of 332 aircraft that were operating 1,400 flights a day to destinations in 26 countries. By June 2020 operations had been slashed to only 5% of capacity, shrinking to 39 domestic services in Brazil, 13 in Chile, and to four international flights. By November 2020, having first restored more domestic flights, Latam was moving gradually to re-open regular connections between Peru, Brazil, and Ecuador. At that point it was estimated that the airline was operating at 33% of its total capacity.

Colombia-based Avianca, which also operates regional hubs in El Salvador, Ecuador, and Peru sought bankruptcy protection in the US in May 2020 and laid off significant numbers of its employees. In the third quarter of 2020 it reported a loss of US$283.5m, compared with a loss of US$40.1m in the year-earlier period. Total revenues fell by 83% to US$206.9m. Before the pandemic struck, the company operated a fleet of 158 aircraft serving 76 destinations in 27 countries. In September, as it began re-opening its routes, Avianca said it had achieved a seat occupancy rate of 66.7%. In October a US court approved the company’s financial rescue plan, totalling US$2bn. A month earlier the Colombian government offered US$570m in loans to help bail out the airline, but this was challenged in court on fair competition grounds and ultimately abandoned. The company’s rescue package has therefore been put in place by private investors.

Brazilian carrier Gol Linhas Aereas, the region’s third largest carrier, estimates that as a result of the pandemic it lost around US$1.5bn in overall sales. The biggest hit came in the second quarter. At that point the airline operated only 57 flights a day, or about 9% of its total capacity. By the end of the third quarter, this had increased to 271 flights per day, or 40% of capacity. It hoped to raise that further to 490 flights per day, or 65% of capacity by the end of 2020. In the third quarter it reported a loss of US$300m, with operating revenues falling by 73.7% on year-earlier levels. The company nevertheless managed to maintain good load factors on the planes it was operating, with around 80% of all seats occupied, the highest among Brazilian carriers. Worries over Gol’s ability to survive the pandemic were heightened by reports that it would struggle to repay a US$300m loan due at the end of August. However, as part of a refinancing agreement with Delta of the US, it was able to make the repayment. The company said that as a result it had no significant debt maturities to repay until 2024.

As often happens during a downturn, there may be some winners – companies that despite the crisis are able to adapt and gain market share. Those that may benefit during this crisis include a new wave of budget carriers that have less debt and lower fixed costs. One of the potential winners is Mexico-based Volaris which already, before the outbreak of the pandemic, had overtaken Aeroméxico as the biggest passenger carrier in the country. Volaris operates entirely with leased aircraft. Its cost per available seat mile, a measure of efficiency, is roughly one sixth of Aeromexico or Panama-based Copa Airlines (the latter is nevertheless seen as having comparatively healthy finances).

In one optimistic scenario, the road to recovery might begin with domestic routes and smaller aircraft. The Economist has pointed out that, because of Colombia’s difficult geography, to get from Bogota to Cali takes almost 10 hours by road but only one hour by air. Making that route profitable and sustainable should not be too difficult. Some of the region’s low-cost carriers (LCCs) are upbeat about the current turbulence. Estuardo Ortiz, chief executive of Chile’s JetSMART, recently said: “We are not considering filing for bankruptcy at the moment. The fundamentals of JetSMART in its ultra-low-cost structure are still valid. We are still focused on long term sustainability and with our growth projection for 2026.” Colombian LCC Viva Air says it expects initially big price discounts as carriers try to entice customers back into the air. However, most analysts expect fares to ultimately end up higher than they were before the pandemic.

Travel, health, and red tape: As international travel is re-opened, Latin American countries have introduced a range of different health and documentation requirements. These vary in strictness. Uruguay, which still limits international travel, and which is regarded as one of the more successful countries in its efforts to control the virus, requires arriving travellers to complete an online health declaration. They must also produce evidence of a negative PCR test taken at least 72 hours before travelling. Visitors are required to quarantine for seven days, and to take an additional Covid-19 test on the fifth day after arrival, or in its absence, to extend the quarantine period for another seven days. Quarantine and test costs are paid by the foreign traveller.

With some variations a similar approach has been taken by Chile. The country also requires proof that each visitor has a health insurance policy that covers coronavirus-related issues. Visitors to Chile must have tested negative for Covid-19 through a PCR test taken less than 72 hours before travelling. However, unlike Uruguay, under rules taking effect from 7 December, and with the exception of travellers from high risk countries, the negative PCR test will make 14-day quarantine unnecessary. Chile uses the World Health Organisation (WHO) definition of high-risk countries which, significantly, includes the US. The net result is that for the immediate future US tourists arriving in Chile will need to quarantine for two weeks, a requirement which makes coming for a 1-2 weeklong holiday impractical.

At the other extreme a group of countries have very light touch requirements. Brazil for example, only requires evidence that visitors have insurance policies covering Covid-19. Mexico, which traditionally attracts very large numbers of short-stay US tourists, does not impose any quarantine requirements on international visitors. A decision in Colombia to lift the PCR test requirement has proven controversial. The government says it will instead rely on a form of self-certification where passengers must answer a health questionnaire and confirm they have no symptoms such as fever or breathing difficulties. They must also agree to take part in a tracking exercise conducted by their insurance companies or by the national health tracking centre (Centro de Contacto Nacional de Rastreo – CCNR).

José Ricardo Coelho of lobby group Asociación Latinoamericana de Transporte Aéreo (LATA) says quarantine requirements in effect “kill the demand” for air travel and tourism. He cites a survey of recent airline passengers commissioned by LATA which showed that 86% felt that the travel chain they were using (including not just the flight but connecting travel between airports and their homes or destinations) was safe.

New ideas on how LAC tourism may respond

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The travel and tourism crisis has thrown up a wide range of ideas about how to respond or rebuild and re-invent the Latin American and Caribbean tourism industry. Some of them may lead nowhere, but others could turn out to be useful in a general industry reset. It is still too early to pick any clear winners and losers, not least because the immediate future course of the pandemic is still difficult to predict.

Adjusting to the end of mass tourism?

One possible future scenario is that the era of mass tourism has ended, or at least has gone into a period of decline. In this model, as global mobility reduces, so long-haul flights become much more expensive, and a significant proportion of the population begins to spend their holidays closer to home. The main implication of this scenario is that the LAC tourism industry will need to move upmarket, catering for fewer, wealthier, or more niche types of visitors. A number of global cities and industry analysts seem to be already moving towards that conclusion. Tony Matthews, an urban and environmental planning specialist at Griffith University in Australia, has made that case, commenting: “Cities that rely heavily on tourism are facing an extraordinary crisis. Do they wait it out until mass tourism is viable again, or do they start developing major new industries and economies?” Griffith argues that urban economies are by their nature difficult to “re-tool”.

Notwithstanding that difficulty, a number of European cities have already adjusted their approach in a way that may be relevant to the LAC countries. The city authorities in Barcelona have said they intend to “put quality over quantity”, promoting local food and seeking to attract higher-spending visitors. Amsterdam says it will concentrate on social and environmental improvements. Matthews comments: “With less future income from tourists it makes sense for Amsterdam to try to improve its economic fundamentals in other ways.” Bangkok in Thailand has also dialled down mass tourism. David Robinson, director of Bangkok River Partners, says: “The race to the top of the ‘most visited’ chart does not benefit the country. More is just more, not better, and certainly not more financially beneficial to the country. It’s unsustainable.”

Focusing on improved infrastructure

The World Economic Forum (WEF) noted that before the pandemic a number of LAC countries had begun to improve their travel and tourism competitiveness including air, land, and sea infrastructure. However, the pandemic also altered the relative weighting of key components of competitiveness in a way that is not particularly helpful to the region. For example, tourists now place much greater emphasis than before on the availability of good healthcare facilities - and LAC has 42% fewer hospital beds per 10,000 inhabitants than the global average. The region will also need to overcome often unfavourable business, safety, and security conditions, gaps in health and hygiene, and environmental issues.

While acknowledging the existence of funding constraints, WEF has suggested the way ahead could be to invest more in tourism related infrastructure through public-private partnerships (PPPs). Desirable investments would include contactless payment and ticketing options in airports, buses, and Metros, which would save time and reduce the spread of the virus. More technologically advanced infrastructure would improve quality and reduce costs.

Increased infrastructure resilience would help cope not only with pandemics but also with natural disasters such as hurricanes and earthquakes. A World Bank study has found that investment in resilient infrastructure in low and middle-income countries can generate US$4 worth of benefits for every US$1 spent. Investment in digital systems would prepare the LAC travel and tourism sector for the spread of 5G (5G subscribers in the region are expected to reach 58m by 2025). Digitalisation could also help small and medium-sized enterprises (SMEs) in the industry to offer more competitive services.

Improved marketing techniques

Some tourism executives say that in response to the pandemic the sector should focus more rigorously on specific market segments, so as to optimise profitability. One version of this hypothesis is that the industry in general should target the millennial generation, which is now larger than the baby boomers. Recent research suggests millennial travellers are attracted by personalised and technology-based travel options and place a high value on authenticity and unique experiences. Latin American and Caribbean tour operators can offer a particularly good fit for adventure-seeking millennials, with an emphasis on outdoor activities, hiking, sightseeing, and a range of sporting activities.

Countries that have already established a distinctive tourism brand may be well-positioned to ride out the storm. One example is Costa Rica, which over the last two decades has built its reputation as an eco-tourism destination with beautiful beaches, tropical rainforests, and diverse eco-systems. While the country has suffered from the global downturn in 2020 (tourism accounts for around 8% of GDP) it intends to use these already established green credentials to recover around US$1.5bn in lost revenues and generate 80,000 new jobs.

There are a number of other ways to improve the targeting of market segments. Destinations like Mexico and the Caribbean can sharpen their focus on attracting short-haul US and Canadian travellers, where airlift is easier than for long haul visitors (e.g. Europe). Although airlift remains an issue, as China is emerging as the only major global economy expected to record positive growth in 2020, targeting Chinese tourists as travel restrictions are gradually eased may be a useful and potentially profitable diversification strategy.

Across the region there are signs that the industry as a whole is promoting domestic tourism as a first step designed to kickstart a wider recovery process. Various governments have already begun to prioritise this as a policy option. One way of encouraging domestic tourism has been to move public holidays to Fridays or Mondays, thereby creating a number of long weekends that will encourage short holiday breaks in local resorts.

There may also be scope for better targeting regional and neighbouring country tourism flows. Uruguay, for example, has for many years attracted visitors from neighbouring Argentina and Brazil and a relatively smaller number of travellers from the US and Europe. While Uruguay’s southern hemisphere summer season (December to March) will suffer because of the pandemic, the country’s relative success in controlling the coronavirus, providing high levels of safety, good health services, institutional stability, and a high standard of living has attracted a significant number of longer-staying Argentine visitors. Somewhere between 15,000 and 20,000 Argentines are estimated to have moved to Uruguay since the outbreak of the pandemic in March, equivalent to about 0.6% of the country’s total population of 3.5m.

Like a downturn in any other industry, companies are likely to focus on supply-side consolidation and demand-side simplification of the product offer. To some extent this is a natural process. Given the drastic and abrupt downturn, it is likely that a significant number of travel and tourism companies will be driven into bankruptcy or administration. On the other hand, those that have larger cash reserves and lower costs will be a position to take over some of their rivals.

Attracting remote workers and digital nomads

A number of analysts have wondered whether the surge in remote working experienced in wealthy countries during the pandemic might offer some clues to help to revive the tourism sector. The argument is that if people were able to work remotely from home during the more intense phases of lockdowns, they might also be attracted by the idea of working remotely from a more distant location, with a more relaxed lifestyle and in a better climate – a second home, time-share, villa, or hotel in a tourist destination in the LAC region. Frank J Llibre, a top executive at the Dominican Republic’s Grupo Puntacana, has spoken about the potential attractiveness of this option in the Covid era, particularly if the local operator can offer good broadband connectivity, high health and cleanliness standards, and appropriate services for longer-stay visitors. His company operates a cluster of businesses including an airport and the residential Puntacana village, which includes an international school, a medical centre, and sports facilities as well as shops and restaurants. Subject of course to reliable airlift, some LAC countries may be able to develop this model designed to cater to longer stay remote workers.

A related experiment is being pursued in Panama. From December 2020 a giant cruise ship, MS Satoshi, which has a length of 245 metres and a total of 777 cabins distributed over 12 decks, will anchor 22kms off the Bay of Panama. The ship, owned by a company called Ocean Builder, has been diverted from the mobile cruise tourism business which has become unviable because of the coronavirus pandemic. As a result of the crisis, many cruise ships have been idled at anchor in various parts of the world. In this case the idea is to repurpose the ship to offer a home for ‘digital nomads’ and crypto-currency entrepreneurs. According to Panamanian tourism minister Ivan Eskildsen, this will be the world’s first residential, fixed-location cruise ship designed for “digital nomads, new technology entrepreneurs and digital professionals who are seeking to work remotely”.

The ship will be linked to Panama City by a regular small ferry service taking 30 minutes for each trip. Facilities onboard include multiple restaurants, a theatre, health centre, casino, and a gym. The company is currently also building water-based homes known as Sea Pods on Panama’s Caribbean coast. It says an initial tranche of 200 cabins on the ship will be sold by auction by the end of this year and are expected to be priced at somewhere between US$25,000 and US$50,000 each. Like a condominium, residents will also have to pay a fee for the upkeep of the ship and facilities. Ocean Builder says it is also able to assist residents who are interested in acquiring permanent residence status in Panama (the Panamanian government has recently offered improved terms to convince more foreigners to become residents, in an attempt to boost inward investment and innovation). It is not yet clear whether the MS Satoshi project will succeed, but the experiment is likely to be watched closely in both Central America and the Caribbean, still adjusting to the collapse of the cruise ship industry.

Introducing new technology: The tourist sector as a whole faces the challenge of adopting new digital technologies that will help control costs and improve profitability. One example of how this can work is the Who’s Your Guest website launched by Inbal Tubi, who owns and runs hotels in both Brazil and Colombia. The project was launched as 80% of Colombia’s hotels closed in the first phase of the lockdown; occupancy rates in July stood at only 14%. Tubi had been frustrated by high commissions charged by booking platforms, so he launched an alternative designed to give the hotel a larger share of the fees. He says hotels have had to pay “crazy” 15%-30% commissions to established online booking sites such as Expedia and Booking.

“Booking makes more money than the hotel on the reservation. And you have absolutely no information about the guest you are about to receive. The guests go on TripAdvisor and know everything about you, but you have no idea.” To solve that problem, he has created a mutual rating system through “Go Travel”, a direct booking club, which offers discounted rates to the more desirable customers. Tubi says hotels can boost net profits by 12% by using the system, which also enables contactless check-in “so the hotels know in advance if you like an extra pillow on the bed, if you’re lactose intolerant, what tours you do. So they can give you a personalised service.” He had worked on the idea before the pandemic, but as he puts it “the industry was growing like crazy and no-one had time for new ideas”. The Covid pandemic he adds, “is the moment I’ve been waiting for, for three years. It’s all about timing. Just like Airbnb was born out of the 2008 crisis. Everyone is already expecting a new normal, so that’s the time to bring in new ideas.”

Five conclusions from the industry crash

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Pulling together the tourism and travel trends discussed in this report, five main points emerge:

First, it will take the industry a number of years to get back to 2019 levels of activity and revenue. Estimates vary, but it is hard to see tourist arrivals and revenues recovering until 2024.
Second, the speed and strength of the recovery will be highly dependent on the outcome of the wider regional and global struggle against the pandemic. As of end-2020 news about potentially effective vaccines is encouraging, but rolling them out will be a complex, costly and time-consuming process.
Third, the tourism and travel industry will shrink. Financial losses, particularly in the Caribbean will be high. Some countries will default on their foreign debt. Airlines, hotels, and tour operators will fail. Job losses will mount.
Fourth, travel and tourism will slowly re-invent itself. New business models will emerge. They will include growth in 'staycations', domestic and regional tourism, shorter-haul travel, and remote working among other possible innovations
Fifth, there will be some winners. Smaller companies with newer technology and lower costs may seize market share. Those that are quick to use digital technologies and the opportunities offered by 5G may prosper.

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