The merger of Colombia's Avianca airline and TACA of El Salvador has in one stroke heated up the aviation industry in Latin America, with major operators in Chile, Brazil and other countries most likely to be challenged for a share of the market.

Chile's LAN group is most directly exposed and faces immediate challenge to its ambitious plans for expansion and growth, but Brazilian businesses that own airlines are also sitting up after the Avianca-TACA merger was announced, industry sources said.

Latin America's passenger traffic has not been affected seriously while aviation sales have dropped in other parts of the world since the recession hit the global economy in 2008. European destinations have also seen a stable growth, giving Latin America's privately owned operators scope for further growth, said the sources.

Both Avianca and TACA indicated they expect to emerge from the deal leaner with greater efficiencies in place in their international operations. They said in a joint statement they plan to operate the new holding company together, though it's not clear yet if a new leadership structure is in the cards.

Although both Avianca and TACA have said they plan to keep their respective identities and continue to operate independently, some key compromises are in store and questions have been raised about the future of a 13,000-strong workforce.

Together the airlines operate about 130 aircraft on more than 100 destinations in South, Central and North America and Europe. Both compete in the aviation marketplace for passengers as well as cargo business.

The deal means Avianca's shareholders will receive 67 percent of the stock while TACA investors will control the remainder.

Avianca's main shareholder, Bolivian-born Brazilian-Colombian entrepreneur German Efromovich, and TACA Chairman and CEO Roberto Kriete indicated the merger will place the two airlines in a strategic alliance while sharing destinations in Europe and the Americas. Both airlines have established strong business links in those regions.

Industry sources said the merger would likely create demand for new aircraft as the joint business grows.

At the same time, weaker airlines may have to face up to cost cuts without expanding, said the sources.

The merger and the resulting strategic alliance puts the new group directly in competition with Chile's LAN group, which operates flights to destinations in the Americas and the Caribbean, Europe and Oceania.

Although privately run and publicly quoted on the New York Stock Exchange, LAN is practically Chile's flag carrier, based in Santiago. Its hubs outside Chile include airports in Argentina, Ecuador, Peru and Miami.

Industry sources said the merger would also build pressure on Mexican airlines to gear up for stiffer competition. Grupo AeroMexico, the holding company of AeroMexico and AeroMexico Connect, has already responded to news of the Avianca-TACA deal and hinted at plans for a strategic business review.

If airlines affected by the recent economic slowdown do nothing as the Avianca-TACA alliance grows, they risk being swallowed by the new group, industry sources said.