11-Jan-2013 1:00 AM

VivaAerobus and VivaColombia focus on domestic expansion as Irelandia ponders third Viva franchise

Analysis

VivaAerobus and VivaColombia are planning further expansion in the Mexican and Colombian domestic markets in 2013 while they remain separate entities without any network or operating synergies. But the two low-cost carriers could start exploring a closer partnership in 2014 as VivaAerobus looks to potentially join VivaColombia as an A320 operator and launch services to other Latin American countries.

Meanwhile, Irish investment firm Irelandia Aviation, which owns stakes in VivaAerobus and VivaColombia, continues to study establishing a third Viva affiliate in a new Latin American market. With the Viva brand already established in Colombia and Mexico, and as the Brazilian market is currently over-saturated, smaller Latin American markets that lack any local LCCs are being studied. The Viva group could ultimately consist of several LCCs, with most of the carriers being small in size but enjoying economies of scale by being part of a pan-Latin American group.

Irelandia expected to remain with VivaAerobus after IPO

VivaAerobus is the original Viva, having launched services in 2006 with investment from Irelandia and Mexican bus company IAMSA. Irelandia, led by former Ryanair director Declan Ryan, has remained with VivaAerobus for over six years despite the carrier struggling at times.

Unlike its previous investments, Irelandia intends to stay invested in VivaAerobus after the carrier’s planned initial public offering (IPO), which highlights the firm’s commitment to continue developing the LCC market in Latin America. Irelandia decided to exit its investments in Singapore’s Tiger Airways and Las Vegas-based Allegiant Air following IPOs. Irelandia is now left with stakes in just two airlines – VivaAerobus and VivaColombia – and continues to scour the market for new opportunities in Latin America as well as other emerging markets.

VivaAerobus and VivaColombia both have IPO strategies. But it is logical for VivaAerobus to go first as VivaColombia, which is also owned by IAMSA and Colombian partners along with Irelandia, only launched services in May-2012. VivaColombia chairman and part-owner Juan Emilio Posada told CAPA in Nov-2012 that its “IPO strategy is less urgent” and is “to be refined” as the carrier develops.

VivaAerobus is aiming to have its IPO on the Mexican Stock Exchange in 2013, hoping to use the proceeds to accelerate expansion. But the timing is contingent on market conditions.

Mexican LCCs Interjet and Volaris also have IPO strategies and have stronger positions in the Mexican market, which could impact investor appetite for VivaAerobus. Interjet failed in its original attempt for a listing on the Mexico Stock Exchange during tough market conditions in 2011 but plans to ultimately make a second attempt.

The aborted IPO at Interjet in Jun-2011 followed a successful IPO at the Aeromexico Group in Apr-2011. The IPO at Aeromexico would likely not have been possible without the collapse of Mexicana in 2010, which left Aeromexico as Mexico’s only full-service carrier and significantly improved the outlook of Aeromexico as well as Mexico’s three LCCs.

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VivaAerobus has had mixed success in its first six years

VivaAerobus struggled through most of its early years as Mexico’s two other surviving LCCs, Interjet and Volaris, have expanded more rapidly. VivaAerobus currently operates a fleet of about 20 ageing 148-seat 737-300s while rival Interjet and Volaris each now operate a fleet of about 40 new A320 family aircraft. VivaAerobus accounts for a 13% share of Mexico’s domestic market, compared to 24% for Interjet, 20% for Volaris and 38% for the Aeromexico Group, based on passenger data for Nov-2012 from Mexico’s DGAC.

VivaAerobus also competes with Interjet and Volaris in the Mexico-US transborder market but has struggled to gain a foothold in the US. The carrier currently only serves two destinations in the US, compared to five a year ago. It has tried and failed in several transborder routes over the years, having initially launched services to Austin in Texas from multiple Mexican destinations in 2008. VivaAerobus beat Volaris to the US market by one year and Interjet by four years but it is now by far the smallest Mexican carrier in the transborder market with a meagre 0.4% share of total capacity between the two countries.

VivaAerobus, however, has succeeded in that it survived while two other LCCs that launched at about the same time as the Mexican market de-regulated – Avolar and ALMA – failed. The carrier also has succeeded at opening several new point-to-point domestic routes which were previously un-served.

VivaAerobus has always followed the Ryanair model, primarily operating low frequency point-to-point routes and trying to stimulate demand in un-served or under-served city pairs through very low fares. It is a pure LCC model, purer than the model used by Volaris and much purer than the model used by Interjet, which targets business and upmarket leisure traffic with low density configuration 150-seat A320s.

VivaAerobus is largest LCC in Monterrey and has niche operation in Mexico City

While smaller than Mexico’s other LCCs, VivaAerobus has built up a niche and gained traction in the dynamic Mexican market, particularly at its Monterrey headquarters. VivaAerobus now operates 20 domestic and two international routes from Monterrey, including nine low frequency routes that are not served by other carriers, according to Innovata data.

VivaAerobus currently has about a 31% share of domestic capacity at Monterrey, second only to the Aeromexico Group’s 33% share. Monterrey is Mexico’s fourth largest airport after Mexico City, Cancun and Guadalajara.

Like Volaris and Interjet, VivaAerobus also has benefitted from the collapse of Mexicana and Mexicana LCC subsidiary Click in Aug-2010. VivaAerobus’ original strategy was to bypass Mexico City with point-to-point routes, but the carrier adjusted this strategy in early 2010 and entered the Mexico City market. As a result of Mexicana’s collapse slots became available so VivaAerobus was able to rapidly expand its Mexico City operation.

VivaAerobus operates 14 domestic routes from its Mexico City base (including seasonal services) and currently accounts for 6% of domestic capacity at Mexico City compared to about 15% for Volaris and 29% for Interjet. While a modest operation, VivaAerobus has been able to build up meaningful presence at the capital serving niche routes such as Puerto Escondido (only served by turboprop operator Aeromar) as well as high frequency trunk routes to its Monterrey and Guadalajara bases.

The carrier’s four largest routes are now at Mexico City – Monterrey, Cancun, Reynosa and Guadalajara. Mexico City is now the second largest of VivaAerobus’ three bases, smaller than Monterrey but larger than Guadalajara.

VivaAerobus top 10 hubs/bases/stations based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013

VivaAerobus top 10 routes based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013

VivaAerobus opened its Guadalajara base in 2009 and now operates 12 domestic routes from the city. But as is the case with Mexico City VivaAerobus remains the fourth largest carrier in Guadalajara, accounting for 15% of domestic capacity.

VivaAerobus plans new base in Cancun as domestic capacity surges in 2Q2013

VivaAerobus is planning to open a fourth base in Jun-2013, Cancun, which is currently the carrier’s fourth largest destination. VivaAerobus now has seven domestic routes at Cancun, four of which are served less than daily. The additional base, which reportedly will initially include four 737-300s, will allow VivaAerobus to better serve its Cancun routes and open up potential new destinations from the beach resort.

Cancun also has seen growth from Volaris over the last year as both Volaris and VivaAerobus have been focusing on stimulating a growth in demand to beach destinations. Volaris, like VivaAerobus, plans to focus capacity expansion on Mexico’s domestic market in 2013, which grew by about 11% in 2012 and will likely record double digit growth again in 2013. Volaris sees the US-Mexico market, which is dominated by US carriers as US carriers account for over 75% of capacity in the transborder market, as more challenging while there are plenty of domestic opportunities, particularly in the discretionary travel sector as more and more bus passengers are persuaded to fly.

VivaAerobus for at least the short-term will likely only retain a small niche presence in the US market although it will look at more rapid US growth in 2014 and beyond. Domestic growth in 1H2013 will focus entirely or almost entirely on existing routes. VivaAerobus has not launched a new route since Jul-2012, when it added service to Cuernavaca from Cancun and Monterrey. It also has not yet announced any new routes for 2013, which indicate the carrier is focusing on adding capacity to existing routes through at least the first few months of the year.

The carrier plans to offer a consistent 107,000 weekly seats in 2Q2013 (including 105,000 domestic seats), up about 26% from current capacity levels, according to Innovata data. Most of the capacity increase will be allocated to its Monterrey hub, where it will offer about 53,000 weekly domestic seats compared to about 39,000 currently.

VivaAerobus weekly seat capacity: 07-Jan-2013 to 30-Jun-2013

VivaAerobus will also temporarily increase capacity over the Easter holiday in late Mar-2013 to about 120,000 domestic weekly seats. The carrier’s model of operating older aircraft give it the flexibility to utilise its fleet less during quiet months and spool up capacity during peak periods. Ryanair, which now parks a large portion of its fleet during the quiet winter months, and Allegiant, which Irelandia previously had an investment in, follow similar strategies.

VivaAerobus and VivaColombia expected to eventually operate common fleet

VivaAerobus may have to adjust this strategy in 2014, when the carrier plans to start phasing out its 737-300s. VivaAerobus is currently evaluating new aircraft options and will most likely opt for second-hand A320s, which was the selection VivaColombia made in 2011 during its pre-launch phase.

Having both Viva carriers operating the same type will allow for synergies and cost savings in such areas as maintenance, spare parts and training. The two carriers may also place a joint order for new-generation aircraft, most likely the A320neo, which would replace the current generation A320s as they come off lease at VivaColombia and potentially VivaAerobus. VivaAerobus envisions ultimately operating 50 aircraft, with proceeds from its IPO helping to fund the expected fleet renewal and expansion

While it will focus on domestic growth in 2013, VivaAerobus plans to look at international expansion in 2014 both in the Mexico-US transborder market and to Latin America. Southbound services to Central America and South America, including Colombia, are likely as the carrier looks to promote the Viva brand in the region.

VivaColombia to focus on domestic market for the short to medium term

VivaColombia also eventually plans to expand into the international market but will stay entirely domestic-focused for at least 2013 and likely 2014. Mr Posada stated that while international destinations are in VivaColombia's five-year plan it is in no hurry to operate internationally and will not expand into the international market purely for exposure.

He pointed out that international flights are always more expensive as operating costs and taxes are higher. For example a flight from Colombia to a Caribbean destination is 60% more expensive than a similar length domestic flight to Santa Marta, a city on Colombia’s Caribbean coast. “We want to be very disciplined and operate the most profitable routes,” Mr Posada explains. “The glamour of flying international is not part of our DNA.”

VivaColombia prefers its customers to take two domestic trips instead of one international trip as its model is to stimulate frequent travel with “ridiculously low fares” and then profit off ancillary sales. If passengers pay less for their tickets in theory they have more to spend on more frequent travel and on ancillaries when on board.

Mr Posada said the carrier also wants to remain flexible when it comes to growing its fleet. It now operates five A320s, which is the minimum number of aircraft required for Colombian carriers. A sixth aircraft will likely be added at some point in 2013 but Mr Posada said the carrier is now focusing on consolidating its current five-aircraft operation. He said VivaColombia is an opportunistic acquirer of aircraft, similar to the aircraft acquisition strategy at VivaAerobus, and while it has a five year fleet plan it is “not anchored to a specific schedule”.

VivaColombia should capture a 10% share of Colombia’s domestic market in 2013

VivaColombia carried 400,000 passengers in its first six months of service and about 500,000 passengers in 2012. The carrier aims to carry two million passengers in 2013. Based on a projected domestic market of about 20 million passengers in 2013, VivaColombia should capture approximately a 10% share of the domestic market this year. In Oct-2012, the last month the Colombian CAA reported traffic data, VivaColombia flew 85,000 passengers, giving it a 5% share of Colombia’s domestic market.

Through the first 10 months of 2012, domestic passenger traffic in Colombia was up 15% to 15 million. More double-digit growth is likely in 2013 as VivaColombia continues to build up its operation.

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As the only LCC in a fast-growing market, there are huge opportunities to stimulate demand. While VivaColombia has entered some trunk routes such as Medellin-Bogota, it has taken a similar approach to its sister carrier in Mexico and opened several routes which were previously under-served or not served at all. In several cases flag carrier Avianca has responded by launching the same route and matching VivaColombia’s fares but Mr Posada said the result is that these markets have grown significantly with all carriers transporting more passengers.

VivaColombia in Dec-2012 stated there has been 185% passenger traffic growth on the routes it operates while routes it doesn’t operate have only grown by 5%. According to Colombian CAA data for Oct-2012, the Bogota-Medellin trunk route that VivaColombia serves saw a 36% increase in traffic while Bogota-Barranquilla, a trunk route VivaColombia has not yet entered, traffic was up by only 5%. Not surprisingly the impact on smaller point-to-point routes has been more pronounced with passenger traffic up in Oct-2012 by 294% on Cartagena-Medellin, 187% on Cali-Medellin, 183% on Barranquilla-Medellin and 162% on Santa Marta-Medellin.

VivaColombia currently serves 10 destinations. Over 80% of its capacity is allocated to its only base in Medellin, which accounts for its seven largest routes. But the carrier also operates several point-to-point routes bypassing Medellin and will eventually look to establish a second base.

VivaColombia top 10 hubs/bases/stations based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013

VivaColombia top 10 routes based on weekly seat capacity: 07-Jan-2013 to 13-Jan-2013

VivaColombia has had to make some network adjustments, discontinuing some of its initial routes, and encountered reliability issues in its first few months. But the carrier’s on-time performance has improved in recent months and Mr Posada stated that financially “all indications are performing better than the business plan”.

As Latin America’s third largest market after Brazil and Mexico, Colombia has plenty of opportunities for growth for all carriers despite the intense competition. The country’s economy and middle class is growing rapidly, creating ideal market conditions particularly for LCCs but also for the three main full-service carriers – Avianca, LAN Colombia and Copa Colombia.

According to VivaColombia, 94% of Colombia’s 34 million people have never flown before but the carrier’s low fares and point-to-point routes are starting to give people an option to buses and increase the first time flier population. Mexico went through a similar movement after the launch of VivaAerobus and Volaris and before that Gol started a new trend in Brazil, where there are now more domestic air passengers than interstate bus passengers.

Infrastructure and congested airports is a huge challenge in Colombia but VivaColombia’s focus on point-to-point routes that bypass Bogota should allow the carrier to grow until the situation in Bogota improves. Given the 100 aircraft that Mexico’s LCC industry is now supporting, it is not unfathomable to think that VivaColombia could at one point join VivaAerobus in operating a 50 aircraft fleet, particularly if it is Colombia’s only LCC.

Viva has potential franchises in Ecuador, Peru and Central America

Viva as a group is now tiny, accounting for only 7% of total LCC capacity within Latin American. But the seeds are there for a much bigger group as Latin America has a need for more LCCs.

With the recent consolidation in Brazil, which has seen Gol acquire Webjet and Azul acquire TRIP, there are now only six LCCs in all of Latin America. VivaAerobus and VivaColombia are the smallest carriers in this group, which also includes Gol, Azul, Volaris and Interjet.

Virtually all of the region’s LCC capacity is allocated to just thee markets – Brazil, Mexico and Colombia. While two of Latin America’s other big markets are off-limits for political reasons to LCCs, Argentina and Venezuela, there are several smaller markets which could support smaller LCCs that are part of a bigger group. In these markets, such as Ecuador and Peru, it would be challenging for an independent LCC to carve out a sustainable niche but more feasible if the LCC is part of a group or umbrella.

There is currently not a single LCC operating to or within Ecuador. In Peru the LCC penetration rate is 0.1% as there is only one LCC operating one route once a week (Spirit Airlines from Fort Lauderdale). Both markets, particularly larger Peru, have been growing rapidly in recent years. Peru also has a modest size domestic market with four full-service carriers. Colombia is also a large international market for both Ecuador and Peru, presenting synergy opportunities between VivaColombia and a potential VivaEcuador and or VivaPeru.

Central America also presents potential opportunities for Viva. The intra-Central America market has extremely high fares as it is dominated by TACA and Copa.

Central America consists of seven small countries but has a common market across five countries (Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua) permitting any airline from these countries to connect any two countries. As a result, there is potentially enough demand to support a LCC in one country that serves the entire region. There are only very limited domestic markets in Central America but the region as a whole when combined presents a reasonably sized regional market that currently consists of over 100,000 weekly seats and could be significantly larger through low fare stimulation.

Costa Rica, the largest of the Central American markets, would be the most logical country for a local LCC. Costa Rica has a LCC penetration rate of 9%, which is significantly higher than the LCC penetration rate in other Central American countries. But all the LCCs serving Costa Rica come from North America including Mexico. There are no LCC services linking Costa Rica with other Central American countries or South America. There are only two LCC routes that connect a Central American destination with another destination in Latin America (Interjet from Mexico City to San Jose in Costa Rica and Guatemala City). The potential is enormous and Viva could be the solution.

The emerging Viva group has big ambitions under Irelandia

Irelandia has a team led by ex-Tiger CEO and Irelandia partner Tony Davis looking at potential LCC opportunities in Latin America. Mr Davis has experience with the pan-regional group LCC model in Asia, a model that could potentially be adopted to unlock the LCC potential of Latin America’s still untapped markets. As CAPA’s airline strategy journal Airline Leader reported in Nov-2011:

The cross-border LCC model pioneered in another emerging market, Asia, offers an enticing alternative for several of the Latin American markets not yet penetrated by LCCs. Malaysia-based AirAsia and Australia-based Jetstar have expanded and continue to pursue further expansion by launching new affiliates or joint ventures with local partners. While technically separate entities from a regulatory perspective, the affiliates leverage the powerful brand of their partner and enjoy several important synergies such as common fleet, IT systems and websites. As more affiliates are launched, access to new domestic markets is gained and more dots within the region can be connected, resulting in a pan-regional network.

Mexico’s VivaAerobus and its two major shareholders, the Ryan family-backed investment firm Irelandia Aviation and Mexican bus company IAMSA, have emerged as the first group ready to test out the cross-border LCC model in Latin America ... Viva could quickly emerge as a large pan-Latin America player, as all of the other low-cost carriers in the region are now entirely focused on their home markets. Irelandia, led by Declan Ryan, clearly sees the opportunity to strike first in virgin LCC markets throughout Latin America. With the iconic Ryan family as major shareholders in the Mexican and Colombian affiliates, Viva is well positioned to establish ventures across the region and become the first pan-Latin America LCC brand.

With all of Latin America’s other LCCs focused entirely on their home markets of Mexico and Brazil, Viva could have first mover advantage in establishing LCCs in the rest of Latin America. There will be challenges, as there was initially in Asia. But it is just a matter of time before the challenges are overcome and the LCC revolution spreads to the rest of Latin America. Irelandia could be in the driver seat.