18-Jan-2014 2:50 AM

Uruguay’s BQB Líneas Aéreas pursues rapid expansion, emerging as successor to Pluna

Analysis

BQB Líneas Aéreas has accelerated expansion, positioning it as Uruguay's new flag carrier 18 months after the demise of Pluna.

BQB began pursuing expansion in late 2013 with four new routes, its first jet (a wet-leased A320) and a fourth ATR 72 turboprop. The carrier is planning further expansion in 2014, including the acquisition of a fifth ATR 72 and up to three A319s while the wet-leased A320 will be returned.

BQB should be large enough by the end of 2014 to render the proposed re-launch of Pluna or the establishment of another new Uruguayan carrier unnecessary. Uruguay is a small market and BQB is already about one third the size of Pluna, which had operated a fleet of 13 CRJ900s.

BQB initially focused on Argentina-Uruguay market

BQB Líneas Aéreas, also known as BQB Air, commenced operations in early 2010 following a regional carrier model and focusing on the Uruguay-Argentina market. Argentina-based transportation company Buquebus (BQB), which operates buses and ferries between Argentina and neighbouring Uruguay, established the airline in a bid to increase its market share between Buenos Aires and Uruguayan beach resort Punta del Este and Uruguayan capital Montevideo.

Montevideo is only about 200km from Buenos Aires while Punta del Este is about 350km but by road the distances increase significantly. There is a two-hour high speed ferry option to Montevideo which is almost as expensive as flying. Cheaper buses and bus-ferry combinations are offered with bus-ferry combinations taking about five hours to Montevideo and about seven hours to Punta del Este.

Flying is a popular option and Argentina-Uruguay has generally been a very profitable market for airlines as the flight distances are so short, resulting in a very high yield. Buquebus now has an integrated reservations platform and website, allowing its passengers to select different combinations of flights, ferries and buses at various pricing points.

Buenos Aires is by far the largest destination for Uruguay, currently accounting for about 40% of total seat capacity. Aerolineas Argentinas has always been by far the largest foreign carrier in Uruguay and has also been the largest carrier in the Uruguayan market since the mid-2012 collapse of Pluna.

Aerolineas Argentinas and LATAM dominate Uruguayan market

Aerolineas currently offers six daily flights from Buenos Aires to Montevideo and seven to Punta del Este, according to OAG data. Aerolineas currently accounts for a market leading 26% of total seat capacity in Uruguay compared to 19% for BQB Air. LATAM is also now bigger than BQB, with a 22% share of capacity. LATAM subsidiaries LAN and TAM now serve Montevideo from Santiago and Asunción respectively.

Overall there are 10 foreign carriers operating passenger services to Uruguay, according to OAG data. In addition to Aerolineas and the two subsidiaries of LATAM, Montevideo is served by Avianca subsidiary TACA Peru (from Lima), Gol (from São Paulo and Porto Alegre in Brazil), Spain's Air Europa (from Madrid), Air France (from Paris via Buenos Aires), American Airlines (from Miami), Copa (from Panama City) and Sol (from Buenos Aires and Rosario in Argentina).

All 10 carriers serve Montevideo while Sol, a small Rosario-based turboprop operator, and Aerolineas are the only foreign carriers serving Punta del Este.

Uruguay capacity by carrier: 13-Jan-2014 to 19-Jan-2014

Rank	Airline		Total Seats
1	AR	Aerolineas Argentinas*	16,448
2	5Q	BQB Lineas Aereas	11,820
3	JJ	TAM Airlines*	7,112
4	LA	LAN Airlines	6,682
5	G3	Gol	6,256
6	AF	Air France	3,308
7	AA	American Airlines	3,150
8	UX	Air Europa Lineas Aereas	2,384
9	CM	COPA	2,240
10	TA	TACA*	2,100
11	8R	SOL*	924

BQB had modest beginnings

BQB in its initial two years flew under the radar screen of Pluna and foreign carriers as it only had a fleet of two ATR 72s and operated a network which did not overlap much with its larger competitors. BQB competed from the beginning with Pluna and Aerolineas Argentinas on the Punta del Este-Buenos Aires route, which is a large but very seasonal market with significantly higher levels of capacity in the southern hemisphere summer season. But BQB had a very limited presence with less than one daily flight on Montevideo-Buenos Aires, which is a bigger market on a year-round basis.

At the time of Pluna's collapse, BQB operated 13 routes but only Punta del Este-Buenos Aires was operated daily. Most of its routes were small point-to-point niche routes that were not operated by any other carrier, including a few domestic routes and a few routes to secondary cities in Brazil.

BQB's initial response to Pluna's collapse was rather conservative. In the first year after Pluna ceased operation the carrier only added one ATR 72 and picked up two Pluna routes, Montevideo to Asunción and Porto Alegre. Only a small amount of capacity was added on Montevideo-Buenos Aires Aeroparque, a route BQB currently serves with two daily frequencies compared to between four and seven daily flights for Aerolineas Argentinas (varies depending on the time of year). For the most part BQB continued to operate the same niche network with similar capacity levels.

In the meantime the Uruguayan government looked for new investors to take over Pluna's operating certificate and routes. The government also attempted on multiple occasions to auction off seven of Pluna's CRJ900s. The government had only owned 25% of Pluna, with 50% stakes owned by Argentinean investment firm Leadgate and 25% by the parent of Canadian regional carrier Jazz. But the government ended up responsible for the aircraft.

After several delays, a successor carrier emerged in mid-2013 - Alas Uruguay. The new carrier initially planned to launch in 2H2013 using some of Pluna's CRJ900s but switched gears in late 2013 and was instead seeking to lease 737s, a type Pluna had operated along with 757s and 767s before Leadgate took over and restructured the flag carrier in 2007.

However, Alas' planned acquisition of aircraft never materialised and over the past month the proposed start-up has faded from the scene. With BQB now accelerating expansion, the prospects for Alas or any other new Uruguayan carrier are significantly diminished.

BQB launches Rio de Janeiro and Santiago

BQB adjusted its strategy in late 2013 and started to pursue more ambitious expansion. The carrier began wet-leasing an A320 from Spanish LCC Vueling, which it has been using to operate three new routes which were launched in Dec-2013 - Montevideo to Santiago, Rio de Janeiro and Florianópolis.

BQB also launched in Dec-2013 service from Montevideo to Curitiba in Brazil. Curitiba is currently served with four weekly ATR 72 frequencies, increasing to five frequencies in early Mar-2014, according to OAG data.

The launch of Curitiba was made possible after BQB added its fourth ATR 72 in Nov-2013. The additional turboprop is also being used on some of the carrier's new Rio de Janeiro flights.

BQB currently serves Rio de Janeiro with five weekly flights, one with A320s and four with ATR 72s, according to OAG data. Pluna had served Rio de Janeiro with two daily CRJ900 frequencies. TAM filled the void by launching one daily A320 flight from Rio de Janeiro to Montevideo in Nov-2012 but dropped the route at the end of 2013, leaving an opening for BQB.

Montevideo to Rio de Janeiro capacity by carrier (one-way seats per week): 19-Sep-2011 to 20-Jul-2014

Santiago could prove to be a more challenging market as BQB for the first time has to compete against the largest airline group in Latin America, LATAM. BQB launched Santiago on 15-Dec-2013 and currently serves the route with one daily A320 frequency.

Santiago was Pluna's biggest destination after Buenos Aires and was served with up to four daily flights. LAN increased capacity to Santiago after Pluna's demise and currently serves Montevideo with three daily flights, according to OAG data.

BQB launches Florianópolis and adds capacity to Asunción

BQB also launched in Dec-2013 seasonal services to Florianópolis, a popular beach destination in Brazil that had been served by Pluna seasonally. BQB currently operates two weekly flights to Florianópolis, one using ATR 72s and one using A320s, according to OAG data.

In addition, BQB has increased capacity to Asunción by placing the wet-leased A320 on three of its six weekly flights between Montevideo and the Paraguayan capital. BQB launched Asunción services in early 2013 after taking delivery of its third ATR 72. Pluna had served the route with up to two daily CRJ900 flights.

BQB eyes A319s and São Paulo

The wet-leased A320 is seen as a temporary solution and will be returned to Vueling at the end of Mar-2014, in time for the Spanish carrier's peak season. Forward schedule data from OAG shows the A320 coming off in late Mar-2014 all four of the routes that BQB currently operates with A320s. BQB's schedules for now show Florianópolis and Santiago will be dropped in late Mar-2014 while Asunción and Rio de Janeiro will only be operated with ATR 72s.

But the carrier has been seeking to acquire up to three A319s in 2014 and aims to have the first aircraft in its fleet by the end of Mar-2014, which would allow it to continue serving Santiago and provide more capacity to Rio de Janeiro and Asunción. As Florianópolis is typically a seasonal destination it will likely be dropped until the start of the next southern hemisphere summer season in late 2014.

The acquisition of A319s would also give BQB a better option for Rio de Janeiro and planned new services to São Paulo. The carrier now operates four of its five weekly flights to Rio de Janeiro Galeao with ATR 72s and is planning to use the ATR 72 to launch six weekly flights to São Paulo Guarulhos at the end of Feb-2014, according to OAG data.

The ATR is not an ideal aircraft for Montevideo to Rio de Janeiro or São Paulo as both routes are over four hours in duration with an ATR 72. An A319 can fly each of these routes in about two and a half hours.

An usually long turboprop flight is particularly an issue for the Montevideo-São Paulo market as the route is now served by two other carriers, TAM and Gol, with A320s. TAM currently operates three daily flights on the route while Gol operates 10 weekly flights.

Gol entered the non-stop São Paulo-Montevideo market after Pluna, which operated four daily flights to São Paulo, collapsed. Gol previously only served Montevideo from Porto Alegre, a former Pluna route it continues to serve in competition with BQB. TAM also added a third daily frequency on São Paulo-Montevideo a few months after Pluna's exit (in Sep-2013 the third frequency was taken over by TAM's Paraguayan unit).

Montevideo to São Paulo capacity by carrier (one-way seats per week): 19-Sep-2011 to 20-Jul-2014

Although it has higher per seat costs than the A320 the A319 could be an ideal aircraft size for BQB given the relatively small size of the Uruguayan market, particularly once the peak season ends in March. The A319 is only slightly larger than the 90-seat CRJ900 that had been operated by Pluna.

With two or three A319s, BQB will be able to offer more frequencies on its longer routes while increasing overall capacity. The A319 would likely be used to take over all flights to Rio de Janeiro (GIG), São Paulo (GRU), Santiago (SCL) and Asunción (ASU). Buenos Aires (AEP and EZE) and the secondary Brazilian destinations in BQB's network - Curitiba (CWB), Florianópolis (FLN), Foz do Iguaçu (IGU) and Porto Alegre (POA) - are more suitable with turboprops. Foz do Iguaçu is served from Montevideo (MVD) via small Uruguayan city Salto (STY).

BQB top 10 international routes ranked by weekly seat capacity: Mar-2014 (after launch of São Paulo)

Expansion at Buenos Aires Aeroparque would be attractive

BQB has committed to one additional ATR 72-500, which according to the CAPA Fleet Database is expected to be delivered in Mar-2014. The fifth turboprop could enable further capacity increases and the launch of new routes. Turboprop capacity will also be freed up if BQB ends up acquiring more than one A319 as the ATR 72 will no longer have to be used on the longish routes such as Rio de Janeiro.

BQB particularly would be interested in adding capacity to Buenos Aires Aeroparque, where it currently operates two daily flights to Montevideo and 17 weekly flights to Punta del Este. BQB has only been able to marginally increase its share of capacity at Aeroparque since Pluna's demise as Aerolineas has taken over most of the slots at Aeroparque previously held by Pluna.

Before it suspended operations Pluna served Aeroparque with up to 10 flights from Montevideo and between two and six daily flights from Punta del Este (depending on the season). Aerolineas currently operates five daily flights from Aeroparque to Montevideo and six from Aeroparque to Punta del Este, which is reduced to as few as one in winter and shoulder months as Montevideo service is increased.

Aerolineas also operates one daily flight from Buenos Aires Ezeiza to both Montevideo and Punta del Este. (BQB also operates one daily flight to Ezeiza from Montevideo.) Connections to Aerolineas' long-haul network are available at Ezeiza while at Aeroparque there are domestic and short-haul international connections. Aerolineas uses a mix of 737s and E190s, which are operated by its regional unit Austral, on its Uruguay routes.

The Uruguayan government had expressed interest in re-securing the slots for the Pluna successor but with the launch of Alas Uruguay now looking unlikely it should instead mount a fight to get the slots for BQB. This will not be an easy battle as Argentina is extremely protective of Aerolineas and fears a stronger Uruguayan carrier would take away traffic from Aerolineas. The Argentinean flag carrier currently accounts for about 64% of total capacity between Argentina and Uruguay, compared to only 29% two years ago in mid Jan-2012, when Pluna was still operating and had a 69% share, according to CAPA and OAG data.

The Argentinean government was a vehement opponent of Pluna and blocked its expansion in Argentina, which contributed to its demise. The government and Aerolineas were irritated that a large portion of Pluna's Argentinean passengers were sixth freedom passengers. Pluna in particular carried a large number of passengers between Argentina and Brazil, diluting the ability of Aerolineas to compete in the fast-growing Brazilian market.

BQB has an opportunity but should be cautious as it expands

BQB, however, does not pose the same threat as Pluna. While BQB is also now pursuing expansion in Brazil, where it will soon serve six destinations, it does not have nearly the same frequencies and capacity levels as Pluna.

BQB currently has only about 12,000 weekly seats system-wide, which is less than one-third the capacity Pluna provided. Pluna accounted for 54% of total seat capacity at Montevideo before its demise while BQB currently has only a 20% share, based on CAPA and OAG data.

As its fleet further expands in 2014 to up to eight aircraft, compared to five currently, BQB's total share of the Montevideo and Uruguayan markets will inch up. BQB should be able to overtake LATAM and Aerolineas, giving it the number one position in its home market.

But BQB is unlikely to approach the size of Pluna and Montevideo Carrasco Airport is unlikely to reach its pre-Pluna size. Montevideo currently has about 30% less capacity or 22,000 fewer weekly seats than prior to Pluna's demise as only about 40% to 45% of Pluna's seat capacity has been backfilled by other carriers.

Further BQB expansion should allow Montevideo to fill some of the remaining void but a full recovery is not realistic as about 40% of Pluna's passengers transited. The lessons from Pluna highlight the challenges facing carriers from small markets. Uruguay, which has a population of only about three million, does not need a fully-fledged flag carrier. A niche point-to-point operator will suffice.

BQB has an opportunity to pursue more expansion from a tiny base and carve out a sustainable niche. But it should be wary of expanding too ambitiously and capturing the attention of its much larger competitors in much larger neighbouring countries. Uruguay does not need another Pluna.