Boliviana de Aviacion set to expand as re-launch of Aerosur is unlikely due to government roadblocks

Aerosur has been battling financial problems for several months and started scaling back its operation in late 2011 and early 2012 as its outstanding tax debt reportedly ballooned to more than USD100 million. In late Mar-2012 Aerosur was forced to return its Boeing 747-400 and suspend its Madrid service. Further route cuts were made in Apr-2012 and Aerosur was only operating a handful of flights when its operations were entirely suspended in late May-2012.

The suspension came after the Government reportedly starting seizing the 20-year old privately-owned carrier's assets to cover the outstanding tax debt. Its fleet, which had consisted of about 11 aircraft, primarily 737-200/300/400s but also one 747-400 and one 767-200ER, was reportedly reduced to only two 737s. The carrier has repeatedly stated over the last month its intention to relaunch operations but so far those declarations have failed to materialise.

The Government in late Jun-2012 threw yet another obstacle in Aerosur's path after reportedly rejecting a proposal from Franklin Mining Bolivia CEO William Petty to invest USD15 million into the carrier. Aerosur now has a 11-Jul-2012 deadline to relaunch or the Government will seize its operating licence. It seems increasingly unlikely Aerosur will be able to secure the capital it would need to resume services.

The latest developments in Aerosur's challenges are rooted in a bitter rivalry that ensued between Aerosur and BoA after the government-owned airline launched operations and ended the monopoly on Bolivian domestic trunk routes that Aerosur had enjoyed since the 2007 collapse of the country's flag carrier Lloyd Aero Boliviano. Aerosur repeatedly complained that its profitability on Bolivian domestic routes was being wiped out by irrational pricing and capacity ushered in by BoA. Aerosur opted not to reduce its domestic capacity to force some market rationalisation although it did opt to focus capacity expansion on the more profitable international market.

BoA built domestic share quickly to rival Aerosur

By 2010 BoA matched Aerosur's share of the domestic market with both carriers transporting about 700,000 domestic passengers. In 2011, BoA overtook Aerosur and transported 721,000 domestic passengers compared to 629,000 for Aerosur, according to reports citing Bolivian DGAC figures. The Bolivian domestic market grew has grown roughly 40% since BoA's launch as its low fares has stimulated demand.

Based on capacity figures from OAG, Aerosur accounted for about 35% of domestic seats prior to its collapse compared to about 42% for BoA, 13% for small turboprop operator Amaszonas and 10% for regional carrier Aerocon. With Aerosur's exit, BoA is left with about a 68% capacity share compared to 18% for Amaszonas and 14% for Aerocon.

Bolivia domestic capacity share by carrier (% of seats): Before and after Aerosur suspension

Source: CAPA - Centre for Aviation & OAG

While BoA rapidly took away market share from BoA domestically after its launch in 2009, Aerosur continued to dominate the international market from Bolivia. As of Nov-2011, before Aerosur started to cut flights, Aerosur accounted for about 80% of international capacity provided by Bolivian carriers while BoA only accounted for about 20%. While the two carriers started competing in 2010 on key regional international routes to Buenos Aires and Sao Paulo, Aerosur remained the only Bolivian carrier operating medium and long-haul services including to the US and Spain.

Aerosur's suspension leaves big void in Bolivia's international market

Aerosur served the US from its base in Santa Cruz with 767-200ER flights to Miami and Washington Dulles. It also operated trans-Atlantic service from Santa Cruz to Madrid with a 747-400 leased from Virgin Atlantic Airways.

Aerosur's regional Latin American network included several destinations in Argentina, Brazil, Peru and Paraguay. Regional international flights were operated from both Santa Cruz and La Paz. The carrier also previously operated flights to Panama.

Santa Cruz has a population of about 1.6 million, making it the most populous city in the country. La Paz has as population of almost 1 million but neighbouring city El Alto, where the La Paz airport is located, also has a population approaching 1 million. Due to its high altitude, La Paz cannot support medium-haul or long-haul departures, which is the reason that Santa Cruz serves as the country's main international airport.

BoA is based at Cochabamba, which has a population of about 700,000 and is located between Santa Cruz and La Paz. BoA currently serves its two international destinations from a mix of Cochabamba, La Paz and Santa Cruz with different rotations depending on the day of the week. Its Buenos Aires and Sao Paulo flights are timed so that quick domestic connections are available to all three cities for those days a non-stop is not available. BoA is currently the only carrier operating international flights at Cochabamba.

Bolivia is currently served by 10 foreign carriers: Lan Airlines and Sky from Chile, Lan Peru, TACA Peru, American Airlines, Brazil's Gol, Panama's Copa Airlines, Aerolineas Argentinas, Colombia's Avianca and TAM Paraguay. All of these carriers except Sky and Avianca serve Santa Cruz. La Paz is served by Avianca and Sky as well as by American, Lan Airlines, Lan Peru and TACA Peru.

These 10 foreign carriers now account for about 87% of international capacity in Bolivia, compared to 38% prior to Aerosur's collapse. BoA only accounts for 13% of total international capacity in Bolivia, compared to 10% prior to Aerosur's collapse. Latin American airline group Latam now has a leading 23% capacity share in Bolovia, followed by rival airline group Avianca-TACA, which has a 17% share of capacity.

Bolivia international capacity share by airline group (% of seats): Before and after Aerosur suspension

Source: CAPA - Centre for Aviation & OAG

Latam has three subsidaries or affiliates serving Bolivia: Lan Airlines which operates flights to La Paz and Santa Cruz from Iquique in northern Chile (with continuing service to Santiago); Lan Peru, which operates flights to La Paz and Santa Cruz from Lima; and TAM Paraguay, which operates flights to Santa Cruz from Asuncion. Avianca-TACA has two subsidiaries or affiliates serving Bolivia: TACA Peru, which operates flights to La Paz and Santa Cruz from Lima, and Avianca, which operates flights from La Paz to Bogota.

Foreign carriers slow to add capacity to Bolivia - for now

The sudden gain in capacity share for the foreign carriers has so far been driven entirely by Aerosur's exit as none of the carriers serving Bolivia have yet filed capacity increases for their Bolivian routes. However, this will likely come after the market settles down and there is a final outcome with Aerosur's operating license and it it becomes clear which routes BoA will absorb.

Of Aerosur's routes, only a few had foreign competitors. Aerolineas Argentinas and TAM Paraguay particularly stand to benefit as Aerolineas and BoA are left as the only two carriers linking Santa Cruz with Buenos Aires while TAM Paraguay is the only carrier left serving Santa Cruz-Asuncion. TAM Paraguay now operates four weekly flights to Santa Cruz while Aerolineas operates one daily flight to Santa Cruz. Neither carrier currently serves La Paz.

Foreign carriers could also potentially be enticed to pick up some relatively thin routes that Aerosur was the only carrier serving. For example, Lan Peru and TACA Peru - both of which now link Lima with both La Paz and Santa Cruz - could be enticed to begin serving Bolivia from Cusco, a Peruvian city and popular tourist destination that had been served by Aerosur. Salta in northern Argentina was also served by Aerosur, which could be potentially picked up by an Argentinean carrier. BoA or one of Bolivia's small regional carriers could also pick up Cusco or Salta given the proximity of these cities to the Bolivian border.

A Brazilian carrier may also be enticed to launch service in the Sao Paulo-Bolivia market now that BoA is left as the only carrier offering non-stop flights in this market. Gol could potentially add non-stop flights, supplementing its current service to Santa Cruz from Campo Grande in Brazil (where onward flights to Sao Paulo and other points in Brazil are available). Latam subsidiary TAM may also be enticed to enter the market as currently only its sister carrier TAM Paraguay serves Bolivia.

Copa also stands to benefit from Aerosur's exit and could potentially add capacity to Santa Cruz, which it began serving at the end of 2008 with four weekly flights and now serves daily. While Aerosur had already pulled out of the Panama market, Copa now stands to benefit from Aerosur's suspension of flights to Miami and Washington DC as Copa offers one-stop flights to these cities via its Panama City hub.

BoA moves quickly to start long-haul operations

BoA has not yet filed any international schedule changes but is expected to shortly. It was already evaluating expanding its international operations to more regional markets in Latin America before Aerosur's challenges began. Markets previously under consideration included Peru, Cuba, the Dominican Republic, Mexico, Panama and Venezuela. BoA had also been looking at expanding into the long-haul market but until Aerosur's collapse this was seen as more of a long-term project.

In the aftermath of Aerosur's demise BoA is now looking to accelerate expansion of its regional international market, with the likely expansion of its 737 fleet beyond the current seven 737-300s. BoA is also moving quickly to establish a long-haul operation with flights in Aerosur's abandoned long-haul markets of Madrid and Miami. On its official Facebook page BoA has advertisements for both destinations, indicating flights will start soon.

BoA CEO Ronald Casso has been quoted in the local press stating that flights to Madrid could begin in Jul-2012 or Aug-2012, with ticket sales starting in early Jul-2012. Air Europa also reportedly plans to launch twice weekly flights from Santa Cruz to Madrid in Nov-2012, but Santa Cruz is not yet listed on the carrier's list of available destinations on its website.

BoA needs to quickly secure aircraft to support flights from Santa Cruz to Madrid to meet its ambitious plans to launch the route in the upcoming weeks. Aerosur operated a 415-seat 747-400 on its three weekly flights to Madrid but BoA does not need to place that much capacity in the market and is likely looking for a smaller widebody aircraft for its first trans-Atlantic flight.

BoA said as far back as early 2011 that it was studying the operation of 767s, but also explained at the time it would need to operate the larger aircraft on routes within Latin America for a period of time before gaining necessary approvals to launch flights to Spain and the US. While BoA has declared a timeframe for launching flights to Spain, it has not stated if all the regulatory approvals have been granted for the service. BoA could potentially wet-lease a widebody for an interim period, giving it time to prepare for its own long-haul operation and secure all the required approvals of a trans-Atlantic ETOPS operation.

A wet-lease option would also allow BoA to accelerate its launch of services to the US, where securing regulatory approvals can be a long and tedious process. No exact timeframe is apparent yet for the potential launch of a BoA service to Miami.

Now that Aerosur is grounded American Airlines is the only carrier offering non-stop service between the US and Bolvia. American currently operates one daily flight on a Miami-La Paz-Santa Cruz-Miami routing using Boeing 757s. While La Paz is a big market, it cannot support long-haul non-stop outbound flights due to its very high altitude.

BoA left to dominate Bolivia's domestic market

BoA is also expected to add domestic capacity to fill the void left by Aerosur. BoA is primarily a domestic carrier, with about 90% of its capacity (seats) currently allocated to domestic routes. BoA is moving quickly to fill the domestic service gaps created by Aerosur and the Government's rejection of Aerosur's potential bailout gives BoA an opportunity for unfettered expansion.

BoA already serves all the major domestic routes in Bolivia, operating flights from all the largest airports in the country. In addition to Santa Cruz, La Paz and Cochabamba BoA operates flights from Cobija in northern Bolivia, Sucre in the country's central southern region and Tarija located in the south of Bolivia.

BoA network map: 29-Jun-2012

Source: CAPA - Centre for Aviation & Innovata

There are also potential opportunities for Bolivia's regional carriers Amaszonas and Aerocon to expand. Currently there is no overlap between BoA and these carriers as BoA does not operate regional aircraft and sticks to trunk routes while Amaszonas and Aerocon focus on services to smaller regional airports. But Aerosur's demise could persuade the regional carriers to expand onto some of the trunk routes as well as launch some regional international services.

Privately-owned Amaszonas now operates small turboprops to smaller airports in Bolivia from La Paz, Santa Cruz and Trinidad in Bolivia's Amazon region. The carrier has announced on its website that it will launch new flights on the domestic trunk route of La Paz to Santa Cruz and international flights from La Paz to Cusco in Peru, but no specific launch dates are given. Amaszonas' route map also includes a planned new route linking La Paz with Arequipa in Peru.

Amaszonas route map: 29-Jun-2012

Source: Amaszonas
Note: Planned La Paz-Santa Cruz route not included in the route map

Privately-owned Aerocon is based at Trinidad airport and operates small turboprops on domestic routes, primarily from Trinidad.

While it is unlikely the Bolivian market can support two similarly sized domestic carriers as was the case with Aerosur and BoA, a larger regional player could potentially be sustained. In particular there could be sufficient demand to support a potential second player on trunk routes such as Santa Cruz-La Paz and Santa Cruz-Cochabamba. BoA now has a monopoly on these routes (some foreign carriers operate between Santa Cruz and La Paz but do not currently have pick-up rights).

BoA nine domestic routes ranked by capacity (seats per week): 25-Jun-2012 to 01-Jul-2012

Source: CAPA - Centre for Aviation & Innovata

BoA unlikely to abuse new monopoly status

Even though BoA now has a monopoly on domestic trunk routes, it is unlikely the government-owned carrier will abuse its new dominant position. The premise behind the Bolivian Government's creation of BoA was to make air travel more affordable in the country, so raising fares would run counter to the airline's stated mission.

With such a mission it is hard to conceive a new private carrier launching to fill the void left by Aerosur. It is also seems unlikely a new investor would be willing to back Aerosur under such market conditions. It could also dissuade an existing regional operator such as Amaszonas from expanding into larger aircraft and trunk routes.

Any new carrier on domestic trunk routes runs the risk of ultimately encountering the same challenges as Aerosur, which found it difficult to compete given the Government's policy of using BoA to make domestic air travel more affordable. Despite its low fares, BoA - which is not a low-cost carrier but borrowed some elements of the LCC model as part of an effort to keep its costs lower than its competitor - has claimed to be profitable since 2009 although these claims were repeatedly questioned by Aerosur.

As BoA looks to expand rapidly in the wake of Aerosur's shutdown, there does not appear to be significant fall-out from one of Latin America's longest-standing carriers ceasing operations. The Government's rejection of Franklin Mining's investment offer is likely to deter other would-be investors for Aerosur, which is diminishing the chances of the carrier re-launching and opening the door for strategic expansion at BoA.