05-Jan-2014 8:10 PM

VivaColombia adjusts strategy to focus on Bogota, domestic trunk routes and international services

Analysis

Colombia's only low-cost carrier VivaColombia is planning to accelerate expansion in 2014 with the launch of international services and several domestic trunk routes. The carrier, which did not add a single aircraft to its fleet 2013, is keen to grow its domestic market share to at least 20% from about 9% currently. But the biggest opportunities could be in Colombia's international market, which remains un-penetrated by LCCs with the exception of services to the US.

VivaColombia is poised to become the first Latin American LCC to serve Panama and Peru. Services to Mexico are also likely as VivaColombia looks to start pursuing synergies with Mexican sister carrier VivaAerobus.

VivaColombia and VivaAerobus are both partially owned by aviation investment firm Irelandia, which aims to establish other Viva affiliates in Latin America. Irelandia sees huge opportunities in the region's LCC sector, which is now limited almost entirely to domestic operations within just three countries - Brazil, Mexico and Colombia.

Summary

VivaColombia plans to expand its domestic market share from 9% to at least 20%.
The airline is set to become the first Latin American LCC to serve Panama and Peru.
VivaColombia is considering synergies with Mexican sister carrier VivaAerobus to serve Mexico.
The airline will open a base in Bogota to launch at least six new domestic routes.
VivaColombia will compete against Avianca and LAN on virtually all of Colombia’s trunk routes.
The airline also plans to serve Panama City and Lima from Bogota, its first international routes.

VivaColombia to open Bogota base

VivaColombia launched operations in May-2012 and currently operates a fleet of five 180-seat A320s on 13 domestic routes. Seven of its routes are from Medellin, which is the carrier's only current base.

In its first 20 months of operations VivaColombia has focused primarily on stimulating demand on point-to-point routes which have traditionally been under-served or entirely un-served. VivaColombia currently operates only three routes from the capital Bogota, where Colombia's other main carriers allocate most of their capacity.

VivaColombia is shifting gears in 2014 and has announced it will open a base in Bogota, where capacity constraints are being eased as El Dorado International Airport is upgraded. The new two-aircraft base at Bogota will be used to launch at least six new domestic routes, resulting in VivaColombia competing against Avianca and LAN on virtually all of Colombia's trunk routes. VivaColombia currently only competes in five of Colombia's top 12 domestic routes.

VivaColombia also has unveiled plans to serve Panama City and Lima from Bogota, which along with Medellin-Panama City will be the carrier's first international routes. Once all nine of the recently announced new routes are added, VivaColombia will operate 11 routes from Bogota compared to eight from Medellin.

VivaColombia current and planned new routes

Current routes Planned routes
Medellin-Cartagena Medellin-Panama City
Medellin-Bogota Bogota-Panama City
Medellin-Cali Bogota-Lima
Medellin-Barranquilla Bogota-Pereira
Medellin-San Andres Bogota-Cucuta
Medellin-Monteria Bogota-Santa Marta
Medellín-Santa Marta Bogota-San Andres
Bogota-Cartagena Bogota-Bucaramanga
Cali-Cartagena Bogota-Monteria
Cali-Santa Marta
Cali-Bogota
Pereira-Cartagena
Pereira-Santa Marta

Bogota opportunities are too good to pass up

While Bogota could quickly emerge as a bigger base for VivaColombia, the carrier will only have a small share of the Bogota market, where the Avianca Group now dominates with about a 60% share of total seat capacity. VivaColombia carried only 577,000 passengers to and from Bogota in the first 10 months of 2013, according to Colombian CAA data. This gave the carrier only a 4% share of domestic passenger traffic at Bogota El Dorado and a 3% share of total traffic.

Bogota recorded 11% passenger growth in the first 10 months of 2013 to 20.6 million passenger, including 14.4 million domestic and 6.2 international passengers. Medellin's Jose Maria Cordova Airport grew at a much faster clip of 36% in the first 10 months of 2013 to 4 million passengers, including 3.3 million domestic passengers.

Passenger traffic at Colombia's top 12 airports: Oct-2013 vs Oct-2012 and 10M2013 vs 10M2012

Rank	Airport	Oct-2013 pax	Oct-2012 pax	Pax growth Oct-2013	10M2013 pax	10M2012 pax	Pax growth 10M2013
1.	Bogota	2,155,420	1,958,597	10.05%	20,595,042	18,510,420	11.26%
2.	Medellin Cordova	563,667	512,435	10.00%	5,384,205	3,968,620	35.67%
3.	Cali	374,171	337,557	10.85%	3,631,958	3,004,399	20.89%
4.	Cartagena	276,131	269,270	2.55%	2,767,477	2,247,944	23.11%
5.	Barranquilla	197,565	169,344	16.66%	1,800,583	1,570,220	14.67%
6.	Bucaramanga	131,374	125,492	4.69%	1,261,189	1,125,437	12.06%
7.	San Andres	115,741	112,604	2.79%	1,130,279	1,031,633	9.56%
8.	Santa Marta	104,161	84,930	22.64%	1,052,980	814,031	29.35%
9.	Pereira	100,390	89,803	11.79%	978,651	803,192	21.85%
10.	Medellin Herrera	84,208	79,933	5.35%	800,016	760,454	5.20%
11.	Cucuta	70,164	77,790	-9.80%	721,845	737,427	-2.11%
12.	Monteria	61,278	50,505	21.33%	584,573	466,062	25.43%

VivaColombia has driven most of the growth at Medellin Jose Maria Cordova, which is Colombia's second largest airport although it is less than one-quarter the size of Bogota. As it opens and expands its Bogota base VivaColombia should start to drive faster growth for Bogota - although not nearly as fast as what has been recorded at Medellin since mid-2012 from a much smaller base.

VivaColombia intentionally avoided having a base at Bogota in its initial stage, claiming El Dorado Airport was too congested and expensive for its pure low-cost model and that there were bigger opportunities to stimulate demand in point-to-point markets bypassing Bogota. VivaColombia has indeed had success outside Bogota as its routes that do not touch the capital accounted for over 900,000 or 61% of the 1.5 million passengers that it transported in the first 10 months of 2013. These routes also had an average load factor of about 83%, proving VivaColombia has succeeded at stimulating demand between secondary cities which have traditionally only been served by buses.

But VivaColombia cannot continue to pass up on the huge opportunities in the much larger Bogota market. Bogota remains relatively un-penetrated by LCCs, which currently account for only about 3% of domestic capacity and 7% of international capacity at El Dorado. Even if its fares are slightly higher than what it is able to offer on non-Bogota routes, VivaColombia will enter at a much lower price point than the incumbents, stimulating demand for more frequent trips from Bogota's fast-expanding middle class population.

There are still opportunities to further expand in other parts of Colombia, which has been seeing economic growth on par and in some cases even faster than the capital. But only with a large base in Bogota will VivaColombia be able to ultimately reach the 50-aircraft fleet and capture the 20% to 25% share of the market it is targeting.

Bogota expansion begins with new Pereira route

VivaColombia has not yet set launch dates for any of the nine planned new routes except for Bogota-Pereira, which according to the carrier's internet-based booking engine will begin operating on 20-Jan-2014 with one daily flight. Bogota-Pereira will be VivaColombia's 14th route overall and its fourth at Bogota, joining Medellin, Cali and Cartagena.

Bogota-Medellin is the largest domestic route in Colombia while Bogota-Cali is the second largest and Bogota-Cartagena is the third largest. Bogota-Pereira is the seventh largest domestic route with 737,000 passengers in the first 10 months of 2013. Avianca and LAN Colombia are the only carriers currently operating the route with Avianca operating about 10 daily flights and LAN three daily flights, according to OAG data.

Avianca flew 549,000 passengers on the Bogota-Pereira route in the first 10 months of 2013, giving the flag carrier a 75% share, while LAN Colombia flew 187,000 passengers for a 25% share. Total traffic on the route grew by 14% in the first 10 months of 2013, which is impressive but still slightly lags the overall 16% growth in Colombia's domestic market. VivaColombia should be able to stimulate new demand as its one-way fares on the route start at only COP50,000 (USD26) including taxes.

VivaColombia to add capacity on Bogota-Cali

Effective 20-Jan-2014 VivaColombia is also upgrading service on the Bogota-Cali route from 12 weekly flights to 21, according to the carrier's internet booking engine. The carrier at the same time is also upgrading Bogota-Medellin, its largest route, from 39 to 42 weekly flights but is downgrading Bogota-Cartagena from 11 weekly flights to seven.

There is plenty of room for VivaColombia to grow on Bogota-Cali as it only captured a 6% share of the route in the first 10 months of 2013 with 126,000 passengers carried. On Bogota-Medellin VivaColombia captured a much larger share, 13%, with 367,000 passengers carried.

The reduction on Bogota-Cartagena is somewhat surprising as VivaColombia only captured a 5% share of the market in the first 10 months of 2013 with 84,000 passengers carried. All three routes are also served by Avianca, LAN Colombia and Copa Colombia with Avianca having by far the largest share on all three.

VivaColombia to soon serve virtually every major domestic route in Colombia

VivaColombia has said through a Facebook posting that it also plans to launch services in 2014 from Bogota to Bucaramanga, Cucuta, Monteria, San Andres and Santa Marta. Bogota-Bucaramanga is the fifth largest domestic route in Colombia while Bogota-Santa Marta is the sixth largest and Bogota-San Andres is the eight largest. Monteria is the 12th largest, based on passenger traffic for the first 10 months of 2013.

The 10th and 11th largest routes are Medellin to Cartagena and Cali, which are already served by VivaColombia. Therefore the upcoming VivaColombia expansion will result in the carrier operating 11 of the 12 largest domestic routes in Colombia, up from only five currently. Of the 10 largest domestic routes from Bogota it will serve nine, up from only three currently.

Top 12 domestic routes in Colombia based on passengers carried: Oct-2013 vs Oct-2012 and 10M2013 vs 10M2012

Route	Oct-2013 pax	Oct-2013 load	Oct-2013 pax	Oct-2012 load	Pax growth Oct-2013	10M-2013 pax	10M-2012 load	10M-2012 pax	10M-2012 pax	Pax growth 10M2013
Bogota- Medellin	292,022	84.02%	265,434	80.62%	10.02%	2,756,918	78.37%	2,254,968	77.19%	22.26%
Bogota- Cali	225,062	83.67%	201,777	78.54%	11.54%	2,168,235	80.15%	1,883,303	76.47%	15.13%
Bogota- Cartagena	178,421	82.41%	160,507	83.53%	11.16%	1,736,475	82.09%	1,551,189	81.53%	11.94%
Bogota-Barranquilla	132,609	87.94%	112,435	84.35%	17.94%	1,167,045	81.63%	1,103,601	81.39%	5.75%
Bogota-Bucaramanga	96,232	83.39%	92,190	79.24%	4.38%	946,308	77.97%	856,041	76.27%	10.54%
Bogota- Santa Marta	73,736	88.64%	71,559	83.86%	3.04%	737,746	83.53%	741,704	82.01%	-0.53%
Bogota- Pereira	71,752	81.99%	70,492	77.87%	1.79%	736,545	80.65%	645,567	76.02%	14.09%
Bogota- San Andres	61,839	88.42%	61,825	82.26%	0.02%	603,839	83.80%	584,660	84.91%	3.28%
Bogota- Cucuta	53,609	90.92%	57,844	83.11%	-7.32%	567,242	81.72%	594,264	80.90%	-4.55%
Cali- Medellin	47,965	78.88%	40,143	76.93%	19.49%	444,248	76.57%	279,884	76.83%	58.73%
Cartagena-Medellin	47,042	78.10%	57,342	71.35%	-17.96%	510,498	81.84%	330,541	80.08%	54.44%
Bogota- Monteria	39,429	87.82%	32,885	83.50%	19.90%	386,484	77.86%	344,884	84.33%	12.06%

The only exception will be Bogota-Barranquilla, which is the fourth largest domestic route in Colombia with 1.2 million passengers carried in the first 10 months of 2013. It is inevitable VivaColombia will also unveil plans to launch service between Bogota and Barranquilla. The carrier already serves Barranquilla from Medellin and has the authority to operate Bogota-Barranquilla.

While VivaColombia has not set a launch date for any of the six planned new domestic routes except Bogota-Pereira, most of the domestic expansion is expected to be implemented in 1H2014 while international services are anticipated to commence in 2H2014. VivaColombia will likely initially operate each new route with one daily flight as the carrier generally has secured authority to operate seven weekly frequencies on its new designated routes.

VivaColombia currently holds designations for about 25 domestic routes which it has not yet launched. The most recent batch of new designations was received in early Dec-2013, when VivaColombia secured authority to operate 11 new domestic routes. This included permission to operate up to seven weekly flights on four routes from Bogota - Barranquilla, Bucaramanga, Pereira and Santa Marta. (Approvals for Bogota to Cucuta, Monteria and San Andres approvals were received separately.)

As part of the new route designations from early Dec-2013 VivaColombia also secured approval to operate three new routes from Medellin - Armenia, Cucuta and Valledupar. Armenia was designated at two weekly flights and Valledupar at three weekly flights while Cucuta was designated for up to seven weekly flights. Some of VivaColombia's existing seven routes at Medellin are operated less than daily as the carrier has not been shy to test out unproven markets.

VivaColombia also received permission in early Dec-2013 to operate up to seven weekly flights from Cartagena to San Andres and Bucaramanga and from Cali to San Andres. These would also be un-served or under-served point-to-point routes following the carrier's original network model.

The recent round of new route designations also included authority to operate up to seven weekly flights on four international routes: Bogota to Panama City; and Medellin to Panama City, Mexico City and Cancun. Authority to serve Lima in Peru from Bogota is part of a separate application.

VivaColombia has confirmed it intends to start using in 2014 its authority to serve Panama City from Bogota and Medellin as well as launch service from Bogota to Lima. But it has not yet begun ticket sales for any international services or indicated if it also plans to start using its authority for Mexico.

VivaColombia targets Colombia-Panama market

Bogota and Medellin to Panama City are short high demand routes that have not yet been penetrated by LCCs. Copa is the only group currently operating Medellin-Panama City with six daily frequencies (includes Panama-based Copa Airlines and Copa Colombia).

The Copa and Avianca groups are the only players in the Bogota-Panama City market with Copa offering seven daily flights and Avianca offering three. Panama City is the largest international destination from Bogota based on number of frequencies. It is the second largest after Miami based on capacity with about 17,000 weekly seats.

Bogota top 10 international routes ranked by capacity (seats): 30-Dec-2013 to 5-Jan-2014

Bogota-Panama City was also the second biggest international route in Colombia after Bogota-Miami based on Colombian CAA passenger figures for the first 10 months of 2013. There were 540,000 passengers on the Bogota-Panama City route, an increase of 3% compared to the same period of 2012. The average load factor on the route was a relatively low 70.5%, which is 6.5ppts below the average international load factor in Colombia. But this should not sway VivaColombia as the low load factor could be a result of the high fares between the two countries.

While a large portion of passengers travelling between Colombia and Panama connect, there is a large local market. The distance is very short but the un-penetrable jungle geography of the Panama Isthmus means flying is usually the only option for travelling between the two neighbouring countries. There are currently over 20,000 weekly one-way seats between the two countries - none of which are offered by LCCs.

Colombia to Panama capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Jul-2014

Panama is one of the least penetrated markets for LCCs. Currently Spirit Airlines is the only LCC serving Panama with three weekly flights from Fort Lauderdale. Full-service carriers account for over 99% of capacity at Panama City, including about 85% for Panama-based Copa.

As there are no LCC alternatives, VivaColombia could potentially open up new lower cost options in the Panamanian market to Colombia and other destinations in South America. VivaColombia currently does not offer a transit product but has said it is preparing to start offering connections. This would open up options for domestic connections in Colombia as well as international connections, starting with Peru.

VivaColombia plans Lima service

Bogota-Lima is also a large market that has traditionally been plagued by high fares. Currently the Avianca and LAN groups are the only non-stop operators with four daily and two daily flights respectively. VivaColombia will be the first LCC and should be able to stimulate significant demand by introducing lower fares.

Bogota to Lima capacity by carrier (one-way seats per week): 19-Sep-2011 to 6-Jul-2014

Bogota-Lima was the third largest international route in Colombia with 513,000 passengers in the first 10 months of 2013. The average load factor was 83.4%.

The Lima market is currently served by only two LCCs, Spirit Airlines and JetBlue. Spirit currently operates only one weekly flight to Lima from Fort Lauderdale while JetBlue launched daily services on the Lima-Fort Lauderdale route in Nov-2013.

As is the case with Panama, VivaColombia will offer the first non-US LCC option to Peruvian passengers. While the initial focus will be on the local Lima-Bogota market, other city pairs will become available as VivaColombia introduces its connection product and expands its international network.

VivaColombia will also offer the first non-North American LCC international option for Colombian passengers. LCCs now offer about 21,000 weekly international seats in Colombia, giving LCCs an 8% penetration rate in the international market. But all these seats are currently provided by a trio of LCCs from the US and Mexico - JetBlue, Spirit and Interjet.

VivaColombia and the Viva Group has plenty of international opportunities

The Colombia-Panama and Colombia-Peru markets represent just two of several opportunities for VivaColombia and the Viva Group overall in Latin America's regional international market. While LCCs have succeeded at penetrating the domestic markets in Brazil, Mexico and now Colombia, LCCs account for less than 5% of intra-Latin America international capacity. Brazil's GOL and Mexico's Interjet are currently the only two LCCs with any international flights within Latin America.

In addition to Panama and Peru, Mexico would be a logical destination market for VivaColombia as it would allow the carrier to link up with sister carrier VivaAerobus. Interjet became the first LCC to enter the Colombia-Mexico market when it launched services from Mexico City to Bogota in Jul-2013. VivaColombia or VivaAerobus will likely serve the Mexico City-Bogota route at some point, joining Interjet as well as Aeromexico, Avianca and Copa Colombia. Avianca and Copa Colombia also currently serve the Mexico City-Cancun route.

So far VivaColombia has only applied to serve Mexico from Medellin, which would involve entering routes not currently served non-stop by any carrier. The proposed Medellin-Mexico City and Medellin-Cancun routes are logical as VivaColombia is based at Medellin, opening up domestic connection opportunities throughout Colombia. Mexico City and Cancun are also two of VivaAerobus' four bases.

VivaAerobus' largest base is in Monterrey in northern Mexico, which could also potentially support future services to Colombia when factoring in connections to the US. VivaAerobus currently only serves one international destination, Houston, but is keen to expand in the US and is also exploring potential destinations in Latin America.

VivaAerobus is Mexico's smallest LCC and currently operates 19 737-300s to nearly 30 domestic destinations. But it is planning to significantly accelerate expansion after placing an order in Oct-2013 for 52 A320s, the first six of which are slated to be delivered in 2014.

VivaColombia, which has so far relied on leased second-hand A320s, could potentially join VivaAerobus in ordering new A320s or be allocated some of the aircraft from VivaAerobus' order. Irelandia, which along with Mexican transportation company IAMSA has stakes in both carriers, is also keen to establish new Viva franchises in Latin American markets which are not yet penetrated by LCCs.

Irelandia continues to look at opportunities for third Viva franchise

Irelandia, which is led by former Ryanair director Declan Ryan, have been exploring several potential new markets for Viva franchises including Chile, Peru, Panama and Central America. Chile and Peru are among the world's largest aviation markets still lacking a local LCC. Panama and Central America are smaller markets but Panama has the fastest growing economy in Latin America while the five other main Central American countries have a common market which combined could potentially support an LCC.

Entering Latin America's largest market, Brazil is unlikely as there are already two strong LCC groups in Brazil with GOL and Azul. Brazil foreign ownership restrictions would also be a challenge. Some Latin American markets still lacking LCCs such as Argentina and Venezuela are not open due to protective government policies. But other countries in the region - including Peru, Chile, Ecuador and Panama - are open and would generally be receptive to a local LCC being established.

VivaColombia's decision to make Peru one of its two first international markets could be a sign that a VivaPeru franchise is in the works. VivaColombia's management team initially planned to stick with the domestic market for at least the first two to three years. As CAPA reported in Jan-2013, following an interview with VivaColombia chairman and shareholder Juan Emilio Posada:

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.

But as is the case with VivaColombia's decision to start serving more Colombian domestic trunk routes, the opportunities in the international market are too good to pass up. While taxes and operating costs are high on international routes within Latin America, there is still an opportunity to under-cut the very high fares offered by the full-service incumbents and stimulate demand.

VivaColombia and the Viva Group also have a window to build on its first mover advantage and expand into other South American markets before other LCCs seize on the opportunity. Sticking to the domestic market and its original pure LCC model, with point-to-point services and no connection product, would eventually limit VivaColombia's ability to expand. The fact VivaColombia has not added a single aircraft in over a year could be a sign of these limitations.

Irelandia's Declan Ryan told Colombian newspaper The Colombiano in a Q&A published in Dec-2013 that he envisions VivaColombia eventually operating a fleet of 50 aircraft and capturing a 20% to 25% share of Colombia's market. In the first 10 months of 2013, VivaColombia accounted for only an 8% share of domestic passengers in Colombia compared to a 59% share for market leader Avianca and a 19% share for LAN Colombia. Copa Colombia, which has been cutting domestic capacity over the past couple of years and focusing more on the international market, captured a 6% share while small regional carriers Satena, EasyFly and Antioquia accounted for the remaining 8%.

In the Colombian international market the Avianca Group accounted for a leading 52% share of passenger traffic in the first 10 months of 2013. The Copa Group accounted for 17% and LAN, whose Colombian affiliate is only now starting to pursue international expansion, 6%. LCCs accounted for a 6% share including 3% for both JetBlue and Spirit and less than 1% for Interjet.

It is time for VivaColombia to accelerate expansion after a quiet 2013

Mr Ryan declined to say how many aircraft will be added in 2014 but VivaColombia will clearly be accelerating expansion after a rather conservative first 20 months. The carrier launched with three A320s in May-2012 and has since only added two aircraft, which were delivered in Jul-2012 and Oct-2012.

A more than one-year hiatus from fleet expansion is unusual for a new LCC. While VivaAerobus has had success at stimulating demand and filling up its aircraft, the conservative strategy could indicate there is relatively little room for growth in the domestic market outside Bogota.

Adjusting its strategy to focus on Bogota, with domestic trunk routes and international services, is logical as VivaColombia looks to pursue faster growth and capture a larger share of the Colombian market. But it will also come with challenges as it starts to overlap more with three of Latin America's strongest and deep-pocketed airline groups - LAN, Avianca and Copa.

2014 will be a critical year for VivaColombia and the still emerging Viva Group. There are huge opportunities for LCCs in Latin America outside Mexico and Brazil. But Latin America's leading full-service airline groups, which unlike their LCC competitors have for several years been using the cross-border joint venture model to expand throughout the region, will almost certainly respond.