Colombia enjoys a brighter outlook than most of its neighbours in 2016

But the free fall in oil prices that occurred in early 2016 created uncertainty for Colombia. Oil is one of the country's largest exports, and the depressed pricing is creating challenges for the government to improve a budget deficit that was roughly 6.5% of the country's GDP in 2015.
Colombia's unemployment rate has charted an impressive decline during the last few years, falling from 11.8% in 2010 to approximately 9% in 2015. However, that performance is in part tempered by rising inflation, which reached nearly 7% in 2015.

During 2015 the COP fell 50% against the USD, and with oil prices falling below USD30 per barrel in early 2016, challenges stemming from currency valuation could linger throughout year.

Despite Colombia's mixed economic outlook for 2016, the country's airlines appear to be on solid footing. Domestic passenger levels for the period spanning Jan-2015 to Oct-2015 (the latest data available at the time this report was compiled) increased 10.5% to approximately 21 million. Load factors remained stable, falling slightly from 78.2% to 77.8% year-on-year.

For the 10 months ending Oct-2015, Avianca represented a 61% share of domestic passengers, LAN Colombia held an 18% share and VivaColombia represented a 10.5% share of the Colombian domestic market. In just three short years of operations, LCC VivaColombia has quickly gained stature as Colombia's third largest domestic airline.

VivaColombia's seats on offer jumped nearly 23% y-o-y between Jan-2015 and Oct-2015, and passengers boarded increased 20%. The airline's 86% domestic load factor fell 2ppt y-o-y, but was still the highest among Colombia's domestic carriers.

At just three years old, VivaColombia is still trying to build up scale in the Colombian market, and its growth reflects the company's efforts to use a new generation low cost airline strategy of product unbundling to penetrate the Colombian market. However, yields in Colombia during 2015 were affected by the general economic dark cloud that hung over Latin America, and VivaColombia did not escape the yield pressure that affected nearly every airline operating in the region.

Colombian market leader Avianca did cite some yield improvement during late 2015 measured in the COP. In 3Q2015 Avianca explained it had adjusted capacity in the Colombian domestic market, which helped lift domestic average fares denominated in the COP y-o-y. Avianca achieved its capacity reduction by cutting frequencies and down-gauging to lower capacity A318s on some routes.

Avianca executives concluded the reductions were not affecting its Colombian market share in a meaningful way, and also cited capacity reductions by some of its competitors. "We expect that rational behaviour will continue in the future," said Avianca Holdings former CEO Fabio Villegas.

Data from the Colombian government indicate rational domestic industry growth for the first 10 months of 2015. Total seats on offer grew 11% y-o-y and passengers boarded increased 10.5%.

Colombia's second largest airline LAN Colombia posted a 3.4% rise in seats on offer for the 10 months ending Oct-2015 and grew its passengers levels by 4%. The country is a small, but important, portion of LATAM Airlines' Group network. The CAPA Fleet Database shows LAN Colombia operates five A320 narrowbodies.

LAN Colombia has maintained its position as Colombia's second largest airline, with its domestic market share ranging from 17% to 19% during the last couple of years. In mid-2015 LATAM pointed to healthy demand levels in Colombia, but also highlighted pressure stemming from the devaluation of the COP.

During 2015 LAN Colombia added new domestic flights from Medellin to Cali and Cartagena. Cali to Medellin and Cartagena to Medellin were Colombia's 11th and 12th largest domestic markets in late 2015. LAN Colombia's main domestic rivals Avianca and VivaColombia operate on both routes.

Consequently, all three of Colombia's largest airlines - Avianca, LAN Colombia and VivaAerobus - now operate on each of the country's trunk routes. Copa Colombia operates from Bogota to Medellin and Cali, but during the last couple of years has pulled down its domestic presence in lieu of a focus on more international operations from Colombia. Copa Colombia's domestic seats on offer dropped nearly 45% y-o-y from Jan-2015 to Oct-2015 and passengers boarded fell 41%.

Copa's contraction in the domestic market perhaps opened up opportunities for VivaColombia and LAN Colombia as those two airlines work to broaden their presence in the domestic market. Prior to VivaColombia's market entry in 2012, Copa Colombia held an 8% share of the domestic market. VivaColombia also improved its positioning in the Colombian market when it opened a base in Bogota during 2014. That allowed VivaColombia to inject low cost competition on most of Colombia's key trunk routes. Its presence in those markets is small; on most of the routes its share is less than 10%.

During the initial phases of its operations, VivaColombia intentionally avoided having a base at Bogota, concluding the airport was too congested and expensive for its pure low cost model, and larger opportunities to stimulate demand existed in point to point markets outside of Bogota El Dorado International airport.

But VivaColombia could only avoid the ripe opportunities in Bogota for a limited period of time. Prior to VivaColombia's debut at the airport, it was relatively unpenetrated by LCCs. VivaColombia could enter the market at a much lower price point than the incumbents, stimulating demand for more frequent trips from Bogota's expanding middle class population. Bogota has now passed Medellin as VivaColombia's top base measured by seats.

Colombia charted 10.2% growth in international passengers y-o-y for the first 10 months of 2015 to 9.8 million. Avianca during the last couple of years has launched flights from its Bogota hub to London, increased frequencies to Barcelona and re-launched service between Bogota and Los Angeles.

Avianca also expanded service to the Caribbean in 2015 with the launch of new flights from Bogota to Barbados. LAN Colombia also branched out in the Caribbean with new service from Bogota to Punta Cana, joining Avianca and Copa Colombia on the pairing. Latin American airlines have cited opportunities to add capacity to the Caribbean due to economies in that region performing slightly better than much of South America. LAN Colombia's sister airline TAM also introduced service from its Brasilia hub to Punta Cana in 2015. The Dominican Republic's forecast GDP growth of 5.2% is markedly better than estimates of 0.3% growth for Latin America.

VivaColombia marked a milestone in Dec-2015 with the launch of its first flights outside Latin and Central America with service from Bogota and Medellin to Miami. The airline is operating three weekly services on each pairing. Miami is a key market for Latin American airlines - both low cost and full service carriers. Bogota-Miami is the largest international market from Colombia and Medellin-Miami is the fourth largest.

Bogota-Fort Lauderdale was the second largest international market from Colombia for the 10 months ending Oct-2015. The greater South Florida to Bogota market does have existing low cost service, both JetBlue and Spirit operate service from Fort Lauderdale to Bogota, 46km from Miami.

Both JetBlue and Spirit serve other points in Colombia from South Florida, addressing a gap in low cost service between the US and Colombia. In addition to Bogota, JetBlue operates flights from its Fort Lauderdale focus city to Medellin and Cartagena. It also offers service between Orlando and Bogota. Spirit also offers flights from Fort Lauderdale to Medellin, Armenia and Cartagena.

VivaColombia's new routes to Miami have ample competition. Avianca, LAN and American operate flights between Bogota and Miami and American and Avianca offer service from Medellin to Miami. VivaColombia has estimated it will transport 85,000 passengers between Bogota and Miami in 2016 and 90,000 on the less competitive Medellin-Miami route.

VivaColombia's other international services include Bogota to Lima, Quito and Panama City Pacific International airport. It also serves Panama City from Medellin. Panama City was one of the airline's first international routes, and it adopted a pure low cost strategy by serving a secondary airport. For the 10 months ending Oct-2015, VivaColombia offered roughly 300,000 seats on international routes, and transported 200,000 passengers, which resulted in a load factor of 66% on its international offerings (this excludes new routes to Miami that launched in Dec-2015). Some of the airline's international routes are less than a year old, so they still have some time to reach maturity and grow load factors.

VivaColombia's entry into the Panama City market has not concerned the leading airline between Bogota and Medellin and Panama City Tocumen - Copa Airlines. Executives of Copa have concluded that VivaColombia's operations at Panama City Pacific have not had a significant impact on Copa's business.

Bogota is gaining additional long haul service in 2016 with new service from Madrid operated by Air Europa. In early 2016 TAM resumed flights from its Sao Paulo hub to Bogota. In late 2015 Delta Air Lines broadened its reach in Colombia, adding service from its Atlanta hub to Cartagena and Medellin, the company's second and third destinations in Colombia. Delta also serves Bogota from Atlanta.

Avianca has also stated it is evaluating service from Bogota to Frankfurt, Toronto and Boston. Frankfurt and Toronto are hubs for Avianca's Star partners Lufthansa and Air Canada, and each airline currently operates service from those airports to Bogota.

Colombia's Civil Aviation Authority has reportedly approved 57 new routes for 2016, 34 domestic and 23 international. VivaColombia has gained approval for nine domestic and four international. As of early 2016 the airline had not announced any of the new routes after taking delivery of its ninth A320 in late 2015.

VivaColombia will no doubt continue growing in Colombia's market in 2016, despite some economic uncertainty hanging over the country from falling commodity prices. If the airline needs to source more Airbus narrowbodies, it could possibly look to its Viva sister group carrier Mexican LCC VivaAerobus. It has four current generation A320 narrowbodies on order and 40 next generation A320neos in its order portfolio. The CAPA Fleet Database shows VivaAerobus is scheduled to take delivery of 11 Airbus jets in 2016, which could be allocated to VivaColombia if necessary.
The Viva Group is also attempting to launch a franchise in Costa Rica, which could also operate some of the VivaAerobus aircraft. Aside from possible fleet sourcing, there has not been any coordination between VivaAerobus and VivaColombia during the latter's three year existence, and at this point, deepened coordination does not seem to be a priority for the Viva Group.

LATAM Airlines Group does not break out specific capacity growth for its Spanish speaking countries - Colombia, Chile, Ecuador, Peru and Argentina - but has stated that it plans collective capacity expansion of 6% to 8% in those markets during 2016. The Avianca Group, which has airlines operating in Colombia, Ecuador, Peru, Costa Rica and El Salvador, grew its system capacity 5% to 7% in 2015. The company had not offered formal capacity guidance as of early 2016, but has indicated growth could be flat y-o-y.

Similarly to Brazil, Colombia's airlines need to take steps to mitigate current economic uncertainty while creating strategies to capitalise on long term opportunities in the country. Colombia's population is forecast to grow from 49 million in 2016 to 51 million by 2020. With just 21 million domestic passengers travelling in Colombia for the 10 months ending Oct-2015, the country's growth prospects remain robust.

Illustrating the air traffic growth potential for Colombia, LATAM Airlines Group has estimated trips per capita in Colombia during 2014 were 0.71 compared with 3.73 for the UK and 2.68 for the US.

Colombian market leader Avianca has estimated that by 2020, the middle class should represent 51% of the country's population, up from 41% in 2012 and 31% in 2000. All of that data points to an opportunity for Colombia's three largest airlines to continue growing at a reasonable pace, which seems to be a trend at least for the next couple of years as economic weakness remains an overhang in Latin America.

There is also room for different airline business models within Colombia. As a full service airline, Avianca will continue to exploit its leading position in Colombia to flesh out is global network that includes intercontinental long haul additions to connect with major population centres and strongholds of its Star partners.

One question Avianca will no doubt be fielding in 2016 is how the proposed joint venture between oneworld partners LATAM and American will affect its strategy. The companies disclosed their plans in early 2016 to seek anti-trust immunity to coordinate on routes and schedules between the US and Canada and six Latin American countries - Brazil, Colombia, Chile, Peru, Paraguay and Uruguay.

Avianca remains the largest airline operating between Colombia and the US, representing 39% of the seats on offer in late Jan-2016. Combined American and LAN represented a 20% share. Avianca's Star partner held an 8% share. Obviously Avianca will remain the market leader, but the ability of LATAM and American to jointly manage schedules and pricing to maximise revenue as one entity creates certain advantages over airlines not operating under immunised arrangements.

VivaColombia also has opportunities with its low cost model for traffic stimulation in the Colombian market. Unlike the highly mature US market, VivaColombia can stimulate just enough price sensitive traffic to cover its flights without creating too much market disruption. However, its competitors are monitoring its developments closely, and now that all three of Colombia's largest airlines are operating on the country's trunk routes, overall prices should fall in those markets.

Prior to the economic downturn that swept across Latin America in full force during 2015, Avianca stated that it was feeling little pressure from VivaColombia, and the LCC's market entry had actually boosted demand for Avianca's flights. Even with the added pressure of a rapid currency devaluation, load factors in Colombia's domestic market remained stable y-o-y from Jan-2015 to Oct-2015 at 78%.

Colombia faces a challenge in creating the infrastructure necessary to support air traffic growth during the next decade. The country's largest airport Bogota El Dorado International has taken steps to boost capacity, but it is still combating congestion. Bogota is Latin America's third largest airport after Sao Paulo Guarulhos and Mexico City, handling 27.4 million passengers in 2014. During the past two years the airport has faced significant capacity constraints even with the completion of new international and domestic passenger terminals that opened between 2012 and 2014.

But the renovations were not sufficient to handle Bogota's growth. The project was designed to allow for passenger throughput at Bogota of roughly 15 to 17 million; but the airport's annual passenger numbers have been in excess of 20 million since 2011.

Colombia is taking further steps to ease congestion at El Dorado. In late 2015, the airport inaugurated a new air traffic control tower that is designed to increase service from 58 to 90 per hour. El Dorado is also in the midst of a two year expansion that includes a terminal expansion and runway modernisation to further ease capacity constraints, and up passenger throughput to approximately 40 million p/a by 2021. For airlines operating at the airport, the changes cannot come fast enough.

Long term plans for Bogota include the construction of another airport known as El Dorado II. The targeted completion date for the new airport is 2021. Plans are also under way to build a new airport in Mexico City as the current airport Juarez International is slot constrained and operating at full capacity The new Mexican airport is scheduled to open in 2020, which results in two brand new major gateways opening in Latin America's second and third largest markets during the next four to five years.

Improving infrastructure is key for Colombia as the country continues to become more attractive to tourists and businesses alike. International passenger numbers increased 13% in 2012, 14% in 2013 and 10% in 2014. The country could be bracing for a major historical milestone in 2016 as government and the FARC rebel forces work toward a peace agreement with a targeted Mar-2016 deadline.

Once an agreement is reached, Colombia's citizens will vote on the pact in a referendum. If the deal comes to fruition, Colombia's tourism industry will get a further boost and the country may become more attractive to a larger group of foreign investors, both of which bode well for increasing air travel to Colombia.

Colombia's aviation market has grown at solid rates during the last few years as growing economic stability and an expanding middle class have worked to make air travel a viable goal for a wider portion of the country's population. Weakening macroeconomic trends are casting uncertainty over the country at the start of 2016; but over the long term Colombia's fundamentals show significant upside for the country's airlines.

Colombia's three largest airlines are dutifully working to ensure their long term success while crafting strategies to withstand short term challenges. Those companies appear to be taking a rational approach to their expansion in a country whose influence in Latin America continues to grow.