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Viva Air Group to accelerate Latin America expansion following Peru launch and Airbus order

Latin American LCC group Viva is considering the launch of new affiliates after placing an order for 50 A320 family aircraft. The 15 A320ceos and 35 A320neos will be used to expand in Colombia and Peru, as well as to support potential start-ups throughout Latin America.

The Viva Air Group has expanded much more slowly than initially anticipated since launching VivaColombia in 2012. VivaColombia has shrunk its international network to only four routes, and has also been consolidating its domestic operation, suspending several routes in 2017.

However, VivaColombia is still expanding by adding frequencies to existing routes. The group also launched a Peruvian affiliate in May-2017, providing the first LCC option in Peru’s domestic market.

CAPA will hold its inaugural Latin America Aviation Summit in Cartagena, Colombia, on 11/12 September 2017. VivaColombia CEO William Shaw will be among many c-level airline speakers.
For further information please see:  Latin America Aviation Summit

Viva branded airlines currently operate more than 100 routes

The Viva Air Group currently operates 30 routes using 11 A320ceo aircraft in 180-seat all-economy configuration. Viva Air Peru currently operates six domestic routes within Peru using two A320s. Its longer-established sister airline VivaColombia operates nine A320s on 24 routes, including 20 domestic routes within Colombia.

The original Viva branded airline, VivaAerobus, operates 68 routes that include 67 domestic routes within Mexico, using 22 A320s. VivaAerobus still uses the Viva brand and enjoys some synergies with the other two airlines, but is now a completely separate company with no common ownership. 

VivaAerobus was launched in 2006 by the Mexican bus company IAMSA and LCC investment firm Irelandia Aviation. IAMSA and Irelandia teamed up again to launch VivaColombia in 2012. However, in 2016 IAMSA sold its stake in VivaColombia to Irelandia and Irelandia sold its stake in VivaAerobus to IAMSA. Irelandia has since established Viva Air Peru. 

For the CAPA profile of the Viva Group please see: Grupo Viva

Viva branded airlines are small compared to their Latin American LCC peers

VivaAerobus is a relatively small player, accounting for a 15% share of domestic passenger traffic in Mexico in the first five months of 2017 and a less than 1% share of the Mexican international market.

Rival LCCs Interjet and Volaris, which launched at about the same time, have expanded much faster. Volaris carried 6.3 million passengers in the first five months of 2017, compared to 4.8 million for Interjet and 2.8 million for VivaAerobus (based on Mexico DGAC data).

VivaColombia is also still relatively small for an LCC that has been operating for more than five years.

VivaColombia accounted for a 14% share of domestic passenger traffic in Colombia in the first five months of 2017 and a 2% share of international passenger traffic. It carried 1.6 million passengers in the first five months of 2017 (based on Colombian CAA data).

The three Viva branded airlines are all among the smallest LCCs in the Latin American market. Combined, they operate 33 aircraft and generate approximately 300,000 weekly seats. As a trio, they are smaller than any of the region’s four main LCCs – Gol, Azul, Volaris and Interjet.

Latin American LCCs ranked by weekly seat capacity and fleet size: week commencing 31-Jul-2017

Rank Airline Country Weekly seats Number of aircraft 
1 Gol Brazil 822,176 116
2 Azul Brazil 531,507 125
3 Volaris Mexico 388,859 65
4 Interjet Mexico 339,492 73
5 VivaAerobus Mexico 196,023 22
6 Sky Chile 90,688 15
7 VivaColombia Colombia 93,600 9
8 Wingo Colombia 23,004 4
9 Viva Air Peru Peru 10,800 2
10 Volaris Costa Rica Costa Rica 6,480 2
11 JetSmart* Chile  3,720 2

Viva branded airlines could triple in size over the next 10 years

However, the Viva branded airlines have ambitious fleet plans which, if fully implemented, will make them much more significant players in the Latin American market.

The Viva Air Group signed an MoU for 50 aircraft with Airbus at the Jun-2017 Paris Air Show, including 15 A320ceos and 35 A320neos. The new aircraft will be used to replace the group’s current fleet of 11 A320s, which have an average age of more than 15 years (according to the CAPA Fleet Database). The other 39 aircraft will be used for growth – in the group’s existing markets of Colombia and Peru, as well as potential new markets.

Viva Air Group fleet summary: as of 31-Jul-2017

Aircraft In service In storage On order
Airbus A320-200 11 0 15
Airbus A320-200neo 0 0 35
Total: 11 0 50
VivaColombia has so far only acquired second-hand aircraft, including the two A320s which it has subleased to Viva Air Peru. VivaAerobus also initially relied on second-hand aircraft before taking delivery of its first new A320 in 2015.

VivaAerobus has a separate aircraft order with Airbus which the airline initially placed in 2013 – when it ordered 12 A320ceos and 40 A320neos. VivaAerobus has so far taken delivery of all 12 A320ceos and the first two A320neos. The other eight A320ceos in its current fleet were taken from leasing companies, mainly as second-hand aircraft.

VivaAerobus fleet summary: as of 31-Jul-2017 

Aircraft In service In storage On order
Airbus A320-200 20 0 0
Airbus A320-200neo 2 0 38
Boeing 737-300 0 8 0
Total: 22 8 38

VivaAerobus initially operated 737-300s and phased out its last 737 in 2016. The decision to transition to A320s was partially driven by a desire to have a common fleet with VivaColombia, unlocking potential synergies.

If all the orders are delivered as committed, the Viva branded airlines will operate a combined fleet of more than 100 aircraft within the next decade. This will still make them smaller than Latin America’s other main LCC players, but the gap should be narrowed as they triple in size.

Viva Air Group aims to establish more new affiliates

The biggest potential opportunities for Viva are in new markets not yet penetrated by LCCs. The group continues to look at establishing affiliates in several Latin American countries.

With the potential new affiliates the group will use the same model as it has in Peru, where Viva Air Peru has been supported by Irelandia and VivaColombia. VivaAerobus has not been involved in the project in Peru and, at least for now, is not looking to participate in future new airline projects.

LCCs account for a majority of passenger traffic in Latin America’s two largest domestic markets – Brazil and Mexico. However, the rest of the region remains underpenetrated and – in some cases – not penetrated at all.

“Latin America has big potential, and in the eyes of the world, it is viewed as a market that has not yet matured in the way that North America, Europe or Asia’s markets have”, VivaColombia CEO William Shaw told CAPA in May-2017 interview. “This is a great opportunity for the low cost model, and we have had this ambition since we started with the first low cost airline in Colombia in 2012, VivaColombia, and our most recent launch in Peru with Viva Air. Our biggest dream is to spread low airfares around Latin America, making travel more accessible to all people.”

“We expect to see rapid market growth in our new market in Peru for the rest of this year as the ‘Viva Effect’ begins to spread through the continent. We will continue to work with all government entities that are essential to the growth of the sector, freeing markets from bureaucracy and stimulating growth to everyone’s benefit”, Mr Shaw added.

See related report: Latin America’s airline CEOs discuss the market, liberalisation, challenges & opportunities. Part 2

Viva Air Peru brings low fares to six domestic trunk routes

Viva Air Peru launched services on 9-May-2017 and is now offering just over 10,000 seats across six domestic routes (based on the schedule on its online booking engine).

None of the routes are served with more than one daily flight, and Viva Air Peru only has three weekly flights on the largest domestic route in Peru – Lima-Cusco. Fares start at USD19 one way, including taxes.

Viva Air Peru network and capacity share: as of 31-Jul-2017

Rank Origin Destination

Weekly

one-way

seats

number of 

competitors

Viva's

capacity

share

1 Lima Arequipa Rodriguez Ballon Airport 1,260 4 7%
2 Lima Piura Airport 1,260 3 11%
3 Lima Tarapoto Airport 720 3 8%
4 Lima  Chiclayo Cornel Ruiz Airport 720 2 10%
5 Lima Cusco Velazco Astete Airport 540 5 1%
6 Lima Iquitos Coronel FAP Francisco Secada Airport 540 4 5%

All the routes now served by Viva Air Peru are among the top eight domestic routes in Peru. Viva Air Peru also initially served another top eight route, Lima-Trujillo, but suspended it after only a few weeks.

With the launch of Viva Air Peru, domestic trunk routes in Peru are now served by as many as six airlines. The Peruvian domestic market was already extremely competitive before the entrance of Viva, with the established airlines offering relatively low fares although not following LCC models.

The Peruvian domestic market has already almost tripled in size over the past decade: from 3.7 million passengers in 2007 to 10.8 million passengers in 2016.

The leading airline group LATAM (previously known as LAN) has consistently been the largest player in the Peruvian domestic market and accounted for a 61% share of the total Peruvian domestic market in 2016. The Colombia based airline group Avianca and privately owned independent airline Peruvian Airlines are the other main players with 12% shares each.

Peru domestic passenger traffic (by millions) by airline: 2007 to 2016

Airline 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
LATAM Peru 2.3 3.0 3.4 3.8 3.9 4.5 5.3 5.7 6.2 6.6
Peruvian Airlines N/A N/A 0.1 0.6 0.8 0.8 0.9 1.1 1.3 1.3
Avianca Peru 0.1 0.1 0.1 0.1 0.4 0.9 1.2 1.2 1.3 1.3
LC Peru 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.3 0.5 0.9
Star Peru 0.5 0.5 0.5 0.7 0.8 0.8 0.6 0.6 0.6 0.5
Others 0.7 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
TOTAL 3.7 4.1 4.3 5.5 6.2 7.2 8.3 9.0 10.0 10.8

Viva Air Peru tries to drive new phase of growth for Peru's domestic market 

The Viva Air Group is confident there is still room for stimulation, particularly as Peru’s economy and middle class population grow. Mr Shaw expects Viva Air Peru will drive 40% growth in the overall Peruvian market. 

Mr Shaw said Viva Air Peru aims to carry 700,000 passengers in its first year, which would give it approximately a 5% share of the Peruvian domestic market. He pointed out that competitors had reduced fares by up to 70% following Viva Air Peru’s launch.

“We see Peru as Colombia was five years ago, now the market has grown and the passengers have benefited the most”, Mr Shaw told CAPA. “As more LCCs seek to establish in the region, it brings more opportunities to Latin Americans and democratizing airfares in the region. This model is just begging to be here.”

Peru’s domestic market should be large enough to support an LCC fleet of at least 10 aircraft. With its initial fleet of two aircraft, Viva Air Peru is currently only capturing approximately a 3% share of Peru’s domestic market. Viva Air Peru also intends to compete on regional international routes in a later phase.

See related report: The Viva Group settles on Peru amid changing competitive dynamics in Latin America

VivaColombia’s route suspensions highlight challenges

However, overcoming competition from full service incumbents can be challenging in Latin America. The region’s main full service airline groups enjoy economies of scale and strong brands, and are relatively lean. Infrastructure constraints and high airport taxes also pose major barriers to any start-up. 

VivaColombia has stimulated demand, driving down fares by as much as 60% on some domestic routes, leading to faster overall growth in Colombia. However, the airline has struggled in several markets and has been slow in expanding its fleet. VivaColombia has suspended services on several domestic trunk routes due to lack of profitability, and has also reduced its international operation.

VivaColombia recently announced the suspension of services from Bogotá to Barranquilla and Medellín from early Sep-2017. This will leave VivaColombia with seven domestic routes from Bogotá, compared with 11 at the beginning of this year. VivaColombia dropped Bogotá to Cúcuta in Jan-2017 and Bogotá to Leticia in Mar-2017.

Bogotá-Medellín is the largest domestic route in Colombia – and is also VivaColombia’s largest route, with 39 weekly flights in each direction. Bogotá-Barranquilla is the fourth largest domestic route in Colombia, but is currently only served by VivaColombia with one daily flight.

VivaColombia captured a 19% share of Bogotá-Medellín passengers in the first five months of 2017 and a 6% share of Bogotá-Barranquilla traffic, according to Colombian CAA data. Its average load factor on both routes for this period was 82%, which is slightly above its average domestic load factor of 81%.

VivaColombia consolidates its domestic operation

The decision to drop Bogotá to Barranquilla and Medellín is somewhat surprising given that these are large routes. However, it does match up with VivaColombia’s strategy of consolidating its domestic network and adding capacity on routes that are performing better.

“Within Colombia we have decided to consolidate our network and offer more frequencies on existing routes rather than expand this year”, Mr Shaw said. “We have been offering our customers an improved schedule product with increased frequencies. We have also been betting on our connecting flights, as we know it is a great opportunity to connect our country and our international destinations.”

VivaColombia will continue to serve Medellín with six domestic and two international routes. VivaColombia’s Medellín base is almost as large as its Bogotá base. Much of the airline’s success in the first five years has been on stimulating demand on point-to-point domestic routes that were previously unserved, or underserved.

VivaColombia's international operation suffers from low load factors

VivaColombia added international services in 2014, with flights from Bogotá and Medellín to Panama City's alternative airport, Pacific. It added Lima, Miami and Quito in 2015, but the airline has been scaling back its international operation this year.

Bogotá-Quito was dropped in May-2017, and Bogotá-Panama City was cut from daily to three to four weekly flights in early 2017.

VivaColombia’s international load factor was only 61% in the first five months of 2017. Miami-Medellín, its only US route, has performed relatively better, with a 69% load factor in the first five months of 2017, while its routes to Panama have particularly struggled, with a load factor of only 52%.

VivaColombia has likely been impacted by the launch of services on both its Panama City routes from Copa Holdings' LCC brand Wingo, which began operations in late 2016. Wingo also launched services to Quito, potentially contributing to the suspension by VivaColombia.

The two airlines are also now competing in four domestic routes – Bogotá to Cartagena and San Andrés, Cartagena-San Andrés and Medellín-San Andrés. This is the first time VivaColombia has had to compete against another LCC.

See related report: Colombian LCC Wingo: Copa becomes first Latin American airline group to test out multi-brand model

With the suspension of Quito, VivaColombia’s only remaining international service within South America is Bogotá to Lima, which is served with one daily flight and is strategically important – given the launch of Viva Air Peru.

Viva remains bullish, despite some challenges  

In the first five months of 2017 VivaColombia’s international passenger traffic dropped 20%, to 107,000. Its domestic traffic was up 22% to almost 1.5 million, driving an overall growth rate of 17%.

VivaColombia aims to achieve nearly 50% traffic growth for the full year in 2017, to 5 million passengers. While it could struggle to meet its target, VivaColombia continues to grow faster than the overall Colombian market and the restructuring of its network should improve its profitability.  

The Viva Air Group is clearly bullish on its outlook – in Colombia, Peru and potential new markets – and this confidence in the overall Latin American market drove the decision to order 50 A320s.

The larger fleet should give it better economies of scale compared to the current 11 aircraft, resulting in lower unit costs. Achieving and maintaining a significant cost advantage over its larger, more established full service competitors will be critical if the group is to succeed at spreading its wings throughout Latin America.

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