Airline CEO Interview: JetSMART, Founder & CEO, Estuardo Ortiz

Transcript

Lori Ranson:

Welcome back everyone to this session of CAPALive. I'm Lori Ranson, Senior Analyst for the Americas, and we're very pleased to have, JetSMART's CEO here today, Estuardo Ortiz. Thank you very much for joining us. We are really excited to get your insights. So, I think first off, I know that, Latin America is taking backtrack lately in terms of, Chile has had to institute an international shutdown for a month. Brazil's cases are rising. There are other places in the region, that are battling second wave. So I guess in light of those developments, how do you see the recovery progressing over the next six months to a year?

Estuardo Ortiz:

Thank you, Lori. And thank you for having me as well, and the CAPALive program. And you're right, the week I've seen a, process in the first quarter of ups and downs in South America. And in fact, in some markets, coming backwards for whom Brazil has seen numbers that are actually below the ones in September 2020. So, I think the recovery is going to be laid out by three key factors. The first one is travel restrictions. The second one is, consumer confidence and economic recovery. And you'll see that it's going to be quite different, across the region as the three factors play out, depending on each of the countries conditions. The case on Chile today, it's indeed in the month of April, quite drastic because 96% of population can't travel and the borders are closed. We did have a first quarter in JetSMART that was around 76% of the flights that we were flying in the first quarter of 2019.

So it wasn't that bad. But I think it's going to be, a second quarter, probably lower than the first quarter in terms of total capacity. The good news is that, the vaccination program is making, really good advances and there are expectations to have it reaching 80% of population by, the end of June. If that's the case and the restrictions are removed, my impression is that, we could see a fourth quarter in 2020, reaching 90% plus of the capacity of 2019. But it will all depend on those factors. As the remaining of the region, it will depend a lot on the vaccination program and the measures that the government state, now that we see some more trends of new variants and things like that, that caused governments to be poorly, very cautious on the pandemic.

Lori Ranson:

So it seems like, before this latest set of developments that Chile's domestic market was recovering at a pretty swift pace and could be poised to resume that, once things are sorted out. Is that a way to look at that?

Estuardo Ortiz:

JetSMART was recovering fairly quicker in the sense compared to the previous years. But the market had recovered around 60% in domestic. Bear in mind that international has been always across the region around 25 to 30. So when we talk about recovery, we need to keep in mind, the tremendous difference and the speed of recovery of those two markets.

Lori Ranson:

Right. Before, some countries went back down into lockdown. If you will, I know that the trend was domestic markets were expected to recover at a faster rate, but JetSMART actually before the restrictions launched a lot of international regional destinations, especially to Colombia. And if you could just share with us what drove that decision-making for the airline?

Estuardo Ortiz:

Sure. You're right. We have seen in our markets, the BFR routes, business families, from their relatives. They were resilient through the pandemic and we can focus on reactivating international destinations, such as KALI or Tokyo, very successfully. Leisure and business, I believe have been lagging behind on international. So currently, we were flying in first quarter around 42% or for usually international network, rather than 75 on domestic. I do believe however that, Leisure will drive the demand as restrictions come out. We expect to see pent up demand actually, when that happens. So we are going to be ready, to jump on those opportunities. And the post could be the market to reopen international leisure destinations, a place like Brazil for you, for instance, that have been very difficult during that, but at the past year. But that will be very interesting. I believe people still are, people and they want to travel more so than ever before, to rest, go on vacations, to visit the family relatives. So, when that happens, international routes will have probably recovering quicker and all those back again to the restrictions as well.

Lori Ranson:

Right. Can you give us an update on Argentina as well? There've been some changes in the marketplace there during the last year. So how does JetSMART view its position within the country going forward?

Estuardo Ortiz:

We are pleased with Argentina's performance of the operation today. However, the country remains a still at the lower end of the recovery of 33% of capacity before the pandemic. Regard of the matter, is that there were seven airlines and now we're only three. So utilization, is up around 88% to pre-COVID of the aircraft. We are also seeing important increases, and the unit revenue in the country, as well. We just moved our operations of Bay 322 Aeroparque in Buenos Aires. And recently launched Juni routes. We'll be starting in June [foreign language 00:06:52]. So generally, I think it's got a good prospect for us in the following months.

Lori Ranson:

And as the number of competitors have been reduced, does that give you any pricing traction in the market or is it right now just stimulating to get people to travel?

Estuardo Ortiz:

I think there's been, just different market dynamic now. Bear in mind, there's 67% less capacity, so that's a tremendous amount of capacity, therefore, that it's also been translated into pricing as well. And Argentina, has a trend of the evaluation on inflation needs to keep up. And we're seeing that keeping up, which we did in before the pandemic due the competitive environment was... So all those factors added together. We were positive about, the development international operations so far.

Lori Ranson:

And I know that you're planning to launch in Peru and you had some interest in Colombia and Brazil. Is there still interest in Colombia and Brazil for domestic operations or are you taking a wait and see approach until there's some more clarity in terms of the recovery in the region?

Estuardo Ortiz:

Yes, you're right. I mean, our focus now is to establish operations quickly and Argentina and Chile. And, we have been since the beginning, creating a very special network, different ULCC to where the ones, the traditional, Santiago centric or Buenos Aires centric or LIMA-centered networks. And we see that opportunity as well. We fly in Chile from three different net operational bases. Santiago, of course, but also for example, Concepcion, we used to have just one flight to Santiago before jets might not ask 10 nonstop flights and we have carried close to half a million passengers from that City. When we expand to Peru, we also open routes, to hear what are the key powers never flown before. So there is opportunity today, as well as it was five years ago, when we started. There's a simulation to be done. There's people who have never traveled as 160 million middle-class consumers who had traveled very little by plane. And that opportunity remained there.

So, we have indeed started a project in Peru, many months ago, to get progress made on a certification over a new AOC. We continued to watch very closely. It's a market that we have been evaluating for quite a long time. So, it is possible that if the trend of domestic recovery close quicker than international, it becomes a real opportunity for us and we'll continue watching Colombia but I'll see, those two markets have recovering quicker than the others. So we keep an eye on them.

Lori Ranson:

I want to turn to product for a second because it seems like JetSMART has taken an opportunity during the pandemic to introduce new products. I think bundles and flexible bookings. It seems like, those are opportunities to help improve revenue during the crisis. So, did the pandemic accelerate plans to launch those products or was it something that the company was planning for, quite some time?

Estuardo Ortiz:

Yeah. Good question. My view is that you can never waste a good crisis. You have to take advantage of a crisis. And when this started, we had a few projects that... Because our focus was mostly on growth, we couldn't really cope with it. And the pandemic allowed us to launch this project called JetSMART 2.0. We had two basic focuses. One that reduce costs. I believe cost is, again the most important thing, before the pandemic, during the pandemic and after the pandemic. And secondly, new products, new services for customers. The objective was simple, increase revenue per passenger, give more alternatives to consumers. I think if and then, it has shown us how important this is, customers like to pick, like to choose, and digitalization has grown exponentially. So, it has been a quantum leap in terms of adoption of digital media and digital means of purchase in South America.

So we did launch many products, during the pandemic. It's already been four months since that started, including bundles, cold packs in our case, very successful, those fairlock, Flexi Smart, which is a product that, now it's in flipping your ticket that allows you to change your date or your name or your route. But I think that product will stay after the pandemic. We will just sell it to consumers who are willing to buy it. And flexibility is something that I believe to a silver couple of years is going to be really important. So as a result of that, we've seen the revenue per passenger increased, more than 20%.

Lori Ranson:

You touched on costs. And I know that, two of the major airlines in the region, they're obviously restructuring in chapter 11. They're saying, they're going to emerge much more efficient, much more competitive from a cost standpoint. But, I know that low cost operators during the pandemic haven't rested on their laurels. They've been working to take cost out as well. So, how do you see the landscape once they exit chapter 11 and you all complete your cost-cutting programs? How do you see the competitive landscape at that point in time?

Estuardo Ortiz:

Well, that's a big question I guess but... I believe you're right, Lori. The competitive landscape will change, will be different than it was, before the pandemic. I think all carriers are looking at cash and costs and the ones restructuring through chapter 11, like the ones you mentioned. We know that taking advantage of it fully through restructure fleet. We know you're going to be a smaller than they were before. They might be 20, 30, 40% smaller, but more efficient. We're negotiating contracts, labor conditions, all sorts. So my assumption is that, I need to compete with lower costs, legacy carriers in the future. That said, I think the amount of debt taken globally in the industry, there's some estimates that, well then may actually surpass revenue in 2024.

The trend continues, once it used to be 76%, it could be, about a hundred percent. And Carriage is going into a disruptor and it will have, a heavy burden in terms of the obligations and the interest expense. Leverage ratios are going to be higher. So, that restructuring doesn't come for free. But I do believe that, that's the case and we've been acting accordingly. Part of the JetSMART 2.0 project includes initiative we had before, but we just increased the intensity for it called the lowest cost in America. We want to be positioned in the region at the lowest cost separator. And we think we are, and we've been working reactively and several fronts, improving our field deficiencies, practices, renegotiating contracts, participating along the other Indigo Partners and several joint purchases, to reduce their costs. So, I see JetSMART coming out of the pandemic with a lower cost structure. And at the end of the day, that's our priority. I mean, we're not you'll see and cost is number one.

Lori Ranson:

As being, part of that Indigo group, especially during the crisis. Has that had some unique advantages for JetSMART and the other carriers in the group?

Estuardo Ortiz:

Well, I think, know that you'll see that model has really tested that it was the most profitable before the pandemic. It's been through and after, and we've seen all the evaluations given to the carriers these days. So, we do work in several initiatives together and they bring us a scale that otherwise you would not be able to achieve. So, it's absolutely very beneficial for us, to be part of the Indigo Partners portfolio of airlines. Our focus continues to be the same though. We need to change the model and a few things, but I'm not as concerned as well, talking about the competition, because the bigger opportunity for JetSMART at the end has been, stimulation of all of our 7 million passengers today. And the one point for a million during the pandemic. Our focus has been on stimulations for pricing and connectivity. So, I'm still looking at South America that can grow faster and bigger than it is today... To be our main, our primary source of business.

Lori Ranson:

And, just in terms of fleet, have you all decided to slow down deliveries or made any other adjustments to your fleet plan over the next year or two?

Estuardo Ortiz:

Well, we knows the whole aircraft fleet supply has been clearly above demand in the past year. So, we have seen that, of course, as a factor that we watch very carefully. I do see how Orient Airways adjusting their production capacity and matching the demand. But I do think there's some structural changes in the way we see fleet in South America. The first one is, I see fleet renewal happening. So, many of the competitors getting rid of older aircraft, particularly wide bodies. I also think that the postcode will bring a lot more focus in a narrow body aircraft in South America, rather than the wide body. And costs, will be more important. And price will be more important. So we have focused ourselves on that, making sure that our fleet continues to be competitive. And of course, the pandemic has a huge impact. So we have to adjust our delivery schedule to match demand and recovery. But we also keep very close to understand when demand will come back. They will beep and thump demand at a certain moment in time. And we'll be ready to go forward and retake our growth once it happens.

Lori Ranson:

And I just want to turn to government and government support in the region, because obviously it's a big and important issue. Governments probably weren't in a place to offer a lot of financial support to airlines during the crisis, just because of some economic challenges that were present before COVID-19 began. But, what has been JetSMART's experience dealing with governments during the pandemic, in terms of other means of support?

Estuardo Ortiz:

Lori, it's the region, like you said, has a lot of priorities. Governments have focused theirs on the people and the small companies, not aviation. So, we haven't received any support at all. I'm not expecting that to happen at all. What I do think, it's important and we've been very active because of this, with the governments we work with, is a very comprehensive national reactivation plan, for the tourism industry. It's 3.4% of the P or the GDP in Chile. Similar in Argentina, even more in Peru. Millions of jobs, that have been affected through the pandemic. And the first thing is to, find ways to allow people to travel. That's important. It comes hand in hand with the vaccination program, with better testing, better tracing, better management of the pandemic, right? I think that's the most important item in the agenda for 2021, is to make sure we reactivated the industry. We allow airlines to fly. We allow customers to fly and it's been proven throughout the world, that flying in their book is safe. One and 27 million [inaudible 00:20:01] infected on board. So I think that's a pretty good amount of governance.

Lori Ranson:

Do you think governments are being receptive to working together, to restart, to maybe uniting and finding ways to lift restrictions for inter-regional travel? Do they seem willing to work together? Are they receptive in that regard?

Estuardo Ortiz:

I think the governments are in a difficult position because they have to deal with the economy and have to do with the health. And right now, health has been priority. So, I'm hoping that, again, vaccination programs go forward. Then we'll see a lot more openness and liberty for people to travel.

Lori Ranson:

Right. I think also, maybe just broader, if you could just share some biggest opportunities and the lessons you've learned from this whole crisis, that you'll use going forward, whether it's balance sheet management, cash operations. Share what you think are the most important things that you need to be equipped with going forward. Because, not to be pessimistic, we don't know if another pandemic is going to hit the industry.

Estuardo Ortiz:

That's a great question. I think, the key is mindset, honestly. There's very little you can do to change what the conditions you're in and actually very little to predict it. So having the right mindset from everybody in the company, it's very important. The mindset to be able, basically to adapt quickly, to be agile, to implement with quality and speed. The other learning thing I think is that, we know we're in the right business. We are in the ULCC and we have seen the benefits of it. Cost continues to be number one and they will continue to do so. In the recovery, there's going to be also economic recovery. Not only recovery and restrictions in the pandemic and people are going to be sensitive to price, both companies and people. So, costs and price continue, probably more important after the pandemic. But most have learned that we need to make some adjustments, the pandemic has confirmed things that we knew were important like costs. But it also has, accelerated other things like digitalization.

We're working hard on that as well. We want to be digital leaders in the region. We're not, right now and we want to be, and we were born in digital companies since they won, but it's just sometimes they thought some things like time and we want to make sure that, we make an important step in that regard. So 2022, 2023, we can be leading this in the region. And there are other things I believe, that are highlighted like sustainability. We launched a sustainability program during the pandemic, in the company that encompasses not only environment, but social and economic sustainability. I think the pandemic has shown us the importance of the role we have as an industry and as a company. Now on this regards, flexibility, I think is the other thing that comes to mind. We were not for example, managing the cargo business before the pandemic.

And we have seen, full revenue in the world moving up from 12% to 36% of our cargo business. In our markets here, Garner was minus 90% in some markets and passengers and minus 15% only, in cargo. So we embarked ourselves. We set up a team, which we had set up many actually in the year called smart work sales and certified both airlines and cargo. It took time, because we wanted to do it. You will see style, lower complexity, lowest cost possible, and we'll commence commercialization. And this... Month of April. So there's also new things that you need to do. Managing trotters has been something we never did before, but now it's important. So I think again, mindset, flexibility, and agility, to make sure you continue to be consistent with you are. But also, adapting to the market and taking new opportunities and new markets. It's important.

Lori Ranson:

So after the launch of cargo this month, is that something that's going to be a permanent part of the business for the company or is it something that's temporary right now to push out the risk of...

Estuardo Ortiz:

We definitely see a strategic value in the business. Of course, we'll have to go through it, but it has to keep it. E-commerce has exploded in South America because of the pandemic. So that's only going to help. I also think there's going to be a, less supply of passenger aircraft operations for the next two years at least. That will reduce as well the amount of bailey availability, they used to be before. So, if you think there's going to be less supply, more demand, we do think that's a good place to be. So, it's going to be something very beneficial. Improve our performance, in the future years.

Lori Ranson:

Great. Well, we are pushing up against our time limit, unfortunately, because this has been a really good conversation. Thank you so much for sharing your insights. We really appreciate it. And, at some point, maybe we can do this in person and see where we are in a few months. Thank you again.

Estuardo Ortiz:

I am hoping that very soon. [crosstalk 00:26:09].

Lori Ranson:

Yes.

Estuardo Ortiz:

I hope everybody to be well and their families and businesses. Thank you.

Lori Ranson:

Thank you. You too.

Speaker 3:

CAPALive for the deep dive look into restoring travel in an environmentally sustainable and responsible way. Airlines around the world have used the downtime caused by COVID-19 to reevaluate their carbon footprint with many announcing a commitment to net zero carbon emissions by 2050.

Speaker 4:

Finding a balance between survival of the world and survival of the aviation and travel industry. Finding that balance is not an easy equation. One is an existential threat, and the other one is a threat to our existence.

Eamonn Brennan:

In Europe, before the year 2019, CO2 was growing at twice the rate in Europe, of traffic. So traffic is growing 3% to your tube is growing 6%. This just shows you, that wherever we're in a position in Europe to give direct routing, because there's no traffic, you can really get CO2 down, which really shows you're paying you to enclose the single European sky.

Barbara van Koppen:

The best way to move forward is to, implement those measures, actions that truly contribute to fewer CO2 emissions. So in that respect, fleet renewal and the use of shop are simply key for our future strategy.

Speaker 7:

If you missed any of these sessions, there'll be available for our CAPA members by the news alerts and available on our CAPA TV website. So keep watching and don't forget to share your thoughts on social media with the hashtag CAPALive.

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