Latin American Airlines Scrutinize Purchasing To Weather Downturn

Economic instability in Latin America is causing the region’s airlines to seek greater efficiency in their purchasing and supply chain management.

Latin American carriers are adapting and reconsidering their purchasing strategies to cope with the unstable economies that continue to plague the region (see graphic). This trend is evident in actions by airlines and the Latin American airline association, ALTA.

The worsening currency exchange rate against the U.S. dollar in Colombia is having a negative effect on Avianca TACA and is the company’s biggest challenge. To combat this, it has converted all contract terms with suppliers into U.S. dollars to create a more stable cost base. It has also changed three aspects of its aftermarket contracts: shortening them from typical 10-12-year deals to a maximum of 3-5 years, adding midterm clauses to allow renegotiating terms if conditions change and  demanding more value-added benefits from suppliers.

Copa Airlines amended its buying practices to improve efficiency, especially this year as it had to continually change its projected revenue margins due to the region’s economic challenges. These have affected its operations in some of Copa’s biggest markets such as Brazil and Colombia. Internal teams focus on cost savings and efficiency; even contract terminations are being considered to cut costs. All decisions factor in slowly increasing fuel prices and seek providers that can be “partners” aligned with the airline’s goals.

LATAM Airlines Group, which fortuitously started its own cost-reduction program before the economic downturn, is continuing this process. Using technology to better analyze and manage suppliers, it has identified inefficiencies and started conversations with potential new suppliers. Instead of just informing suppliers of its needs, it now shares information about its problems and expects suppliers to propose solutions.

Bolivia Airlines, which put older aircraft back into service due to low fuel prices, has conducted a microscopic review of contracts and expects more customization to optimize costs. Similar to Avianca TACA, it seeks shorter-term contracts, which are more complex but provide stability.

To foster stronger relationships and win-win improvements with their suppliers, airline members of the ALTA technical purchasing committee designed a supplier performance-evaluation program that launches on July 1 and will measure and rank suppliers based on a variety of metrics and factors. The program’s intent, revealed at ALTA’s recent CCMA and Aircraft MRO event, is to set a common standard for supplier partnerships, providing direct airline feedback and creating a collaborative improvement effort for both parties.

Based on their performance metrics, suppliers will be ranked by an airline review committee. Best-ranked suppliers will be recognized at next year’s ALTA CCMA. Lower-ranking suppliers will have a chance to meet directly with the committee and discuss how they can improve. Instead of being viewed as customers, these participating Latin American carriers want to be seen as “business partners” with their suppliers, having similarly aligned goals.

The committee is chaired by Francisco Sanchez from LATAM Airlines and Guadalupe Espinosa from AeroMexico

At the recent ALTA conference, Sanchez, who also is LATAM Airline Group’s vice president for technical strategic sourcing and procurement, told suppliers: “The airline is nothing without a good supply chain. We are all interdependent on one another. How can you add new value into the conversation? Airlines are all struggling and you, as suppliers, have decades of experience. I really encourage you to think and be creative and bring new ideas.”

Eduardo Iglesias, executive director of ALTA, sees this program as a “chance to make the overall supply chain leaner and more cost-efficient. By helping the suppliers to be more efficient, we can actually target a lower cost base on the technical side and improve the overall supply chain for the entire industry.”

ALTA says the doors are not closed to any suppliers, but those participating in the evaluation program must take the airlines’ improvement recommendations very seriously.  

Video LATAM’s vice president of strategic sourcing discusses what he looks for from suppliers:

Video Copa Airlines’ director of maintenance talks frankly about supplier improvements:

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