Avianca focuses on international expansion; plans new routes to Germany and Argentina

CAPA will hold its inaugural Latin America Aviation Summit in Cartagena, Colombia on 11/12 September 2017. For further information please see Latin America Aviation Summit

Avianca Holdings CEO Hernán Rincón discusses the airline group's growth plans, including the launch of a new European destination

Source: CAPA TV.

Avianca focused more on domestic growth until 2016

Avianca Holdings operates domestic services within Colombia, Ecuador, Peru and Central America as well as international services from all four of its home markets. Although it consists of several countries, Central America is considered to be one market as there is a single aviation market agreement covering most of the region.

The group's international network includes three destinations in Europe (two in Spain and one in the UK) and 12 destinations in North America (11 in the US and one in Canada). Avianca also serves 20 destinations in the Latin America and Caribbean region that are outside its four home markets (based on OAG schedule data for the week commencing 26-Jun-2017). Brazil is not considered a home market for Avianca Holdings because Avianca Brazil is a separate company with a different ownership structure - although a merger is in the pipeline.

In 2016 Avianca Holdings carried 17.6 million domestic passengers and 11.9 million international passengers. International passenger traffic growth was 5.5% - outpacing domestic traffic growth of 3.3%. The group grew domestic capacity, as measured by ASKs, by only 1.6% in 2016, while international capacity was up 9.4%.

The year 2016 represented the first year the group pursued faster international than domestic expansion. Avianca Holdings' domestic passenger traffic grew by least 8% per annum for five years from 2011 to 2016. Domestic traffic has nearly doubled since 2010, which was the first full year following the Avianca and TACA merger.

Avianca Holdings domestic passenger traffic and year-over-year growth: 2010 to 5M2017

Source: CAPA - Centre for Aviation and company reports.

International passenger traffic grew by a more modest 41% from 2010 to 2016. While the group has achieved international growth every year, the rate of growth has been 6% or less in every year since 2012.

Avianca Holdings international passenger traffic and year-over-year growth: 2010 to 5M2017

Source: CAPA - Centre for Aviation and company reports.

International growth will again be the focus in 2017

Avianca Holdings is continuing to pursue faster expansion in the international market in 2017. The focus will be on expanding the international network, as well as adding capacity to existing international destinations.

In the first five months of 2017 Avianca Holdings' domestic ASKs fell by 1%, whereas international ASKs were up 9.4% year-over-year. Domestic passenger numbers were up 3.7% and international passenger numbers increased by 13.3% as load factor improved across both operations (by 3.7ppts in domestic, to 80%, and by 4.2pts in international, to 82.2%).

Avianca Holdings' CEO Hernán Rincón told CAPA on the sidelines of the Jun-2017 IATA AGM that the group's international operation "is growing very, very nicely", while domestic growth was more subdued. The group is experiencing a rise in International demand across its network, including Europe, North America, and within Latin America.

North America growth rate accelerates

In 2016, North America growth lagged Europe and Latin America. Avianca ASKs to North America were up only 4% in 2016, while RPKs were up 5.4%. "We see renewed traffic into the United States and North America which had seen a slowdown last year and has picked up", Mr Rincón said.

In 1H2017 Avianca added capacity to some of its existing North American markets, and launched services to Boston on 2-Jun-2017.

Boston, which became Avianca's eleventh destination in the mainland US and twelfth in North America (when Toronto, Canada, is included), is already performing well. Boston is served with four weekly A319 fights from Bogotá.

Avianca to launch services to Germany

Europe was Avianca's fastest growing region in 2016, with 13.6% ASK growth and 16.5% RPK growth, and the region is again growing rapidly in 2017. "Madrid and Barcelona are growing very, very fast", Mr Rincón said.

Avianca is planning to launch a fourth destination in Europe in early 2018. Mr Rincón said that Munich and Frankfurt were being evaluated, and one of the two German cities would be selected "soon". He said Avianca plans to operate the new route to Germany from Bogotá with one daily 787-8 flight, commencing in 1Q2018.

Avianca's Star Alliance partner Lufthansa already serves the Frankfurt-Bogotá route but does not operate from Munich to Bogotá. Lufthansa has been serving the Colombian city for 50 years, and currently operates the Frankfurt-Bogotá route daily with A340-300s.

Lufthansa and Avianca began codesharing in 2011. Avianca decided to join Star in 2010 and formally entered the alliance in 2012.

Avianca plans more expansion in Spain and London

Mr Rincón said that Avianca is also planning to add capacity to its existing European destinations. Madrid is Avianca's largest European destination and is served with 18 weekly flights from Bogotá, as well as by seven weekly flights from Cali and three weekly flights form Medellín. In Nov-2016 Avianca added seven flights to Madrid, those being four from Bogotá (growing from 14 to 18), two from Cali (growing from five to seven), and one from Medellín (growing from two to three).

Barcelona and London are only served from its main hub in Bogotá with one daily flight on each route. London was launched in 2014, initially with A330s, and upgraded to daily in 2015.

Avianca has nearly doubled its operation in Europe since 2014, when it started taking delivery of 787-8s. Avianca previously served Europe with A330s, which are now used on medium haul flights within the Americas.

Avianca one-way weekly seat capacity to Europe: Jan-2012 to Jul-2017

Source: CAPA - Centre for Aviation & OAG.

787 fleet enables Avianca to grow long haul operation

Avianca now uses its 787 fleet on all of its 42 weekly flights to Europe and on the Bogotá to Buenos Aires and Los Angeles routes, both of which are served with one daily frequency. Its European operation transitioned entirely to 787s in 2016 as three additional 787-8s were delivered, for a total of 10 aircraft.

Avianca configures its 787-8s and A330-200s with a similar number of seats. But it has a much better business class product on the 787, which makes the type more suitable for long haul flights to Europe. Avianca configures its 787s with lie flat business class seats in four-abreast configuration, providing aisle access for all seats, contrasted with six-abreast recliner business class seats on the A330.

Avianca took delivery of an eleventh 787-8 in Mar-2017. This aircraft was used to expand Bogotá-Los Angeles from four to seven weekly frequencies and to replace A330s on Bogotá-Buenos Aires. Mr Rincón told CAPA that Avianca's twelfth 787-8 is slated to be delivered in Nov-2017 and will be used to launch the new route to Germany in early 2018.

Avianca to reaccelerate fleet expansion in 2018

Mr Rincón said that all of Avianca's 787s are being used as growth aircraft. Typically, Avianca also grows its narrowbody fleet every year, but in 2017 the two 787s are the group's only growth aircraft.

Avianca Holdings plans to take delivery of only four aircraft in 2017 - the two 787-8s and its first two A320neos.

However, the two A320neos will be used to replace A320ceos. Avianca Holdings plans to take delivery of its first A320neo in early 3Q2017 and will use the new type on some of its longer A319/A320 routes from Colombia and Central America.

Mr Rincón said expansion of the narrowbody fleet will resume in 2018 and in 2019 the group will further ramp up fleet growth. Avianca Holdings is slated to receive five A320neos in 2018, followed by eight aircraft in 2019. The group took its last A320ceo in 2016 and has no more A320ceo commitments.

Avianca Holdings aircraft delivery schedule: 2016 to 2025

Source: Avianca Holdings.

Avianca grows medium haul international network

Although it is not expanding its narrowbody fleet in 2017, the airline group is able to grow its medium haul international network by using A320 family aircraft that have been freed up by the upgauging of some international flights from A320s to A330s. In addition to Bogotá-Boston, Avianca launched services from Bogotá to Montevideo in May-2017, using A319s. Montevideo was previously only served from Avianca's Lima hub.

Avianca plans to continue growing its medium haul international network over the next several months with the launch of flights to three destinations in Argentina. Mr Rincón told CAPA that the airline group was considering services to the secondary Argentinean cities of Córdoba, Mendoza and Tucumán, from both Bogotá and Lima. There are no nonstop services from Bogotá to any Argentinean destination other than Buenos Aires, but the rival airline group LATAM already serves Córdoba and Mendoza from Lima.

Over the past year Avianca has already added capacity on the Bogotá-Buenos Aires route - initially by expanding from four to seven weekly flights, and then by upgauging the three additional flights from A319s to widebody aircraft.

Avianca now operates one daily 787 flight from Bogotá to Buenos Aires. It also has two daily flights from Lima to Buenos Aires using a mix of A330s and A320 family aircraft. Avianca reported a 92% load factor on its Buenos Aires routes in 1Q2017 - an indication that the additional capacity has been quickly absorbed and the Argentinean market is ripe for further growth.

Avianca has been looking to launch flights to secondary cities in Argentina since the market began opening up in 2016. Under the previous government, Argentina restricted foreign airlines from launching services to any city other than Buenos Aires. The policy forced passengers to backtrack through Buenos Aires, where the flag carrier Aerolineas Argentinas had historically operated all its international services, and prevented several airports from growing international traffic.

See related report: Argentina Aviation Part 1: Avianca, Copa & LATAM promote international traffic at secondary cities

Avianca Holdings to work closely with start-up Avianca Argentina

Argentina's new government has also opened up the domestic market to start-ups, which has resulted in applications from several proposed new operators, including Avianca Argentina. Avianca Argentina is planning to focus on underserved point-to-point domestic routes using ATR 72 turboprops.

Avianca Holdings will work closely with Avianca Argentina, which will feed Avianca's new international services to Córdoba, Mendoza and Tucumán. The objective is for Avianca Holdings to cater to growing demand for international services, while Avianca Argentina caters to growing domestic demand.

However, Avianca Argentina will not be part of Avianca Holdings and is being established separately by the Synergy Group. Synergy is the largest shareholder of Avianca Holdings and owns a 100% stake in Avianca Brazil.

Avianca Brazil and Avianca Holdings are now working on a merger which will result in Avianca Brazil formally becoming part of the group.

Mr Rincón said there are no similar plans to bring Avianca Argentina into Avianca Holdings, but "we will consider that later".

Mr Rincón added that Avianca Holdings is monitoring the developments at Avianca Argentina "very closely" and "we are supporting that in many ways". He added: "There is demand for a domestic service. Argentina is totally underserved today. It's been underserved for a long time. Nobody had invested for years in Argentina and the market is ripe for growth".

Avianca's outlook could brighten as international growth accelerates

Avianca is well positioned to grow internationally as growth in the wider Latin American market picks up after a challenging two years. Prior to the IATA AGM, Mr Rincón told CAPA that "after a prolonged economic deceleration in the region during the past years, the Latin American market is showing symptoms of recovery".

See related report: Latin America's airline CEOs discuss the market, liberalisation, challenges & opportunities. Part 1

Competition is intensifying in the region, driven in part by a wave of new low cost airlines.

However, Avianca expects the new LCCs to stimulate growth in several markets without taking away business from Avianca. The group has no plans to establish an LCC subsidiary as it believes it has the cost base and efficiency level to compete effectively against LCCs.

Avianca expects it can continue to expand in the domestic and short haul international markets even as the LCC penetration rate in these markets rises. However, the biggest opportunities are clearly in the medium and long haul international markets, where demand is growing and there is limited, or no, LCC competition.

Avianca, in many respects, has been underserving the international market over the past several years, choosing to focus more on domestic expansion. Now is the time to pursue international growth through a combination of capacity growth to existing destinations and new destinations.