16-Sep-2013 10:00 PM

Avianca market share in Ecuador slips as domestic operation is reduced while LAN and TAME expand

Analysis

Avianca has cut back significantly in Ecuador's domestic market as it focuses on domestic growth in Colombia and Peru. The group's Ecuadorean subsidiary, AeroGal, has redeployed capacity to the international market, which it sees as more profitable following the opening of a new airport at the capital Quito.

Rival airline group LATAM however has been expanding rapidly in the Ecuadorean domestic market. In 2Q2013, Ecuador was the fastest growing domestic market for LATAM but the slowest domestic market for Avianca.

Government-owned Ecuadorean carrier TAME also has been expanding, leading to a further drop in market share for Avianca. The Ecuadorean market also saw in 2Q2013 the entry of a fourth domestic carrier in Linea Aerea Cuencana.

Summary

Avianca has reduced its presence in Ecuador's domestic market and shifted focus to Colombia and Peru.
LATAM has been expanding rapidly in the Ecuadorean domestic market, while Avianca's market share has dropped.
TAME, the government-owned carrier, has also been expanding in Ecuador, further impacting Avianca's market share.
Avianca's subsidiary AeroGal has not been expanding domestically, while LAN Ecuador has rapidly grown its domestic operation.
Avianca has seen a drop in demand in Ecuador's domestic market due to the elimination of a fuel subsidy and the opening of a new airport in Quito.
Avianca continues to focus on domestic expansion in Colombia and Peru, where it has seen passenger growth.

AeroGal sees limited growth while LAN Ecuador expands

Avianca entered into an alliance with AeroGal in 2008 and acquired the carrier in late 2010. AeroGal renewed its fleet in 2011, replacing ageing 737s with new A320 family aircraft sourced from Avianca's order book. AeroGal adopted the Avianca brand in May-2013, completing an integration process which also saw all carriers from the TACA Group, which merged with Avianca in 2010, take on the Avianca brand.

But under Avianca, AeroGal has not been expanding. Its primary domestic operation has been relatively flat while flights to the US were cut.

LATAM subsidiary LAN Ecuador has expanded rapidly during the same timeframe. LAN Ecuador launched services in 2003 and quickly became the country's largest international carrier. But it did not enter the domestic market until 2009. LAN has since rapidly grown its domestic operation in Ecuador, overtaking AeroGal as the country's second largest domestic carrier in 2012.

TAME remains the country's largest domestic carrier and over the last 15 months has made a big push into the international market. TAME currently serves 15 domestic destinations and eight international destinations, six of which it has launched since mid-2012.

TAME recently took delivery of its first widebody aircraft, an A330-200. It is now preparing to launch A330 service to New York, filling the void left by AeroGal, which dropped New York service in 2012. LAN Ecuador has continued to serve New York, which has a large Ecuadorean community.

Avianca captures only 21% of Ecuadorean domestic market in 2Q2013

AeroGal and LAN both serve the same six domestic destinations in Ecuador. But after overtaking AeroGal in 2012, LAN Ecuador has continued to expand in 2013 while AeroGal has been shrinking its domestic operation.

LATAM reported in its 2Q2013 results a year-over-year increase of domestic Ecuador ASKs of 49%. Avianca Holdings reported in its 2Q2013 results that domestic Ecuador passenger numbers shrunk by 34%. In its results presentation Avianca acknowledged its domestic market share in Ecuador slipped from 30% in 2Q2012 to only 21% 2Q2013.

Avianca domestic market share by country: 2Q2013 vs 2Q2012

Based on current capacity data, AeroGal now has an 18% share of seats in Ecuador's domestic market while LAN has about a 26% share and TAME a leading 55% share. Linea Aerea Cuencana (LAC) has about a 1% share as it currently only operates one route, Quito-Loja, with eight weekly flights.

Ecuador domestic capacity (seats) by carrier: 9-Sep-2013 to 15-Sep-2013

New entrant further shakes up market

LAC launched operations in May-2013 with a one Bombardier CRJ700 regional jet. The carrier initially served four routes - Quito to Cuenca, Guayaquil and Loja as well as Guayaquil to Cuenca. But it quickly suspended every route except Quito-Loja, which is only served by TAME. It competed against both AeroGal and LAN Ecuador as well as TAME on Quito to Cuenca and Guayaquil while only TAME now operates Cuenca-Guayaquil.

LAC is aiming to re-enter the Quito to Cuenca and Guayaquil markets and is also evaluating other potential domestic routes. But it could face an uphill battle given the recent increase in domestic capacity from LAN Ecuador and TAME. According to CAPA and Innovata data, LAN Ecuador's domestic capacity is currently up 57% year-over-year while TAME's domestic capacity had doubled from Sep-2012 levels.

TAME rapidly expands A320 fleet

The TAME expansion has come as the carrier added one A319 and two A320s in 1H2013. TAME started 2013 with a fleet of three A319s, three A320s, two E170s, two E190s and three ATR 42s. It currently operates five A320s, four A319s, two E170s, two E190s and three ATR 42s along with the recently delivered A330, according to the CAPA Fleet Database.

While TAME focused on international expansion in 2012, it has been primarily expanding in the domestic market since early Jan-2013, when it launched Guayaquil-Sao Paulo. Over the last eight months it has added just one international route, Quito to Buenos Aires, which was launched in Jun-2013.

TAME network: as of Sep-2013

TAME has been using its A319 fleet to add medium-haul international routes while its A320s are mainly used on domestic trunk routes. Its E170/190s are used on a mix of thinner domestic and international routes while its ATR 42s are used on subsidised domestic routes to rural regions. With the expansion of the A320 fleet, the domestic trunk routes have seen a surge in capacity.

TAME will again focus more on international expansion in 2H2013, with the anticipated launch of A330 services to New York as well as the launch of A319 services from Quito to Sao Paulo. But TAME is expected to maintain its new higher level of domestic capacity in 2H2013. The increase implemented in 1H2013 has had an impact on the market, particularly as it coincided with increases at LAN Ecuador and the launch of a new carrier.

Avianca sees weakening demand in Ecuadorean domestic market

According to Avianca, the Ecuadorean domestic market also has seen a drop in demand, leading to its decision to cut domestic flights. Avianca CEO Fabio Villegas told analysts during the group's 2Q2013 conference call that domestic demand has been impacted by the elimination of a fuel subsidy and the opening of a new airport at Quito.

Ecuador eliminated the subsidiary at the beginning of 2012, prompting airlines to tack on a fuel surcharge to cover the difference, which resulted in a rise in total prices. Quito's new airport opened in Feb-2013 about 40km from the city, replacing an airport which was near the city centre. Mr Villegas says domestic demand has been affected by the shift in airports, particularly on Quito-Guayaquil, which is by far Ecuador's largest domestic route.

"The market itself has been reduced in the last year. All the airlines have felt that impact," Mr Villegas claimed. "We are waiting for the market to stabilise so that we can define what our capacity in the domestic market is going to be. In meantime we are increasing our international operation from Ecuador."

AeroGal expands international operation

AeroGal has taken over flights from Quito to Bogota and Lima which were previously operated by the group's Colombian and Peruvian subsidiaries. Previously the carrier only served one international destination, Cali in Colombia. The larger international operation has allowed AeroGal to reduce unprofitable domestic flying and post a break-even result for 2Q2013, according to Mr Villegas.

Avianca is now closely monitoring Ecuador's domestic market to determine future capacity levels. "We are waiting to see how the domestic market will behave in light of what's going on with the new airport," Mr Villegas said.

LAN Ecuador has also slightly reduced domestic capacity in Sep-2013 compared to Aug-2013 levels, according to Innovata data. But capacity is still up significantly year-over-year and LATAM has not mentioned any challenges in its domestic Ecuadorean operation. The group's domestic load factors across South America remain relatively healthy.

Avianca has not yet expanded overall capacity in Ecuador's international market as the new AeroGal flights have taken over from flights operated by other subsidiaries. But expansion is possible as AeroGal looks to focus more on the international market.

The Avianca Group currently has a 24% share of international capacity in Ecuador, compared to a leading 27% share for LATAM Airlines Group. TAME has only a 7% share, but this is up significantly compared to 2012 and will grow further as flights to New York and more international routes within South America are added.

Ecuador international capacity (seats) and capacity share (% of seats) by airline group: 9-Sep-2013 to 15-Sep-2013

Airline group	Weekly seats	Capacity share	Subsidiaries/affiliates serving Ecuador
LATAM	24,607	27%	Lan Ecuador, Lan Argentina, Lan Chile, Lan Colombia, Lan Peru
Avianca	21,534	24%	AeroGal, Avianca, TACA, TACA Peru (all now branded Avianca)
Copa Holdings	14,324	16%	Copa, Copa Colombia
AMR	10,654	12%	American Airlines
TAME	5,864	7%	TAME
IAG	3,972	4%	Iberia
Air France-KLM	4,260	5%	KLM
Delta	2,618	3%	Delta Air Lines
United	1,808	2%	United Airlines

Avianca focuses domestic expansion on Colombia and Peru

While Avianca Holdings shifts its focus away from the domestic market in Ecuador, it continues to pursue rapid expansion in its other two domestic markets, Colombia and Peru. For 2Q2013 Avianca reported 15% passenger growth in Colombia and 24% passenger growth for Peru.

Avianca passenger traffic by sector: 2Q2013 vs 2Q2012

Avianca is the market leader in Colombia and has been expanding rapidly in response to new LCC competitor VivaColombia. In 1H2013 Colombia's total domestic passenger traffic was up 21% to 10.3 million, according to Colombian CAA data. As a result Avianca has seen its share in the market drop despite the 15% increase in passenger traffic. In its 2Q2013 results announcement, Avianca stated its domestic market share in Colombia dropped from 60.2% in 2Q2012 to 55.5% in 2Q2013.

But Mr Villegas told analysts it has not lost market share in routes where it competes with other carriers. (VivaAerobus has launched several routes which were previously un-served, contributing to some of the overall growth in the market.) Unlike the Ecuadorean operation, Avianca also remains profitable in the Colombian domestic market.

Mr Villegas said the Colombian domestic operation has performed better in 2013 than the group was initially expecting given the increased competition. "The market is very profitable for us," he said. "It's one of the most profitable markets in which we operate."

In Peru, Avianca has been expanding rapidly over the last three years but remains well behind market leader LAN Peru. Avianca subsiary TACA Peru began targeting the domestic market in 2010. Previously it only had one domestic route and was predominately an international carrier.

Avianca's domestic market share in Peru reached 15% earlier this year. The group expects its domestic market share in Peru to stabilise at about 15% as it is not currently planning any further expansion of its Lima-based fleet.

LATAM focuses domestic expansion on Peru and Chile along with Ecuador

LAN Peru also pursued rapid domestic growth in 2Q2013 but not quite as fast as TACA Peru. LATAM reported ASK growth in the Peruvian domestic market of 17%. Of LATAM's six domestic markets, only Ecuador and Chile recorded faster growth.

LAN Colombia recorded 3% ASK growth in 2Q2013 - a very modest figure given the rapid growth at rival Avianca and the overall growth in the Colombian market. LATAM cut capacity by 12% in the domestic Brazilian market, which has seen challenging conditions over the last year. Avianca also has a sister carrier that operates in the Brazilian market but Avianca Brazil is not included in Avianca Holdings figures as it remains under separate private ownership.

LATAM ASK growth based on sector 2Q2013 vs 2Q2012

For the full year 2013 LATAM is projecting a 7% to 9% ASK reduction for domestic Brazil. The group projects domestic ASKs to increase an average of 12% to 14% across the five LAN-branded domestic markets of Argentina, Chile, Colombia, Ecuador and Peru.

In 2Q2013, domestic operations accounted for about 50% of LAN's ASKs. Of the group's six domestic markets, Ecuador is its smallest.

LATAM ASK breakdown by sector: 2Q2013

Avianca increases focus on larger home markets

Ecuador is also by far the smallest of the three domestic markets served by Avianca Holdings. In 2Q2013, domestic operations accounted for 3.5 million or about 60% of the group's total passenger traffic.

While Avianca is committed to remaining the domestic market leader in Colombia, where it has by far its largest hub, the group is not shy to reduce capacity in other markets if conditions are not favourable. In addition to implementing domestic changes in Ecuador, the group reduced international capacity in Costa Rica in 2Q2013, downgrading the hub at San Jose to a focus city.

Avianca will likely maintain a significant presence in its smaller home markets such as Costa Rica and Ecuador. But its recent moves show the group will not sacrifice profitability to chase market share.