Paths diverge for ULCCs in Latin America and the US
A contrast is emerging between ultra-low cost carriers in Latin America and their counterparts in the US.
For many budget carriers in Central and South America and the Caribbean, opportunities to grow their passenger bases remain robust.
It's a different story in the US, where Frontier and Spirit remain under the microscope after a period of underperformance. Those airlines are being forced to move upmarket as passenger preferences for premium experiences show no signs of weakening.
That added complexity comes at a cost, and it is so far unknown whether the product pivot will result in a change of fortunes, particularly as airlines battle cost pressure - wages in the US continue to grow.
What seems more clear is that Latin ULCCs have a path to build share, rather than stealing it from full service competitors.
- Volaris believes that Mexico presents unique opportunities for ULCCs.
- Elsewhere in Latin America, other ultra-low cost operators are working to stimulate traffic.
- US ULCCs face a somewhat unique set of challenges; those airlines appear to be undertaking a pivot in product.
- It is so far unknown whether US ULCCs can turn the tide.
Volaris touts distinct possibilities for ULCCs in Mexico
Management of the Mexican ULCC Volaris took an opportunity during a recent earnings call to make distinctions between its model and the ultra-low cost operators in the US.
"We are the largest airline in Mexico by passengers, which gives us a strong relative domestic market share and close leadership over legacy carriers," explained Volaris CEO Enrique Beltranena.
He cited Mexico's "unique capacity" for switching bus passengers to air travel, "which has driven growth in the country's emerging air travel market in the last 15 years".
With the restoration of Mexico's safety rating by the US regulators in Sep-2023, Volaris now has a balanced network between Mexico and the US, explained the company's EVP of commercial and operations Holger Blankenstein. That results in Volaris now having two distinct markets in which to allocate capacity.
Data from CAPA - Centre for Aviation and OAG show that as of late Jul-2024, available seat kilometres for Volaris' Mexican operations are split at 65% domestic and 35% international.
Volaris: international vs domestic ASK deployment as of late Jul-2024
During the period of the safety downgrade - broadly two-and-a half years - Mexico's domestic market endured overcapacity, as the country's airlines were prohibited from expanding in the transborder market.
But Mr Blankenstein said that now, Mexico has a "stable competitive domestic market with rational players".
In the domestic market, Volaris can keep fares low on a sustainable basis, "building affinity and recurrent flying in our cost markets, while stimulating demand from bus switchers in less developed markets," Mr Blankenstein explained.
In the US transborder market, where Volaris expects travel to increase over the next decade due to nearshoring investments - "low cost means we can price at levels that our US competitors cannot match," he added.
Mr Blankenstein explained that on transborder services Volaris primarily serves resilient 'visiting friends and relatives' markets where the airline has a competitive advantage with large hispanic communities in Chicago, Denver, Houston and Los Angeles and Oakland.
The reactivation of Volaris' codeshare with Frontier Airlines after the safety upgrade, which historically contributed two percentage points of load factor for Volaris, is expected to be a tailwind going forward, Mr Blankenstein explained.
Additionally, unbundling of services allows passengers to customise their experience and reduce base fares, "which is ideally suited for a high growth aviation market," he added.
Latin America's emerging market status creates opportunities for ULCCs throughout the region
The reality is unlike the US. Air travel in Latin America and the Caribbean is still very much in development. IATA has calculated that the number of average trips per capita for Latin America was 0.65 in 2023 compared with 2.5 for the US and Canada.
Other ultra-low cost operators are also seizing opportunities for passenger stimulation in Latin America.
Earlier in 2024 at the Routes Americas conference in Bogotá, Estuardo Ortiz, CEO of the South American ULCC airline group JetSmart, explained that the company was examining the entire transportation market, including customers travelling by bus, car or train. JetSmart has domestic franchises in Argentina, Chile, Colombia and Peru, and also operates intraregional services within South America.
As of Mar-2024, the group had transported 25 million passengers since launching operations in Chile in 2017.
"All of those are incremental volume," Mr Ortiz noted at the Routes conference. "We haven't taken a single passenger from the competition."
US ULCCs have been mired in a period of financial underperformance
Despite having 31 Airbus A320neos grounded during 2Q2024 due to challenges stemming from accelerated geared turbofan engine inspections, Volaris posted a USD10 million profit, "and its highest absolute" 2Q EBITDAR of USD262 million.
It's a different story for the US ULCC Spirit Airlines, which expects GTF-related groundings to peak at about 40 in Dec-2024. The airline posted a USD142.6 million loss in 1Q2024 and projects a negative 12.5%-13.5% adjusted operating margin for 2Q2024, down from prior guidance of negative 9%-11%.
Spirit has not posted a quarterly net profit since the third quarter of 2021.
Frontier lost USD26 million in 1Q2024 - double its net loss of USD13 million in the 2023 quarter a year ago. The Denver-based airline expects a positive adjusted pretax margin of 3%-6% in 2Q2024.
Will efforts by US ULCCs to create a more refined product pay off?
Those airlines are facing several challenges, including a cost convergence with other US airlines driven by more expensive labour contracts.
In a recent research report TD Cowen analyst Thomas Fitzgerald calculated that labour had increased by about two points of margin for full service airlines compared with 2019, and seven points for LCCs/ULCCs. Mr Fitzgerald said that companies that would prosper were those that have revenue premiums to protect their margins, including premium economy offerings and exposure to long haul international markets, where supply looks structurally constrained versus demand.
Frontier has implemented steps to make its product more attractive, including introducing new fare categories and a cabin upgrade that keeps the middle seat empty in the first two rows of the aircraft.
Spirit has made similar moves to better align its capacity with demand, and has teased a "pivot" in its approach to the market, as it re-evaluates its products. The airline has so far eliminated change or cancel fees and upped its checked bag weight allowance.
What lies ahead will partially hinge on Spirit's ability to negotiate with bondholders on significant debt that is coming due in 2025 and 2026.
It appears the jury is out on efforts by those airlines and other LCCs to become more competitive in the premium passenger segment.
"The LCCs and ULCCs are reworking their business models on the fly," Mr Fitzgerald said. "We are sceptical that these airlines can create enough of a premium product onboard to justify the associated price increases."
Prospects for ULCCs in Latin America seem clear, but remain murky in the US
Clearly there are major distinctions between ultra-low cost operators in Latin America and the US.
Arguably, those differences could become more pronounced over time, as both markets are in the midst of an evolution.
The prospects for Latin ULCCs seem more clear cut, whereas their counterparts in the US appear to be facing an identity crisis.