Airline CEO Interview with VivaAerobus, CEO, Juan Carlos Zuazua

Transcript

Peter:

Good morning, good afternoon to everyone that is watching around the world on this session. It's my sincere pleasure to have one of the most dynamic CEOs that is running one of our Latin American Caribbean airlines in the region, Juan Carlos Zuazua, who is the CEO of VivaAerobús. Juan Carlos, good afternoon, buenos días. Welcome to the show.

Juan Carlos Zuazua:

Peter, thank you for the invitation and hello to all the people joining to this important cafe event. So looking forward to the interview.

Peter:

So Juan Carlos, if you don't mind for the benefit of the audience, I just want to go down a few things about your airline. It is really quite fascinating what you have been able to do during this last year during the pandemic. So VivaAerobús, based in Mexico, you're the first airline in the Americas to resume 100% of the operating capacity that actually took place in November of 2020, this year. You are now carrying more passengers today than you did in 2019. You've increased your market share in the domestic Mexico environment. You're about to become profitable if you haven't already in the first half of 2021. All this during a pandemic in which airlines are just trying to one, survive and restart, and in your case, it's looking to be an exceptional year. What have you been able to do that airlines around the world in the region have struggled with?

Juan Carlos Zuazua:

Thank you, Peter, very good question. Certainly Mexico, one of the countries in Latin America, which never shut down. So, that helped a lot. So we can organise all the stakeholders and we can focus our energies in getting a confidence back to our travel. So at Viva we focused in two different strategy. Number one, we call it the stakeholder restructuring with all of our suppliers. Of course, with 90%+ of our business down many months ago when the pandemic hit in March, we needed to work with other suppliers to find a way out. But at the same token, while we were waiting for the lockdown to start easing, we started working in how will we attract passengers under this new reality, right? So, what will be the messaging? What will be the confidence we'll put in all the process to ensure passengers trust taking an one hour flight to the beach, right?

Juan Carlos Zuazua:

So, we were very lucky in getting these messages out there, along with all the airlines in Mexico, which have done also a very good job, and this is not a one man show. I believe as an industry, we did a very, very good job. And Mexico, as of July last month, as a country, we had already recovered 85% of the overall traffic. Of course, we were leading the recovery. We're well above 100%, as you rightly mentioned, not only on capacity and passengers, due to late January, July, we're growing 23% versus 2019, got 30% market share, and also very optimistic on the future. The second quarter was highly profitable, 40%+ EBITDA margin. And having said that, without any government support or subsidies, so this pure margin, okay.

Peter:

And that was going to be my next question, in a country like Mexico, that the government basically said, we're not going to give you any money, we're not going to do what the US did or countries in Europe, also not going to put any limitations, we're going to let you run the business. What's turned out to be better? That the government didn't give you help, or that just said, you know what? I'm going to let you run your business without restrictions. What's been the best result out there?

Juan Carlos Zuazua:

From a personal perspective, I'm a full believer of the invisible hand and the survival of the fittest, and at the end, whichever company is better prepared to face a pandemic, so we believe that the Mexican government made the right decision in not supporting the industry whatsoever. But, not interfering with the industry, right? In hindsight they call it the essential industry, so meaning that we should continue flying and operating. And another reason why we were able to organise as an industry, and as an airline to recover much faster.

Peter:

And now only for the Mexican carriers that you've been able to return to almost what you had in 2019, but also the international carriers have also slowly been able to grow and come back to the market in a healthy manner. So it's helping everyone and it's stimulating more business for passengers to come, either for personal reasons, vacation, business. Let's move on a little bit about your airline. You know, you are very quickly becoming now the number two airline in the country? About there?

Juan Carlos Zuazua:

Domestically, we be growing as significantly and consistently for the last several years, and that's where we focus our business model as a true ULCC. We want an efficient operation, fast aircraft turnaround over six sectors a day we operate with a brand new A320 fleet. So, the domestic operation provides a lot of the ULCC benefits we're looking for. Of course, international expansion is also important, north and south. We're growing both to the US and to Central and South America. And it's part of our business model. But at the end, we're still highly bullish on that. And the macroeconomic on Mexico as a country, a growing middle class and the opportunities there are for a much bigger aviation market.

Peter:

Now, the low cost has been very successful in Mexico, particularly competing with the buses, which a main point where most of the people were on buses because they just couldn't afford going on aeroplanes . Are the buses still the competition, or are Volaris out of Mexico and the other international carriers now become- Who's your primary competition now?

Juan Carlos Zuazua:

Good question, Peter. I mean, certainly we have very good competitors, Volaris and Aeromexico. We respect them and they're doing a very good job, but in a country of 120 million population and on a pre-COVID domestic market of just 55 million domestic, one-way journeys it's not about a market share game. It's about a more market growth game, right? So, of course we do compete with Aeromexico and Volaris and the smaller regional carriers in many of the markets, but in many others, we don't compete with them and we compete with actual buses. In some cases, even with ferry routes in the Baja peninsula. So, we have a ground and air competition, and we're mainly focused in developing new markets, putting point to point connectivity, and ensuring more Mexicans can fly either more often, or fly for the very first time.

Peter:

In terms of international, we've seen the ultra low cost in the region for a period of time become very strong in their local markets. And now, we're now seeing a mushroom effect in your sector, type of airlines, now really looking outside your home markets. [inaudible 00:08:10] now moving south, we see with JetSMART in South America. And you just mentioned in your case also, you've always had somewhat of a good tie, strong tie, with the US. How fully sure are you now [inaudible 00:08:23] possibly looking at different operations or opening new operations throughout Central America, and how deep in South America would you consider going?

Juan Carlos Zuazua:

In the short term, we're not foreseeing opening a new AOC in a different region. As I mentioned earlier, Mexico is second, is Latin America's second biggest aviation market and one of the markets in Latin America with the lowest aviation penetration. So, we're still highly bullish on both Mexico domestic and Mexico international growth. So we have around pre-COVID, 55 million domestic passengers and another 50 plus million international passengers. I'm a firm believer that this market should at least double, right? We should be at 200 million market both international and domestic in the next 10 years. So there's still a lot of growth to capture within Mexico domestic and Mexico international to the North and South. That's where we're going to be focusing more.

Peter:

In terms of that ambitious goal that you have in almost doubling the number of passengers over the next 10 years, what do you see as your biggest challenge to be able to obtain that growth? You have the liquidity, you're a strong airline, you continue to invest in aeroplanes , you're becoming bigger and bigger. So from your side, you're providing the customer with what they're wanting. But what would be that limiting factor that could prevent you from moving forward? Is it government? Is it-? What is it?

Juan Carlos Zuazua:

Good question, Peter. Certainly, you know aviation, there's so many uncontrollables in our operation and of course we need to manage what we can control. But we need to align every single stakeholder. Passengers pay for air travel, and in that ticket, it includes airport taxes, airport costs, airport fees, and government taxes. So, we need to ensure we have all stakeholders aligned in one single strategy and one single message that we need to continue enabling aviation with competitive pricing, right? So we cannot, on one side, ULCCs like Viva, all of our energy is focusing to ensure we have rock bottom first. My average fare in 2019 was $28, right? And I'm buying bigger aircraft and I want to offer in the future $25 average fares. But in the other token, we see it's hard some of the airports are raising their airport fees 30 or 40%, right?

Juan Carlos Zuazua:

So, we need to ensure we work aligned with both public and private airports are conscious on these big investments we're doing on the sector. And also governments realise that instead of imposing more taxes on this industry, which would take taxes out of the industry, we can stimulate much more demand, which further will contribute in other industries.

Peter:

In terms of taxation and the contribution that aviation brings, particularly in a country like Mexico, it's so vast, it's so big, moving from north to south, just on roads, it's many, many hours. And then the importance of connectivity in terms of tourism. Are you seeing this government, Mexico and other governments like the US that you have a strong penetration into, do they really understand the value that this sector, what you're contributing to social and economic wellbeing?

Juan Carlos Zuazua:

They understand it certainly, and given that we don't have another form of public transportation, like in Europe or Asia, it's pretty much either the bus or the air. Clearly we are an essential industry, right? So that's a reason why we need to work together with governments to see what different types of incentives we can create so we can enable more growth, more point to point connectivity, decentralising air travel, right, connecting more cities without going through big hops. And that's what ULCCs do every day, right? So I believe ULCC penetration in Latin America is perhaps 10 or 15 years behind other more developed nations like Europe, but we'll see the benefits in years to come of getting many regions connected directly, shorter travel times, cheaper fares, and of course all the benefits from tourism, economic trade, connectivity, and bringing families closer. Right?

Peter:

The other key stakeholder here is the airports then, and we'll talk about air navigation in a few minutes. But airports in Mexico, are they aligned with us? Are they aligned with what your vision, your strategy is, or is this still the old way of doing business? They are a monopoly at the end of the day, but has COVID and other crises in the region in Mexico also changed the way they think in terms of partnership?

Juan Carlos Zuazua:

Good question. In Mexico we have three private airports, highly profitable, right? And then we have the public group, which owns the bigger Mexico City airport. I have to say that the three airport groups, they have very long-term concessions and they're doing a good job in running the concessions for their shareholders, not necessarily the best job in running the concessions to reduce costs for travel. We have one of the highest airport fees in the world, right? But those were the rules, how the airports were privatised 15 or 17 years ago. But having said that, under these rules, we believe we work very good together with the three private airport groups. We have objectives in bringing additional growth, connecting new regions, but certainly the cost of travelling in Mexico could be much lower if we will had privatised airports differently 17 years ago. [crosstalk 00:14:10]

Peter:

That's I think a very good point, Juan Carlos, because what you've experienced in Mexico, we've seen in Brazil and other places where we've concessioned airports. The concession contracts that were implemented were put in place by governments are not necessarily helping, definitely not helping the airlines, but also not helping the airports adjust, adapt to different pricing schemes depending on the situation. Is this something that we could, in the case of Mexico, work with this government on as new concession contracts come up for renewal. Look at what the contracts should look at, give more flexibility to the industry, and when we do hit a COVID, or there is a crisis, or there's good time, it can be adjusted so airlines can make money as well as airports, but at a reasonable cost to the travelling public.

Juan Carlos Zuazua:

Absolutely. In my view, airports worldwide, whenever a government is planning to privatise an airport or give a concession, they should see an airport as a public good, right? Not as a money-making machine, right? If we see an airport, that's a public good that if we have a great connectivity strategy, right? Of course, with the proper margins for the CapEx investments the airports are making, we'll have a much better and much more efficient, a good allocation, right? So yes, in 30 years time when the government is next in Mexico granting the new concessions, certainly instead of looking for the highest bidder, they need to look for the most efficient airport operator in order to offer the lowest and more competitive airport passenger fees to the consumer.

Peter:

So let's not look 30 years down the line, let's look today. And your airline has a strong and important presence in Mexico City. And it's known within the industry that one of the biggest airport projects that we had online was the new Texcoco airport a few years ago. That was put off with the new government. And now they're looking into the three airport system. So without getting into the politics and the reasons, the new airport system. What, from your standpoint, do you see as your priority to make sure that your airline and the travelling public will have a good experience, will be successful, with this new airport system? What does the government need to reassure you that would be put in place in terms of how you select which airport you want to operate into in the future?

Juan Carlos Zuazua:

Good question, Peter. Certainly we're going to have three airports by the middle of next year operating. Right now we have Mexico City and Toluca and Santa Lucia will be open in March, April next year or whatever the date is. I think most important, the government have made important changes on the navigation, which was a highly political debate, which all of the airlines are supporting. But I think most important is the ground connectivity, right? If we look at other metro areas like London, for example, you have five different airports, right? But there's a great ground connectivity or how do they call it, the underground connectivity in certain case. You can jump into Liverpool station and go to London Station with, I don't know how many Euros, right? Not very cheap. But in the case of Mexico City, the airport is very well connected with the subway but we need to make sure that the new airport has the ground connectivity, the efficient public transportation to ensure passengers can get in and out of the airport very easily.

Juan Carlos Zuazua:

Right. Toluca is another airport with high potential. The problem is the distance and the ground connectivity. There's a train, which is 80% being built. My personal view is that with train it's completed, even though it's not going to have a complete stop on the airport. But I believe the fourth stop of the train you are going to have a shuttle service to the airport. That's also going to be an important determinant for passengers getting in and out of Toluca, right? So, these systems can work. It's proven they can work like in many other regions in the world. We just need to ensure that people can get in and out of the airport. And second to that, Peter, let's make sure that these, call it alternate airports in this city, they have much more competitive fares and pricing for airlines and for customers. You cannot expect that customers are going to pay the same passenger facility fee as the big airports, right? So we need to have a like Stansted versus Heathrow, like Luton versus Heathrow, et cetera. Right? So, we need to learn from that experience.

Peter:

I think you're answering my next question. You'll be in favour now that Mexico will have three airports, possibly having a low-cost airport?

Juan Carlos Zuazua:

A low-cost airport. Yeah. [crosstalk 00:18:55] In Mexico City it's going to be very hard because the problem is, where? What I believe is that existing terminals should have infrastructure for full service carrier operation and for low cost terminal operation. For example, in Santa Lucia airport, they're going to have a section like Monterey airport, where we currently operate, in which you can co-exist a low-cost operation or a full service carrier operation, in which my passengers will board using the two stairs of the door, fast turnaround, 25 minute turnarounds, et cetera. So, that can very well co-exist in a single airport.

Peter:

So it's much more practical in the case of Mexico is that these three airport systems cater to all types of airline types, legacy, hybrid, but at a different price range depending on the type of service that you are seeking.

Juan Carlos Zuazua:

Exactly, and at the end the price and the demand will follow. Right? If there's a very good incentive on the new airport, more capacity will be allocated there and potentially cheaper fares flying from the new airport that the main airport, similar to the Stansted and Heathrow debate in the UK, right.

Peter:

Let me shift to another one, an important issue in the case of Mexico as a country and how it addresses aviation. Last year the United States government, the FAA, downgraded Mexico to category two. And for our audience, when a country is downgraded by the FAA certain restrictions are imposed. So the airlines can continue to maintain its operations into the US but cannot increase capacity, very difficult to change the aircraft type, are very limited. Whereas with the US carriers, they continue to operate in a free manner. How much of an impact did this restriction come on your airline, particularly as you are recovering strongly, you're bringing in new aeroplanes , there is demand, and the US being such an important market to you. How much of an impact was this downgrade to you?

Juan Carlos Zuazua:

Certainly it's a big reputational impact for our country because we were there 10 years ago. It took us four months back then to recover category one, and we had almost a decade to learn from those mistakes and we're back again in the same place. So yes, certainly short term, there's not a big impact because we can fly pretty much the maximum available capacity we flew in the last 18 months. But in the medium to long-term, certainly there's an impact because we are limited to put additional growth, right? Either frequencies or new routes. Our growing carrier, like Viva, we're receiving new aircraft and opening new markets, which will certainly look into expanding our network into the US. So, we're working closely with the Mexican government. The Mexican government is getting support from the US FAA. And we're confident that hopefully by the end of the year or early next year, we should be getting back to category one and and ensure that the best practises are in place from our government authorities.

Peter:

Now, one thing that many people may not know about you- people who don't know you, they see you for the first time, they think a young guy, you've been in the industry for maybe a couple of years, but you took over the CEO role back in 2009. So you're probably one of our long lasting CEOs in the region in terms of stability. So you're an old guy by our practical purposes. From your side, when you took over Viva at that time in 2009, to what it is today- two questions. One, what has surprised you about the dynamics of your airlines and how you've been able to grow and compete? And what is something that you never expected that did happen during that period of time?

Juan Carlos Zuazua:

Well, I'll start with number two. The airline crisis, number one, Peter, when I took over CEO position in 2009, we had five aircraft. We were a very small carrier. It's a highly volatile industry. And during these many years was sort of the main crisis. We had that 2008 economic crisis, and the fuel crisis, fuel spike, $150 a barrel. And then in 2009 we had the H1N1 influenza virus crisis, which originated in Mexico. And very soon an antiviral was discovered, which is the Tamiflu. And then of course in 2010, the economic crisis, but we have never expected a crisis of this nature like what happened last year, right? Certainly in this type of crisis times is when you know what is the type of people you have within the organisation? What are they willing to do for the organisation? And we were pleasantly surprised, even though we didn't lay down any staff, we took a very strong salary cutes, but we were surprised with the support of our teammates.

Juan Carlos Zuazua:

And second, in 15 years in the industry, perhaps I put because here I know CEO where I'm very young in the industry. I've been only close to 14, 15 years in this industry. And in this journey, you never stop learning. I'm very passionate of the industry. I'm very lucky to be surrounded by great professionals, a lot of great teammates who have much more experience in aviation than I do. And just have the openness to continue learning every day and ask the right questions. And there's a saying that there's not a dumb question, there are dumb people that they don't ask questions, right? So just continue learning every day. You know?

Peter:

Let's talk about the people, because your organisation [inaudible 00:24:46] you said from the very beginning towards the place to what you have today. And talent through the challenge, particularly during this crisis where many people have decided to leave the industry, they look for some other opportunities. And now we see around the world that we actually have a shortfall in talent. We were already somewhat concerned before the crisis, but even now. And now we're seeing airlines struggling to ramp up on their capacity because they just don't have the staff and the people. Is that something that worries you as a CEO, that you've been very lucky that you've been able to keep your people during this crisis, even though with the salary cut and that shows commitment, but as you move forward and you continue to grow and compete, that there will be a shortage of talented people being available?

Juan Carlos Zuazua:

Certainly it's always a challenge. It's an industry that either you love it or you hate it because if you look at it from the outside, it's a highly challenging industry, traditionally has not been very profitable. And many people would prefer to work in a much more profitable industry. But for the people who are in this industry, they know that it's an industry that once you're in, you will love it forever. Right?

Juan Carlos Zuazua:

So, what we did during the pandemic was amazing. We protected every single staff, yeah we took pay cuts, we started paying 100% back in October, but most important is we're hiring a lot of people back again. We will continue hiring, we're a growing airline. And if you have the right purpose as an airline, which we do as a true ULCC, I believe that's one of the best motivators for somebody joining your team and working for a true ULCC like Viva, in which everyday you wake up to work, you know you're going to be doing and contributing for a greater purpose and a greater good connecting people, either for pleasure, for business, or with their families, with cheaper fares every day. Right? So people love that purpose compared to other industries, perhaps they don't have a powerful purpose as we do.

Peter:

And I think one of the things that you bring, and your airline does, is that DNA within the airline in terms of how they contribute to the wellbeing of people, who are in many cases travelling for the very first time and they're going to see a family member or taking a vacation, and they experience the smile, the customer service that your airlines does, and you're doing it very well. Good way.

Peter:

The other important issue to discuss as we're coming to the end is sustainability, our responsibility as an industry in terms of the environment. Just share a little bit in terms of what you're doing at your airline. And again, lets go back to the government because certainly the situation in our region, Mexico, is very different from other parts of the world in terms of government investments in sustainable fuels and so on. What's your position as an airline, having social responsibility, and what do you need from governments to be able to, in the future, become more involved and committed?

Juan Carlos Zuazua:

Certainly on the green side, Peter, two or three years ago we launched our environmental pledge. By far we're Mexico's greenest airline. Right? And why is that? Because running a true ULCC business model like ours, with very young fleet, the new generation and new technology with the GTF, with Pratt, point to point flights, and 240 seats on an A321, by far, we have the lowest COO emission by passenger-kilometre or passenger-mile or whatever measure you want to make it, right. So starting from that, certainly we're in a much better position. We have placed very aggressive targets by the end of 2025, which will be emitting less than 50 grammes of CO2 per passenger-kilometre. On top of that, we have many other initiatives on how we allow passengers to contribute in green environmental projects.

Juan Carlos Zuazua:

And lastly, on the sustainable aviation fuels, as you rightly mentioned in Mexico, very little being done by the government because we don't have a local refinery like in the US. But my personal view is that still, SAFs are way, way too expensive. They're running at $7 per gallon versus $2 per gallon in the [inaudible 00:29:11]. So we're playing here the chicken and the egg, they are pioneers. If we sit down with the Valeros and the big refiners in the world, they need the volume, right? So, eventually we'll need to do something as an industry and perhaps with certain customers, trying to pay for an additional fee so we can start getting more volumes and getting more SAFs gallons being produced, and more and more percentage of our fuels being done with sustainable aviation. Right? So I think it's a challenge we have as an industry, I believe full service carriers are doing bigger airport on the SAFs, local carriers are following behind, but certainly it's a challenge as an industry, we have.

Peter:

Do you see it as a threat in your growth in the future? Maybe not so much in Mexico, they may be more of a follower, in the US and in other countries that implement these of sort of regimes.

Juan Carlos Zuazua:

I don't know if you were reading recently, but that US airlines are lobbying these days to get an important bill passed to get a stimulus to the refineries of like $1.5 Or $2 per gallon for them to produce the sustainable aviation fuels. At the end, something's going to happen. And there's going to be perhaps some big government intervention to get refineries to start producing and lowering the cost of SAFs. If they tell me, okay, you can buy a SAF gallon, at $3, I will be putting several gallons per flight. But at $7 versus $2, it's impossible being fuel, our single biggest costs. Right? So certainly regulation is going to follow in many countries, but I think there's going to be a lot of stimulus and government intervention to make this happen.

Peter:

And just to end, Juan Carlos, again, you run a very successful ULCC. In your point of view, can ULCCs succeed crossing the Atlantic?

Juan Carlos Zuazua:

Very hard question. One of the essential business rules of our type of business model is to have very efficient aircraft productivity, meaning a lot of sectors per day. In a transatlantic market, you're going to have pretty much the same aircraft rotation than a full service carrier. So, many of the previous ULCCs attempts have not been highly successful, right? But eventually somebody will crack it. Right? But I think it's easier to be successful in running shorter sectors, as RyanAir has done very well in Europe, north, south, and west. And airlines like Viva are doing very well in Latin America, right? So that's where I'll focus on, I'll put my money.

Peter:

That's very good. Juan Carlos, a sincere pleasure. It's been great. 30 minutes goes by very, very quickly. And to our audience, this is an airline that you're going to be seeing a lot more in the region. No doubt. They're going to be penetrating many, many markets and being very successful. And as Juan Carlos has said, bringing social and economic wellbeing to the different communities where they serve. Many thanks for your time. Appreciate it.

Juan Carlos Zuazua:

Thank you, Peter. Goodbye to everyone. Bye.

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