Allegiant and Viva Aerobus: evolving the ULCC model
One of the most interesting market developments during the pandemic is the unique partnerships that have emerged. The latest – a proposed joint venture between Allegiant Air and Viva Aerobus – is arguably the most intriguing and demonstrates how the ULCC model is evolving.
In essence, the two ultra-low cost operators are combining to accelerate growth in one of the busiest markets in the world. And in Allegiant’s case, the proposal solidifies a strategy for international expansion.
Of course, obtaining regulatory approval is the next step, but the would-be partners believe they have a compelling case for injecting fresh ultra-low cost competition into the Mexico-US transborder market.
- Allegiant and Viva Aerobus aim to form a Mexico-US transborder joint alliance to inject a new level of ULCC competition into the market.
- Those airlines believe that if the JV is approved, they can achieve an 11% seat share in that market in 2026.
- This proposed tie-up shows how the ULCC model is maturing.
Allegiant invests and teams with Viva Aerobus in a new ULCC duo
Essentially, the two airlines believe that coordinating on pricing and scheduling in their combined operations will provide advantages they would not otherwise have.
In their joint application to the US Department of Transportation (DoT), Allegiant and Viva Aerobus explained that Viva had faced challenges in some of its US markets due to lack of brand awareness, and as result has had to exit some of its transborder routes.
“Viva, by partnering with Allegiant, seeks to avail itself of Allegiant’s distribution network and point-of-sale process within the United States, thereby broadening Viva’s customer base – presently skewed heavily toward Mexico-originating traffic – and stimulating new traffic from the United States to Mexico”, the partners explained.
New alliance-originated US passengers will help Viva launch routes in 2023 that it otherwise would not attempt until 2026 or later, the applicants said, including four routes from Guadalajara, one from Culiacán and one from Bajío.
There are broadly 239 routes between Allegiant airports and leisure destinations in Mexico that currently have no nonstop service, and the two airlines explained that they would provide service on a significant number of those routes.
Data from CAPA and OAG show that as of late Nov-2021, American had the highest seat share from Mexico to the US, at 22%, followed by United at 18%. Volaris held a 13% share, followed by Delta with a 10% share and Aeromexico’s 7% share. Combined, the existing joint venture partners Delta and Aeromexico have a 17% share.
In their application the airlines explained that their projected seat share “would not afford Allegiant and Viva the ability to raise prices or restrict capacity for air services between the U.S. and Mexico”.
“Rather, the alliance’s market penetration would depend heavily on its ULCC pricing, and the alliance would serve as a constraint on the larger airlines, forcing them to compete more vigorously on price as has occurred domestically.”
The Mexico-US transborder market was also one of the fastest to recover, given that Mexico never really shut down its borders and did not institute onerous travel restrictions. And seats deployed between the two countries in late Dec-2021 will trend above 2019 levels.
In their application for antitrust approval the airlines explained that Allegiant has publicly expressed interest in entering the Mexican market numerous times. But instead it had opted to focus on domestic opportunities in light of operational obstacles that would have required a multi-million dollar investment to add services internationally, including developing a Spanish speaking website, an IT system overhaul and learning how to market effectively in a foreign country.
But an immunised JV with Viva Aerobus would substantially reduce those burdens for both airlines, the potential partners said.
“Under the alliance, Allegiant will have access to a prominent and well-established point-of-sale distribution system in Mexico, as will Viva in the United States. Allegiant will have a partner with deep experience operating and marketing in Mexico that also possesses operating rights at congested airports and relationships with the key contacts, airports, service providers and regulators in Mexico. Conversely, Viva will have a partner with deep experience operating and marketing in the US and a similar cluster of relationships”, Allegiant and Viva Aerobus stated.
Allegiant’s proposed investment, which also includes a seat for its CEO Maurice Gallagher on Viva Aerobus’ board, shows that the two airlines believe a JV between two ULCCs is possible without compromising the pillars of the business model.
Allegiant is also investing in an airline that has taken advantage of growth opportunities in the pandemic, without compromising its performance in certain financial metrics. In 3Q2021 Viva Aerobus posted an EBITDAR margin of 44%, compared with 38% in the same period of 2019.
The proposed JV is a landmark partnership for the ULCC model
If Allegiant and Viva Aerobus gain approval for their proposed joint venture it will be arguably a milestone in the evolution of ultra-low cost airlines, which have historically shied away from any changes in their business that could drive up costs.
But clearly these airlines believe they can protect their cost advantages while also partnering to broaden their reach in a highly competitive international market.