13-Sep-2013 4:22 PM

Copa emerges as Costa Rica’s largest airline as Avianca downgrades San Jose hub to focus city

Analysis

Avianca's closure of its hub in Costa Rica has opened up opportunities for other carriers, particularly US carriers and Panama-based Copa. The Latin American airline group significantly downgraded its operation at the Costa Rican capital San Jose in late 2Q2013 as it cut five routes and reduced frequency on three others. Avianca previously considered San Jose as one of its four hubs but now calls it a focus city.

US carriers have been adding capacity to San Jose, with Delta launching service to Los Angeles, one of six destinations cut by Avianca. JetBlue has launched service to Fort Lauderdale.

Copa Airlines is also adding capacity to San Jose and will become the airport's largest carrier in early Oct-2013, when it adds a ninth daily flight from Panama City. Avianca was using San Jose as a competing north-south hub although the number of transit passengers had been small compared to its other hubs and miniscule compared to Copa's hub in Panama City.

Summary

Avianca's closure of its hub in Costa Rica has opened up opportunities for other carriers, particularly US carriers and Panama-based Copa.
US carriers, such as Delta and JetBlue, have been adding capacity to San Jose, Costa Rica, after Avianca cut several routes.
Copa Airlines is also increasing its capacity to San Jose and will become the airport's largest carrier.
Avianca still operates 13 daily flights and 11 routes from San Jose, but its capacity share is about to be overtaken by Copa.
Avianca's decision to close its San Jose hub will intensify congestion challenges at its remaining hubs.
Avianca's reduction in San Jose was likely influenced by Copa's aggressive expansion in the Costa Rican market.

Avianca still has 11 routes from San Jose but only a 26% share of capacity

Avianca has dropped service from San Jose Juan SantaMaria Airport to Los Angeles, New York, Havana, Monterrey in Mexico and Quito/Guayaquil in Ecuador. (The Ecuador service operated on a San Jose-Quito-Guayaquil-San Jose circular routing). Avianca, previously known as Avianca-TACA, also cut back service to Guatemala City, Lima and Panama City from double daily to daily.

Avianca still operates 13 daily flights and 11 routes from San Jose, giving it currently a leading 26% share of international capacity. But Avianca's approximately 21,600 weekly international seats at San Jose is about to be overtaken by Copa, which will see its capacity increase from about 21,000 weekly seats in Sep-2013 to over 23,000 weekly seats in Oct-2013. This will give Copa a leading 28% share of international capacity at San Jose compared to about 26% for Avianca.

San Jose Juan SantaMaria international capacity share (% of seats) by carrier: 7-Oct-2013 to 13-Oct-2013

Copa is upgrading its Panama City-San Jose service to eight daily flights at the beginning of Oct-2013. Six of its Panama City-San Jose flights continue onto other destination in Central America, including two each to Guatemala City and Managua and one each to San Pedro Sula and Tegucigalpa. This gives Copa a total of 14 daily flights in the San Jose market in Oct-2013.

Copa also opened a lounge at San Jose in Mar-2013, strengthening its position in the market. Previously the only airline VIP lounge in San Jose was from Avianca/TACA. While Copa and Avianca-TACA are both members of the Star Alliance, the Avianca-TACA lounge in San Jose was not open to Copa passengers including passengers with Star Alliance gold cards.

San Jose becomes Copa's largest destination

With the eighth daily frequency, Panama City-San Jose will become Copa's largest route, overtaking Panama City-Bogota, which is a hub-to-hub route as Copa's Colombian subsidiary is based in Bogota. This is first time Copa has served any route with as many as eight frequencies although CEO Pedro Heilbron has played down the potential impact of Avianca's reduction in San Jose. "Their San Jose hub was their weakest," Mr Heilbron told analysts during the carrier's 2Q2013 results presentation. "We do not expect a material difference or material benefit."

But Copa likely was a driver in Avianca's decision to close the San Jose hub as the Panamanian carrier has been expanding aggressively in the Costa Rican market in recent years, gaining market share and weakening the position of Avianca.

On the Panama City-San Jose route Copa's capacity has increased by about 70% over the last two years. Panama-Costa Rica is a strong market but cannot alone support the large steady increase in capacity. Copa's sixth freedom traffic to and from Costa Rica has clearly grown significantly.

San Jose Juan SantaMaria to Panama City Tocumen capacity by carrier (one-way seats per week): 19-Sep-2011 to 2-Mar-2014

Copa also launched services to Costa Rica's other international airport, Liberia, in 2012, further solidifying its position in the Costa Rican market. As it becomes the leading carrier in San Jose, Copa also becomes the largest carrier in Costa Rica.

Costa Rica international capacity (seats) by carrier : 7-Oct-2013 to 13-Oct-2013

From Panama City, Copa serves all the destinations dropped by Avianca as well as the 11 destinations that remain in Avianca's San Jose network. The cuts significantly limit Avianca's ability to funnel passengers from north to south using San Jose. Avianca still has opportunities to carry these passengers using its San Salvador, Bogota and Lima hubs. But none of these hubs have nearly the number of international destinations as Panama City, which is by far the biggest hub for international travel within the Americas.

Panama City is also the least congested of Latin America's hubs, which gives Copa a competitive advantage over Avianca and the region's other big airline group, LATAM, in attracting transit passengers. While closing its smallest hub is a logical move for Avianca, it will intensify the congestion challenges at its remaining hubs as passengers that previously transited in San Jose are shifted to other hubs.

Downgrade in Costa Rica comes as Avianca drops TACA brand

The downgrade at San Jose came as Avianca adopted a single brand. The use of TACA as a separate second brand in the Central America and Peruvian marked ceased in May-2013.

Colombia-based Avianca and El Salvador-based group TACA merged in early 2010 and the adoption of a single brand represented the last step in the integration process which has delivered network synergies and improved profitability. Avianca completed a successful initial public offering in 2011. The group reported a net profit of USD148 million for 1H2013, compared to a loss of USD46 million in 1H2012.

See related reports:

The TACA-branded operation had included flights operated by Costa Rican subsidiary LACSA as well as El Salvador-based TACA International and Lima-based TACA Peru. Avianca has retained the hubs in El Salvador and Peru while transitioning these operations to the Avianca brand. The group's largest hub is at Bogota.

In addition to San Jose, Avianca also has what it calls focus cities in Guayaquil and San Jose in Ecuador. The operation in Ecuador is operated by AeroGal, a small Ecuadorean carrier that is 100% owned by Avianca Holdings and also has adopted the Avianca brand.

The Avianca brand is also present in the domestic Brazilian market through Avianca Brazil, which has its main hub in Sao Paulo. But Avianca Brazil is not currently owned by the publicly-listed Avianca Holdings and remains under privately held Synergy Aerospace, although Synergy is the largest shareholder of Avianca. Synergy, controlled by the Efromovich family, is the vehicle that has been used to explore a potential acquisition of TAP Portugal.

LACSA remains for now the operator of Avianca's 11 San Jose routes

Avianca Brazil will also continue to operate under its own "O6" code, while all the other Avianca carriers are expected to adopt Avianca's "AV" code by the end of 2013. For now all of the group's flights to and from Costa Rica continue to operate under the LACSA "LR" code while most flights from the Lima and San Salvador hubs continue to operate under the TACA "TA" code.

LACSA, which was also known as TACA Costa Rica, is currently still listed as the operator of 11 international routes from San Jose. According to Innovata data, the carrier currently operates 91 weekly frequencies across these 11 routes including: Bogota (double daily), Caracas (daily), Guatemala City (daily), Lima (daily), Managua (daily), Mexico City (daily), Miami (five times weekly), Panama City (six times weekly), San Pedro Sula (six times weekly), San Salvador (18 times weekly) and Tegucigalpa (daily).

Bogota, Caracas, Guatemala City, Lima and most San Salvador flights are operated with A320 family aircraft. Miami, Panama City and some flights to the San Salvador hub are served with Avianca's E190 fleet while the short hops to San Pedro Sula and Tegucigalpa in Honduras and Managua in Nicaragua are served with ATR 42 turboprops.

The remaining 11 routes in Avianca's San Jose network should have sufficient local demand to be sustained without having to rely on transit passengers. Avianca is the only carrier operating non-stop services to Bogota, Caracas, Lima and San Salvador. It competes with Copa to Guatemala City, Managua, Panama City, San Pedro Sula and Tegucigalpa. (Copa for the most part picks up a new set of passengers in San Jose on its flights from San Jose to Guatemala City, Managua, San Pedro Sula and Tegucigalpa as Copa has separate non-stop flights to these destinations from Panama City.)

On the San Jose-Mexico City route, Avianca competes against Aeromexico and Mexican LCC Interjet. It competes against American to Miami although American has a dominating 83% share of capacity on the San Jose-Miami route. American, which is the largest foreign carrier in San Jose, currently has two daily flights on the route. (American also operates one daily flight to San Jose from Dallas.)

The San Jose-South Florida market is also served by low-cost carriers Spirit and JetBlue from Fort Lauderdale with one daily flight each. JetBlue launched services on the San Jose-Fort Lauderdale route in late Jun-2013, supplementing the daily San Jose-Orlando service which it launched in 2009.

Delta takes over San Jose-Los Angeles route

Delta also launched at the beginning of Jul-2013 a daily service to San Jose from Los Angeles. Delta initially planned to begin the route in Dec-2013 but Avianca's decision to exit the route from May-2013 prompted it to move up the launch date. (Delta is operating only four weekly flights in Sep-2013 and Oct-2013 but will return to the daily schedule in Nov-2013, according to Innovata data.)

Delta also currently serves San Jose from Atlanta with two daily flights and has unveiled plans to begin serving San Jose from Minneapolis with one weekly seasonal flight starting Dec-2013. At the same time it is also launching one weekly seasonal flight from New York to Liberia.

US carriers are better position to serve the US-Costa Rica market as it is primarily an inbound market. Costa Rica is a popular holiday destination for Americans. Costa Rica also has a large expatriate American population and many Americans have second homes in the country.

US airlines are better positioned than Avianca to serve Costa Rica-US market

The US-Costa Rica market is also highly seasonal, which makes it challenging for local carriers such as LACSA. US carriers can more easily adjust capacity from their hubs depending on the season. Four of the six US carriers serving San Jose - American, Delta, United and US Airways - increase capacity, some significantly, during the peak season.

US Airways essentially serves Charlotte year-round (with the exception of a few weeks during the lowest season) and Philadelphia during peak periods.

United currently operates three daily flights to Houston and one to Newark, but will add a fourth flight to Houston and a second to Newark for the peak winter season. United has benefited from Avianca dropping service from San Jose to New York JFK as it is now the only carrier operating non-stops between and New York City area airport and San Jose. United also launched earlier this year new seasonal weekly services to San Jose from its Chicago O'Hare and Washington Dulles hubs.

American, Delta, United and JetBlue also serve Liberia year-round while US Airways, Frontier and Sun Country serve Liberia seasonally. Liberia, located on Costa Rica's Pacific coast, is a popular beach and second holiday home destination for Americans.

The US currently accounts for 40% of Costa Rica's international capacity but this increases to about 55% during the peak winter season, according to CAPA and Innovata data. US carriers also see their market share increase significantly in the winter, with American and United accounting for almost as much international capacity in Costa Rica in Dec-2013 as Copa and Avianca.

Costa Rica capacity share (% of seats) by country: 16-Dec-2013 to 22-Dec-2013

Avianca focuses on other markets

Avianca's other home markets - Colombia, Ecuador, El Salvador and Peru - have a different dynamic as they have more steady year-round demand and have more outbound demand. These countries also have a lot of US traffic but this traffic is predominately Latino, with a focus on the visiting friends and relatives (VFR) sector.

Avianca as a group continues to expand rapidly despite the reduction in San Jose. In 2Q2013 the group added capacity on seven existing routes from its Bogota hub, partially using aircraft that were redeployed from San Jose. The carrier also added two A320s and one ATR 72 to its fleet in 2Q2013.

Total ASKs were up 8.7% in 2Q2013 while RPKs were up 9.2%, resulting in a slight improvement in load factor to 78.2%. But in its short/medium-haul international network, ASKs were up only slightly as the group focused more on domestic expansion.

International ASKs on routes to North America were up only 1.1% while international ASKs on routes to South America were up just 0.4%. The reduction at San Jose, which unlike the group's other hubs or focus cities is only international, partly explains the low international numbers.

Avianca international network: as of Aug-2013

On the other hand, Avianca's domestic ASKs jumped 18.7% in 2Q2013, driven by growth in the Colombian and Peruvian markets. Avianca expects its full year system-wide ASKs to be up 8% to 10% in 2013. The group also expects its passenger numbers for the year to be up 10% to 12%. In 2Q2013 total passenger numbers were up 10% to 5.9 million.

These figures show the downgrade of the San Jose operation from hub to focus city will not slow down the group's growth as the capacity is allocated to larger hubs. The restructuring of the Costa Rican operation should also improve Avianca's profitability as San Jose was a small and weak hub with limited benefits to the overall group.

The Avianca cuts have also not had a big impact on San Jose's traffic. The airport's operator, Aeris, still reported a 4% increase in passenger traffic for Jul-2013 to 307,000. For the first seven months of the year traffic was up 3% to 2.1 million passengers. San Jose's traffic was up 3.5% in 2012 to a record 3.2 million passengers.

Avianca should be able to retain a large share of its Costa Rican passengers by maintaining several point-to-point routes and offering connections via its larger hubs. But inevitably some traffic will be lost to US carriers and Copa, which is again expanding in Costa Rica and will soon be the country's largest carrier.