Low-cost carrier start-up VivaColombia has adjusted its business plan ahead of its planned May-2012 launch and will focus primarily on stimulating demand on thin domestic routes. VivaColombia has selected Medellin as its base and is in the process of leasing an initial fleet of five A320s, having decided against pursuing fleet synergies with Mexican sister carrier and B737 operator VivaAerobus.
The Colombian carrier, which was provisionally known as La Nueva Aerolinea (LNA) until early this year when investment from VivaAerobus owners Irelandia and IAMSA was secured, had an initial business plan that envisioned sticking to trunk routes from a Bogota base. LNA was initially established over two years ago by four Colombian entrepreneurs, led by former Avianca CEO Juan Emilio Posada. It was initially awarded traffic rights last year for six domestic trunk routes. The cross-ownership in Mexican and Colombian carriers could be the early stages of a Viva-branded pan-Latin American LCC.
VivaColombia CEO Frederik Jacobsen told CAPA on the sidelines of last week’s Latin American airline association ALTA conference in Brazil that the business plan and network strategy was adjusted after VivaAerobus owner Irelandia and IAMSA came on board as new shareholders in Mar-2011. Irelandia, the Irish-based aviation investment firm led by Ryanair founder Declan Ryan, and Mexican bus company IAMSA each acquired a 25% stake in LNA, making it possible for the start-up to adopt the Viva brand. Colombia’s Grupo Bolivar also acquired a 25% stake, leaving the original four founders, which includes Mr Jacobsen, with 25%.
VivaAerobus, which Irelandia and IAMSA launched in 2006, primarily operates thin point-to-point domestic routes. VivaAerobus only entered Mexico’s main market, Mexico City, last year. VivaColombia will similarly focus on thin routes which bypass Bogota, which has a highly congested airport that lacks the space to support a large operation from a new carrier.
Mr Jacobsen says VivaColombia plans to launch services in May-2012 with an initial fleet of three A320s, which will be delivered in February, March and April of next year. He says the company is now finalising lease deals for an initial fleet of five CFM56-powered A320s which were manufactured in the 2002 to 2004 timeframe. The fourth and fifth aircraft are slated to be delivered in Sep-2012.
Mr Jacobsen expects VivaColombia will steadily expand its fleet and operate about 20 A320s by its sixth year. “We expect similar growth as VivaAerobus,” he says. “We expect a lot of market stimulation in Colombia.”
VivaColombia looked at following VivaAerobus, which will soon have a fleet of 20 B737-300s, in acquiring B737s. But Mr Jacobsen says selecting 180-seat A320s was a “no brainer”. He says the B737-300 was ruled out because they are smaller and older. “The inventory is now depleting and it’s very hard to find sister ships,” he explains. The B737-800s are more attractive from an operating cost perspective but Mr Jacobsen says they are currently in high demand and are therefore much more expensive than A320s.
“A320 has the lowest CASK – that’s our main driver,” he says. “We’re very opportunistic in our decisions. … The reality is we got some very good deals with the A320 right now.”
While the two Vivas will not have common aircraft at least initially (they will eventually look at jointly acquiring newer aircraft), Mr Jacobsen says the two carriers may approach some “core suppliers” to negotiate joint deals. “Right now we are looking at a number of things,” he says.
VivaColombia has not yet selected its initial route network. But Mr Jaobsen says the plan is for the carrier to initially operate several domestic routes that are currently not served at all or only by turboprops.
Mr Jacobsen says VivaColombia has been awarded 10 “pioneer” routes such as Cali-Santa Marta which currently have no service. Colombia’s CAA has given VivaColombia one year from May-2012 to operate these 10 routes with the guarantee of no competition from another carrier. Mr Jacobsen says the launch team is now evaluating these 10 routes and will “pick and choose” which ones it will operate.
He says VivaColombia also has been awarded 10 secondary routes such as Medellin-Apartado, which is currently served with several daily turboprop flights but no jets. VivaColombia expects to operate several of these routes within the first few months.
VivaColombia will have less than daily service on several of its initial routes, again following the model used by VivaAerobus. “Part of the LCC model is you don’t need to fly daily,” Mr Jacobsen says.
He adds VivaColombia still plans to operate some of the six trunk routes it was initially awarded. But the carrier will not base any aircraft in Bogota and will only fly into the capital during non-peak hours as it wants to avoid the long delays that are common during the morning and evening peaks. Mr Jacobsen expects VivaColombia will initially operate two or three routes to Bogota.
VivaColombia is not concerned about not being able to offer peak hour flights from Bogota as it is not targeting the business traveler, including the Colombian businessman looking to fly out and back in the same day. VivaColombia will leave Colombia’s three full-service carriers to flight over this sector of the market. Following the upcoming rebranding of Aires to LAN Colombia, Colombia will soon become the only domestic market in Latin America with competition from all three of its main airline groups – LAN, Avianca-TACA and Copa. The three groups now control about 90% of Colombia’s domestic market, with three regional carriers accounting for the remaining 10%.
Colombia domestic market share by carrier (based on passengers carried through first nine months of 2011)
Aires gave the Colombian market its first experience with low fares in early 2009 when the regional carrier began a separate low-cost operation on domestic trunk routes with B737-700s. But Aires was acquired by LAN late last year and will be re-branded LAN Colombia early next month, completing its transition back to a full-service carrier.
Aires’ low-cost operation was highly unprofitable and the carrier was nearly out of cash when it was rescued by LAN, which has been interested for several years in entering the Colombian passenger market. But Mr Jacobsen is confident VivaColombia will not run into the same problems as Aires because VivaColombia will follow a pure LCC model, be well capitalised and operate larger density aircraft.
Aires operated a mixed fleet consisting of Dash-8 turboprops and B737-700s with a hybrid model which included using GDSs. VivaColombia will stick to a simple fleet and follow a pure no frills model without codeshares or GDSs.
Mr Jacobsen says Aires “was a good regional carrier operating turboprops in Colombia” before they rushed into the LCC model and quickly expanded with limited capital. “Their growth rate was unmanageable,” he says. “They grew too fast, too soon and were undercapitalised.”
When LNA was first conceived, it faced the prospect of competing against multiple LCCs including Aires and AerOasis, which was also acquired by LAN last year as it was completing proving flights. LAN quickly decided to shut down AerOasis before the carrier had an opportunity to launch services.
Without any other start-ups in Colombia currently in the works, VivaColombia should have the low end of the market all to itself. Clearly this made the carrier an attractive proposition to Irelandia and IAMSA. Like VivaAerobus, VivaColombia will focus on the visiting family and relatives (VFR) sector and try to stimulate the market by offering low base fares. Ancillaries will be “a big part of our product,” Mr Jacobsen promises.
In addition to betting that the pure LCC model can succeed in Colombia, Mr Jacobsen says “we are also betting on a market that nobody knows about”. He points out that Colombians still primarily rely on bus trips of six hours or more to travel domestically. While fares were reduced significantly following the entrance of Aires’ on trunk routes, Mr Jacobsen believes fares in Colombia are still relatively high.
Colombia’s domestic market grew by 13% in 2009 and 30% in 2010, driven by the rapid expansion at Aires. Growth slowed down in the first three quarters of this year to 3% as Aires' network and fare structure was adjusted by LAN. Mr Jacobsen says fares have increased and “stimulation has ceased”.
“Aires proved the market in Colombia can be stimulated,” Mr Jacobsen says. He says the carrier struggled because it had operational problems, which resulted in frequent flight delays. The delays added cost and turned off passengers “as people were ready to pay low fares but not sit eight hours”.
Skeptics, pointing to the failure of Aires, have said the Colombian market cannot support the LCC model partially because of the high taxes that are in place at all of the county’s airports. But VivaColombia does not believe the taxes are overly burdensome and expects the elimination of a mandatory fuel surcharge will benefit LCCs. The Colombian government recently indicated it would drop within six months a requirement that forces all airlines to tack on a fuel surcharge which equates to about USD35 for each domestic jet flight.
VivaColombia also has received concessions from Medellin Airport following a competition between potential bases. Barranquilla, Cali and Cartagena also participated in the competition and are expected to become secondary bases as VivaColombia expands.
Top 10 airport in Colombia by capacity (seats per week for 21-Nov-2011 to 27-Nov-2011)
|1||BOG||Bogota Eldorado Airport||595,910|
|2||MDE||Medellin Jose Maria Cordova Airport||102,263|
|3||CLO||Cali Alfonso Bonilla Aragon Airport||86,072|
|4||CTG||Cartagena Rafael Nunez Airport||56,656|
|5||BAQ||Barranquilla E Cortissoz Airport||45,178|
|6||BGA||Bucaramanga Palo Negro Airport||35,250|
|7||SMR||Santa Marta Simon Bolivar Airport||29,090|
|8||PEI||Pereira Matecana Airport||26,732|
|9||CUC||Cucuta Camilo Dazo Airport||20,514|
|10||ADZ||San Andres Island Airport||20,023|
Mr Jacobsen does not see a need to base any aircraft in Bogota as “we really see an opportunity to start connecting flights directly”. He points out that only 8 million of Colombia’s 45 million people live in Bogota. While Bogota is Colombia’s largest city the country has several medium-sized cities which are relatively underserved. A large portion of travel in Colombia is between these cities although there are currently a limited number of flights connecting secondary cities, making bus travel in many cases the only viable option.
VivaColombia will also look to avoid Bogota when it expands into international flights. The carrier will not operate any international flights initially but Mr Jacobsen says international routes are already being evaluated and could be launched by the end of 2012. International routes being examined include Medellin, Barranquilla and Cali to the Caribbean, Central America and the southern US.
Mr Jacobsen says once international flights are launched VivaColombia will stick to routes within four hours. He says Aires lost a lot of money on Bogota-New York because it was a long route and JFK is an expensive airport to serve. “You need to focus on where you can make money, not just big cities,” Mr Jacobsen says. “You need to be pragmatic.”
International flights are a key step to the broader Viva strategy as Irelandia looks to potentially establish a pan-Latin American LCC model. VivaColombia’s executive team is now completely focused on the Colombian market but is aware of potential opportunities for LCCs in other Andean countries such as Peru. Colombia’s geographical position makes it a more logical base to pursue expansion across the region than Mexico.
While the LCC penetration in Latin America’s two main domestic markets, Brazil and Mexico, is now above 50%, the rest of Latin America has LCC penetration rates at or near zero. Next year VivaColombia will be the only LCC in Colombia, Latin America’s third largest aviation market after Brazil and Mexico. With the exception of Argentina and Venezuela, which remain closed to new entrants, most of the region’s other domestic markets would struggle to support a standalone LCC. Being affiliated to a pan-Latin American LCC group would be a more viable option for such small markets.
Viva, if it succeeds in Colombia, would become Latin America’s first pan-regional LCC group, following the model used in Asia by AirAsia and, to a lesser extent, Jetstar. The LCC potential across the region is enormous – not only in the domestic markets outside Brazil and Mexico but in the regional international market, which has been growing fast and has not yet been stimulated yet by low fares. Having first mover advantage could prove to be enormously beneficial for the Viva family.