VivaColombia shows minimal market disruption as Colombian traffic posts solid growth

At the time of its launch VivaColombia introduced new flights from its base at Jose Marie Cordova Airport in Medellin to Bogota and Cartagena. The carrier has sensibly rolled out service to other domestic markets, and based on information published on its website operates four 180-seat Airbus A320s with a fourth aircraft due for delivery in Nov-2012. This is slightly off from a previously stated goal by VivaColombia to place five aircraft into operation by Sep-2012.

The airline is building a low-cost, low-fare business model based on traffic stimulation strategies adopted by VivaAerobus and Gol in their early days targeted at travellers in Mexico and Brazil that largely took trips by bus. Its backers are Irelandia run by the Ryan family, Mexican bus firm IAMSA and Grupo Bolivar of Colombia. VivaColombia opted to base its operations at less congested Medellin, and currently only has limited service from Colombia's main and congested airport in Bogota. The carrier plans to focus on thin and secondary routes within Colombia.

See related article: VivaColombia prepares for 2Q2012 launch as Irelandia ponders pan-Latin LCC network

Data published from Colombia's CAA covering Jun-2012 shows VivaColombia's seats on offer, passengers transported and load factor for three of Colombia's domestic trunk routes - Medellin-Bogota, Bogota-Cartegena and Cali-Medellin.

According to the CAA's statistics, VivaColombia offered 9,000 seats between Medellin and Bogota in Jun-2012 and carried roughly 7,485 customers for a load factor of 83%. Avianca's loads on the route year-over-year for June fell from 85% to 83% on a 7% rise in seats on offer, while LAN Colombia's loads notched up 1 ppt to 74% after growing its seat count nearly 55%. Copa Colombia recorded an increase in load factor from 82% to 88% between Medellin and Bogota in Jun-2012, but its seats on offer also declined 20% year-over-year on the pairing.

VivaColombia on its service between Bogota and Cartagena in Jun-2012 offered 900 seats and transported 759 passengers, with a published load factor of 84%. Avianca's load factor on the route increased from 84% to 86% year-over-year on a 25% rise in capacity. LAN Colombia's seats on offer jumped 60% year-over-year as loads fell from 66% to 61%. Copa's 80% load factor was flat year-over-year on a 24% decline in seats on offer.

During Jun-2012 VivaColombia offered 6,840 seats between Medellin and Cali and transported 3,399 passengers on the route compared with Avianca's offering of 35,218 seats and 27,436 passengers transported. Cali-Medellin was not part of VivaColombia's inaugural city pairs.

Copa's pull-back helps keep market stable as VivaColombia moves in

The stated goal of Copa Colombia's parent company Copa Airlines to redeploy capacity from the Colombian domestic market to international services has helped to diminish the effects of VivaColombia's modest introduction of capacity into the domestic market. Copa Colombia's domestic ASKs fell nearly 18% year-over-year in Jun-2012 and for 1H2012 decreased 28%.

Copa Colombia during Jun-2012 recorded significant capacity cuts on the remaining trunk routes it serves in Colombia as its seats on offer fell by 26% between Bogota and Cali, by 14% between Bogota and Barranquilla, fby 21% on Bogota-Bucaramanga and by 12% on Bogota-Cucuta.

Avianca and LAN Colombia increased their ASKs in the Colombian domestic market by 20% and 26%, respectively, year-over-year in Jun-2012. During 1H2012 Avianca grew its ASKs by 20% while LAN Colombia recorded 19% growth. Government-owned regional carrier Satena recorded an 8% fall in ASKs for Jun-2012.

VivaColombia's ASKs accounted for 3% of the overall capacity in Jun-2012, which was not a huge impact given the significant increases recorded by Avianca and LAN Colombia. Overall, ASKs in the Colombian domestic market increased 17% year-over-year in Jun-2012 while traffic also increased 17%. During 1H2012 ASKs in the Colombian domestic market grew 10% while traffic grew 11% to nearly four million passengers.

The first half traffic increases show that overall growth for 2012 should return to the double-digits after growing only 5% in 2011. Aires, which was rebranded as LAN Colombia in 2011 after the South American airline group purchased the struggling Colombian carrier at the end of 2010, significantly cut capacity in 2011 as LAN restructured the carrier's former low-cost business model.

VivaColombia has taken great effort to stress that unlike Aires, it is well-capitalised. Aires operated a fleet of turbroprops and narrowbodies, while VivaColombia plans to stick to an all-A320 fleet.

See related article: VivaColombia takes off in hotly-contested, fast-growing Colombian market

Copa Colombia's continued pull-down in the domestic market resulted in its market share falling 5ppt in Jun-2012 from 17% to 12% year-over-year, based on RPKs. Avianca grew its share by 2ppt to 59%, while LAN Colombia inched up 1ppt to 20%.

In its first full month of operations, VivaColombia captured a 3% share of the Colombian domestic market in Jun-2012. Smaller government-owned carrier Satena lost 1ppt of market share while fellow regional carriers Easyfly and Aerolinea de Antioquia saw their share remain essentially flat year-over-year at 2% and 1%, respectively.

Colombian domestic market share by carrier (% of RPKs): Jun-2012 vs Jun-2011

Jun-2012

Jun-2011

Source: CAPA - Centre for Aviation & Colombia's CAA

For 1H2012 Copa Colombia's domestic market share fell from 18% to 12% while Avianca increased its share from 58% to 62% year-over-year. LAN Colombia's share declined 1ppt to 19% while Satena also recorded a 1ppt decline to 3%. Easyfly and Aerolineas de Antioquia saw their respective shares remain steady at 2% and 1%.

Colombian domestic market share by carrier (% of RPKs): 1H2012 vs 1H2011

1H2012

1H2011

Source: CAPA - Centre for Aviation & Colombia's CAA

Copa Colombia's decision to focus largely on international routes from Colombia is reflected in the 33% international ASK growth it posted year-over-year for Jun-2012. The carrier's traffic for the month jumped by 36%. During 1H2012 Copa Colombia grew ASKs by 42% while its traffic jumped 50%.

Flag carrier Avianca remains the market leader internationally in Colombia, recording a 45% market share based on RPKs in Jun-2012, followed by Iberia at 9%, Air France and Lufthansa with 6% shares and Copa Colombia with a 5% share

Colombian international market share by carrier (% of RPKs): Jun-2012 vs Jun-2011

Jun-2012

Jun-2011

Source: CAPA and Colombia's CAA

During 1H2012 Avianca-TACA captured a 46% share of the international market, followed by Iberia in a distant second with a 10% share. Air France held a 6% share, Lufthansa 5% and American 5% each, Copa Colombia 4% and United 3%.

Colombian international market share by carrier (% of RPKs): 1H2012 vs 1H2011

1H2012

1H2011

Source: CAPA - Centre for Aviation & Colombia's CAA

VivaColombia faces heavy hitters and small regionals at its Medellin base

VivaColombia serves eight markets from its main base in Medellin - Cartagena, Bogota, Cali, Barranquilla, Pereira, Bucaramanga, San Andres and Monteria. The carrier also operates flights from Bogota to Cali and Cartagena and from Cartagena to Cali in addition to a Pereira-Cartagena routing.

Although VivaColombia strategically selected Medellin as its base to avoid the major trunk markets in Colombia, it faces competition from either major airlines or regional carriers in each of its markets except for Pereira-Cartagena.

The most contested market is the trunk route of Medellin-Bogota, which is served by Avianca, LAN Colombia, Copa Colombia and Satena. Avianca offers flights from Medellin to Cartagena while both Satena and Aviana operate service from Medellin to Cali. VivaColombia also competes with Avianca on flights from Medellin to Barranquilla, which is also served by turboprop operator Aerolinea de Antioquia (based at Medellin Enrique Olaya Herrera Airport).

Copa Colombia is VivaColombia's sole competitor between Medellin and San Andres. Easyfly and Aerolinea de Antioquia operate from Medellin to Bucaramanga, while Aerolinea de Antioquia and LAN Colombia offer flights from Medellin (Herrera) to Pereira.

Avianca, LAN Colombia and Copa Colombia all operate on flights from Bogota to Cali and Cartagena, and Avianca competes with VivaColombia on service between Cali and Cartagena.

VivaColombia has reportedly already discontinued flights between Medellin and Pereira. While the route is still listed in its offerings displayed on its website, direct flights in the VivaColombia booking engine are no longer available. The cancellation was reportedly prompted by low demand and the proximity of alternative airports, presumably Herrera, which is located closer to Medellin's city centre but only accommodates turboprop aircraft. LAN Colombia still operates Dash 8 turboprops that were part of Aires' fleet, but is expected to return those aircraft to lessors as their leases expire.

See related article: LAN outlook brightens as strong 3Q2011 earnings are recorded and merger with TAM nears

Carriers serving Herrera cater more toward business passengers with high-frequency service operated with smaller aircraft. The Medellin-Pereira route appears to be more inclined towards business travel as Pereira is a major centre for textiles and coffee production while Medellin is Colombia's second largest economic region behind Bogota. VivaColombia's business model is geared more toward capturing visiting, friends and relatives (VFR) and leisure traffic.

VivaColombia has also recently launched service from Santa Marta to Cali and Medellin. While Santa Marta-Medellin is served by Avianca, those two routes appear to be more in line with VivaColombia's stated aim to capture VFR and leisure customers as Santa Marta's main industry is tourism.

During the next year VivaColombia will need to steer some of its expansion onto the "pioneer" routes it has been awarded by the Colombian government. Those routes currently have no competition, and the government has guaranteed VivaColombia that it will face no contenders in those markets if it launches flights to those destinations within a year. Previously, VivaColombia CEO Fred Jacobsen told CAPA the carrier would likely only launch a couple of pioneer routes by the end of 2012, but those plans could change as the spool-up to five aircraft is taking longer than expected.

VivaColombia seems to be off to a solid start in the rapidly-growing and changing Colombian domestic market. Its load factors to its initial destinations are relatively strong, although they were likely supported by introductory promotional fares that cannot be sustained in the long term. At the moment VivaColombia appears to be co-existing with the larger Colombian carriers in the markets where it competes directly with Avianca, LAN Colombia and Copa Colombia.

But the solid start is by no means a guarantee of long-term success as VivaColombia's business is still very much in its infant phase. Although the carrier has solid financial backing, the business case for a pure low-cost operation in Colombia is far from being proven, and VivaColombia faces an uphill climb to ensure its prolonged viability.