Ecuador’s TAME pursues international expansion but will face challenges from LAN and Avianca

TAME was established by Ecuador's air force in 1962 and has been the largest domestic carrier in the small South American country for several years. TAME is based at the high altitude capital of Quito, where a new much larger airport is slated to open in Feb-2013, and also has a large operation at the coastal city of Guayaquil. Ecuador has a population of about 15 million, with Quito accounting for about 2 million and Guayaquil slightly more than 2 million.

Just over two years ago TAME slowly started to implement a strategy focused on building up its international network, after determining it needed to enter the more lucrative international market to continue to be self-sufficient. The strategy also included raising its international profile by pursuing partnerships with foreign carriers.

TAME remains fully government-owned but is autonomous and has been self-sufficient in recent years. Profits from domestic trunk routes have traditionally been used to subsidise rural domestic routes which private carriers were not willing to serve. But as domestic trunk routes became more competitive, TAME's management team decided it needed the profits of an international operation to survive without government funding.

International expansion began at the end of 2010 but pace picked up in 2H2012

The international expansion began at the end of 2010 with the launch of services to Panama City, which is now served with a daily flight from Quito. Although TAME in earlier eras operated some international services within Latin America, prior to the launch of Panama City it was only operating international charter flights with the exception of Havana in Cuba, which had been transitioned from charter to scheduled flights in late 2009. (Quito-Havana is currently served with two weekly scheduled flights.)

There was a hiatus in continuing with the international expansion strategy in 2011 and early 2012 as TAME focused on rationalising and improving its domestic operation. Three new ATR 42-500s were acquired, replacing a fleet of ageing turboprops and improving the economics on regional routes.

TAME was able to resume and significantly accelerate international expansion in mid 2012 as two additional A319s were added to the carrier's fleet. A daily A319 service to Bogota in Colombia from Quito was launched in Jul-2012. TAME in Aug-2012 added three weekly flights from Esmeraldas, a smaller city in northern Ecuador that previously did not have any international services, to Cali in Colombia using smaller Embraer E170s.

The new Quito-Bogota route was extended to Caracas in Venezuela in Sep-2012. TAME subsequently launched in Dec-2012 a daily A319 flight from Quito to Lima in Peru. Sao Paulo was added on 07-Jan-2013 with the launch of three weekly A319 flights from Guayaquil. At six hours, Guayaquil-Sao Paulo is now by far the longest route in the carrier's network.

At a ceremony marking the Sao Paulo launch, TAME unveiled plans to launch services to Buenos Aires and New York by the end of the first half of 2013. A launch date or exact routing has not yet been set. The carrier is also reportedly considering adding Bolivia in 2013 and potentially launching in 2014 a service to Madrid.

Recent expansion only gives TAME 7% of Ecuador's international market

The recent international expansion has boosted TAME's share of capacity in Ecuador's international market to about 7%, which makes it the fourth largest of the 10 airline groups currently serving Ecuador. While TAME accounts for over half of Ecuador's domestic capacity, LAN (or its parent LATAM) is the leading player in Ecuador's international market with a 29% share of capacity, according to Innovata and CAPA data. This includes flights operated by Lan Ecuador and four other LAN affiliates - Lan Argentina, Lan Colombia, Lan Chile and Lan Peru.

Avianca-TACA is currently the second largest airline group in Ecuador's international market with a 25% share of capacity. This includes flights operated by Colombia's Avianca, TACA Peru, El Salvador-based TACA, Costa Rica-based LACSA (also known as TACA Costa Rica) and Ecuador-based AeroGal.

American Airlines and the Copa Airlines Group, which includes carriers in Panama and Colombia, also currently have more international seats to and from Ecuador than TAME.

Ecuador international capacity (seats) and capacity share (% of seats) by airline group: 20-Jan-2013 to 26-Jan-2013

Airline group	Weekly seats	Capacity share	Subsidiaries/affiliates serving Ecuador
LATAM	26,258	29%	Lan Ecuador, Lan Argentina, Lan Chile, Lan Colombia, Lan Peru
Avianca-TACA	22,536	25%	AeroGal, Avianca, LACSA, TACA, TACA Peru
Copa Holdings	14,932	16%	Copa, Copa Colombia
AMR	9,346	10%	American Airlines
TAME	6,636	7%	TAME
IAG	4,228	5%	Iberia
Air France-KLM	3,520	4%	KLM
Delta	1,736	2%	Delta Air Lines
United	1,736	2%	United Airlines
Conviasa	714	1%	Conviasa

Source: CAPA - Centre for Aviation & Innovata

The LATAM group currently serves 10 international routes from Ecuador: Guayaquil to Buenos Aires, Caracas, Lima, Madrid, New York and Santiago; and Quito to Cali, Lima, Medellin and Miami. The Avianca-TACA group currently serves eight international routes from Ecuador: Guayaquil to Bogota, Cali, Lima and San Salvador; Quito to Bogota, Lima and San Salvador; and a triangle route operated by its Costa Rican subsidiary which goes San Jose-Quito-Guayaquil-San Jose.

Lan Ecuador is the largest Ecuadorean international carrier as AeroGal is primarily a domestic operator, having dropped services to New York in Apr-2012. AeroGal currently only operates one international route, Guayaquil-Cali, which is also served by Colombian sister carrier Avianca.

TAME brings low fares and competition to Quito-Bogota and Quito-Lima routes

With its recent expansion TAME has broken Avianca's monopoly on the Quito-Bogota route, which is the largest international route from Quito. TAME has reduced fares significantly on the route and decided to launch service to Bogota as it believed the market was under-served.

There is already competition in the Guayaquil-Bogota route between Avianca and Copa Colombia. TAME is unlikely to enter this market as Copa is a codeshare partner of TAME.

TAME also has broken the Avianca-TACA and LAN duopoly in the Quito-Lima route, which is the third largest route from Quito (after Bogota and Miami) and also has traditionally suffered from high fares. TAME's strategy for entering these markets is two-fold - the routes have traditionally been profitable and it was able to significantly undercut fares. The lower fares in turn have stimulated new demand and boosted inbound tourism.

TAME's new Sao Paulo flight opens important new link for Ecuador

As a government-owned carrier, TAME works closely with Ecuador's tourism ministry in promoting the country's rapidly growing tourism sector. It also seeks to help Ecuador boost economic ties with other countries. As it builds its network, route decisions are made commercially but TAME will also look to enter new markets such as Sao Paulo where a new direct link will help boost Ecuador's economy and tourism industry.

Previously Ecuador was not linked with Sao Paulo, which is South America's largest city. TAME's entrance in the market could, however, entice LATAM to launch Guayaquil-Sao Paulo service using its Lan Ecuador or TAM subsidiaries, particularly if TAME proves there is sufficient demand in the market to support a non-stop service. TAM currently does not serve Ecuador.

While most of TAME's international services are operated from Quito, there are operational limitations at the Quito airport that prevent the operation of longer routes. For example, Iberia and KLM flights land at Quito from Europe but have to stop in Guayaquil on the return due to takeoff restrictions at Quito. Most of the current restrictions will be eased after Quito, which sits at an elevation of about 2,800m, finally opens a new airport on 20-Feb-2013 at a new site about 20km east of the city.

The new airport's main runway is 4,100m, compared to 3,120m at the current airport. The new airport also has almost twice as much land and is not sandwiched between mountains like the existing airport, which contributed to Quito's poor safety record over the years and made operations challenging in poor weather. The initial terminal at the new airport will be about 30% bigger and, crucially, there is plenty space to expand the terminal or build new terminals should TAME and/or other carriers serving Ecuador continue to expand.

See related article: Ecuador's 'most modern airport in Latin America' now set to open in early 2013

TAME partially fills some of Ecuador's LCC void as more new routes are launched

As it looks to pursue further international expansion at its new home airport, TAME will continue to be attracted to markets that can be stimulated with lower fares. While TAME is a full-service carrier, its entrance in certain markets such as Bogota and Lima can result in the kind of impact typically seen with low-cost carriers. As Ecuador is not served by a single LCC, TAME has adopted a kind of social mission to lower fares for Ecuadoreans on international routes while continuing to offer reasonably priced domestic fares.

But such a mission is not easy to maintain, particularly for an airline that is expected to be self-sufficient. LATAM and Avianca-TACA are fierce competitors which enjoy economies of scale that became even bigger following their landmark mergers. With a small mixed fleet and a brand which is unknown outside its home market, TAME faces an uphill battle in the international markets it has entered. If losses end up mounting across the new international network the Ecuadorean government will be faced with a difficult question of whether to cover the losses or restructure the carrier so that it again only covers the domestic market.

Fares will likely next be reduced in the Ecuador to New York and Buenos Aires markets after TAME's expected launch of services to these two destinations in 2Q2013. AeroGal left a void in the New York market after it dropped Guayaquil-New York services in 2012 as part of a fleet streamlining exercise which saw the carrier phase out its remaining 767 in favour of an all-A320 family fleet. Lan Ecuador is the only carrier now serving Guayaquil-New York, operating 11 weekly frequencies with 767s.

TAME has said it plans to acquire an A330-200 to support the New York flight. TAME will likely serve New York from Guayaquil, where domestic connections are available, although the opening of a new airport in Quito gives the carrier the option of serving New York from Quito and avoiding direct competition with Lan Ecuador. There are currently no non-stop services between Quito and New York although both American and Lan Ecuador link Quito with Miami (American also serves the Miami-Guayaquil route).

Buenos Aires will likely be served by TAME as an extension of its daily Quito-Lima service. This will allow the carrier to pick up passengers between Lima and Buenos Aires, another high fare route served only by LAN, Avianca-TACA and Aerolineas Argentinas. TAME similarly extended its Bogota services to Caracas as Bogota-Caracas is a high fare route that is under-supplied.

Caracas and Buenos Aires are unlikely to support non-stop services from Quito, particularly if operated daily. The Ecuador-Venezuela market is currently only now served with six weekly 737 Guayaquil-Caracas flights from Venezuelan flag carrier Conviasa and two weekly 767 Guayaquil-Caracas flights from LAN. The Ecuador-Argentina non-stop market is only served by LAN with five weekly A320 flights between Guayaquil and Buenos Aires.

If TAME launches Madrid it would also likely result in a significant drop in fares as the Ecuador-Spain market is now only served by LAN and its oneworld partner Iberia. LAN offers a daily 767 flight between Guayaquil and Madrid while Iberia operates a daily A340 flight on a Madrid-Quito-Guayaquil-Madrid routing. (Due to Quito's high altitude, several airlines operate a triangle route that serves Quito followed by Guayaquil, including KLM - which is the only other European carrier serving Ecuador.)

Madrid becomes a possibility as TAME acquires A330s to support the launch of services to New York. But such a long route would be expensive to operate and presents a huge risk. Depending on how New York and some of the recently launched South American routes perform, TAME could end up deciding against Madrid.

New widebody fleet represents a huge gamble for tiny TAME

Even if it sticks to the US as its only destination outside Latin America, TAME's upcoming expansion represents a risky investment. The new South American routes could be easily discontinued and the A319s redeployed in the domestic market should TAME's newly expanded international operation incur losses. But adding widebody aircraft for New York, and potentially Madrid, is a decision much more difficult to reverse. There are currently only three widebody operators in Latin America outside the powerful Avianca-TACA and LATAM groups - Aeromexico, Conviasa and Aerolineas Argentinas.

Unlike TAME, Conviasa is heavily subsidised and has a government owner that is willing to continually financially support the carrier. Aeromexico and Aerolineas are among the big seven airline groups in Latin America, along with LATAM, Avianca-TACA, Copa (an all narrowbody operator) and Brazilian LCC groups Gol (includes Webjet) and Azul (includes TRIP). These seven groups currently account for about 80% of capacity among Latin American carriers, making it very difficult for smaller independent carriers - whether government or privately owned. The demise in 2012 of Uruguayan flag carrier Pluna and Bolivia's Aerosur shows the challenges the region's smaller international carriers face in the aftermath of the Avianca-TACA, LAN-TAM, Gol-Webjet and Azul-TRIP mergers.

See related article: New LAN-TAM parent LATAM emerges as leader globally and powerful force across South America

TAME is now the largest carrier in South America and the fourth largest carrier in Latin America that is not part of the seven big groups. Only Mexico's three LCCs - Interjet, Volaris and VivaAerobus - are bigger among the Latin American independents based on weekly seat capacity. Other independent carriers remaining in the Latin American market including Chile's Sky and Bolivia's BoA - both of which are about 35% smaller than TAME.

Among Latin America's smaller carriers, only TAME and Bolivia's BoA are pursuing ambitious international expansion. But BoA, which is also government-owned, faces a less risky proposition as Bolivia's only other major carrier Aerosur has ceased operations and neither LATAM nor Avianca-TACA have large operations or local affiliates in the Bolivian market.

TAME fleet renewal paves the way for expansion

TAME currently operates three A319s, three A320s, two E170s, two E190s and three ATR 42-500s. The start of the international expansion strategy at the end of 2010 was made possible after the carrier completed a dramatic renewal of its jet fleet, which had previously consisted of ageing types such as Boeing 727s. TAME only phased out its last 727 in 2009.

The fleet renewal process began just under 10 years ago with the acquisition of A320s and E170s. A319s, E190s and ATR 42s were subsequently added. The A319s have been the main driver of the recent international expansion as the A319 fleet increased in size in 2012 from one to three aircraft. The A320s are primarily being used on domestic trunk routes, the E170/E190s are primarily used on thinner domestic routes (along with a few international flights) and the ATR 42s are deployed on routes to remote areas which have traditionally been unprofitable and are operated as a social service.

On the main trunk routes TAME now competes with Lan Ecuador and Avianca-TACA subsidiary AeroGal. On Quito-Guayaquil, which is by far the biggest domestic route in Ecuador with about 75,000 weekly seats, Lan Ecuador and TAME both have about approximately a 40% share of capacity with AeroGal having the remaining 20%.

Quito to Guayaquil capacity by carrier (one-way seats per week): 19-Sep-2011 to 14-Jul-2013

Source: CAPA - Centre for Aviation & Innovata

Other domestic trunk routes include Quito to Ecuador's third largest city, Cuenca. Lan Ecuador currently has a 44% share of capacity on Quito-Cuenca with TAME accounting for 36% and AeroGal about 20%. But TAME is currently the only carrier serving the Guayaquil-Cuenca route, according to Innovata data.

TAME profits from leading carrier status in the Galapagos

The Galapagos Islands is the biggest domestic market after Quito, Guayaquil and Cuenca and has traditionally been the most profitable of all of Ecuador's domestic markets. Flights to the Galapagos have a much higher concentration of international tourists than other domestic routes, which allows carriers to charge much higher fares.

TAME and AeroGal for several years had a duopoly on the Galapagos Islands routes, where capacity is restricted as part of a control on the number of visitors to the environmentally sensitive islands. But Lan Ecuador was able to enter the Galapagos market in 2010 after several years of attempts.

TAME is still the largest carrier at the main Galapagos airport Baltra. TAME currently accounts for 48% of capacity at Baltra, followed by 30% for AeroGal and 22% for Lan Ecuador. At the smaller Galapagos airport of San Cristobal, AeroGal is larger, accounting for 52% of capacity followed by 30% for TAME and only 18% for Lan Ecuador.

Almost all flights from the Galapagos go to the coastal city of Guayaquil, where connections are available to Quito and the rest of the country. But TAME and AeroGal also operate a limited number of non-stop flights between the Galapagos and Quito.

International services are not allowed at either Galapagos airport. Several foreign carriers such as Copa would be interested in serving the islands but Ecuador is keen to only allow domestic flights as part of an initiative to encourage tourism in other parts of the country. Copa forged a codeshare with TAME in 2011 partially to gain access to the Galapagos so that it could match rival Avianca-TACA and LAN in offering the islands as part of its network.

In 2010, the latest year Ecuador's DGAC reported traffic data, there were 320,000 passengers at Baltra and 99,000 passengers at San Cristobal. There were 3.6 million domestic passengers in total in Ecuador in 2010, with just over half (1.7 million) flying on the Quito-Guayaquil route.

Ecuador top 10 domestic routes ranked by capacity: 21-Jan-2013 to 27-Jan-2013

Source: CAPA - Centre for Aviation & Innovata

TAME is the only airline in Ecuador's smaller markets

Ecuador's smaller cities are typically only served by TAME or primarily by TAME. The only exception is Manta, where Lan Ecuador will launch two daily flights in Mar-2013 from Quito with A320s. This will result in a roughly even split of capacity between Ecuador's three main carriers on the Quito-Manta route.

Manta will give Lan Ecuador a domestic network of six destinations. The carrier only began serving Ecuador's domestic market in 2009, six years after it launched international services. Lan Ecuador initially only operated domestic flights between Cuenca, Guayaquil and Quito. It added services to Baltra in 2010 and to San Cristobal in 2011. Quito-Manta is currently the largest domestic route in Ecuador not yet served by Lan Ecuador.

From Quito, TAME is the only carrier on several domestic routes including Esmeraldas, Loja, Macas, Tarapoa and Tulcan. TAME competes with AeroGal on flights from Quito to Coca in the Amazon, which is currently the fifth largest domestic route in Ecuador based on seat capacity. But TAME has a dominating 77% of capacity on this route.

From Guayaquil TAME only faces competition on four of its domestic routes - Cuenca, Quito, Baltra and San Cristobal. It does not face competition from Guayaquil to Cuenca, Esmeraldas, Loja and Latacunga.

TAME domestic route network: as of Jan-2013

Source: TAME

TAME is a survivor but still faces long-term challenges

TAME has traditionally been the only carrier serving Ecuador's smaller domestic destinations, particularly in the remote interior regions of the country. But the carrier over the years has constantly faced competition from private carriers in Ecuador's main domestic markets.

The competition in these markets has intensified in recent years as Lan Ecuador entered the market and AeroGal was taken over by Avianca. Previously much weaker domestic carriers competed against TAME including Icaro and Air Cuenca, both of which suspended operations in 2011. Air Cuenca was a Cuenca-based start-up carrier which operated for less than a year while Icaro operated for about 40 years, primarily in the domestic market.

TAME is the only Ecuadorean-owned survivor in a market that has seen many casualties over the years. While Icaro and Air Cuenca were recent casualties, for several decades the Ecuador market was served by the likes of Ecuatoriana, Saeta and SAN along with TAME. Ecuatoriana suspended operations in 2005, Satena in 2000 and SAN in 1999.

Having government ownership and a social service mission has obviously helped TAME survive over the years. The carrier also has benefitted from some government protection and will likely continue to have some form of government support even if it does not receive direct financial assistance as Lan Ecuador and now AeroGal are foreign owned. But TAME has a commercial mandate and will need to fend off competition from much larger and more powerful carriers if it is to continue to survive.

A partial privatisation is expected to be considered at some point to help fund further expansion. But finding a buyer will be no easy task with LATAM and Avianca-TACA competing in TAME's home market.

TAME also has had ambitions to line up partners and it succeeded on this front in 2011 when it forged a codeshare with Copa, giving it an important link with one of Latin America's leading airline groups. TAME was hoping Copa, which has no desire to acquire TAME or establish a subsidiary in Ecuador, would be the first of several partnerships made possible after transitioning to a new IT system that can support codeshares with international carriers. But it has yet to ink codeshare with other carriers.

TAME inevitably will need a larger virtual network and strong financial support to overcome LATAM and Avianca-TACA. TAME and a few other carriers such as Chile's Sky are what remain of what used to be a highly fragmented, and also much more inefficient, Latin American aviation market. Even with some government backing it will be a big test to see if TAME can overcome inertia and prosper in its second half century.