Interview with Viva Air Group President & CEO

Transcript

Felix Antelo:Good morning, everyone.

Peter Cerda:It's good to see so many people here after a fun and long night. As I said yesterday, this is not a session that it's only to listen, so I'm going to come back to the stage and ask you guys some questions to To see what we can get out of Felix.

Felix Antelo:To put me in danger.

Peter Cerda:And put you in a little bit of danger. And, you know, the first question I'm going to ask you, Felix, new week, any news, anything happening? It seems every week we hear something coming out of Colombia.

Felix Antelo:No, nothing new. And I'd like to take the opportunity, Peter, to thank you and thank, thank CAPA Puerto Rico for the invitation. I think it's great that we are back together in person. I'm a firm believer in in meeting face to face, and, and, uh, and I'm glad that we are leaving Teams behind and Zoom. So, so really happy to be here and share some time with you guys.

Peter Cerda:Okay, so this new journey, Viva, uh, already very successful. We talked a little bit about it last, uh, yesterday afternoon. Uh, once the government opened the market, people just started flying in Colombia. There was a need, a want, We saw how domestic traffic just boomed better than 2019. International recovered very strongly as well. And we thought, well, that's the progression Viva is gonna have. You started international service to Argentina, which was important, expanding your operations in Peru. And then what we least expected was this marriage with Avianca.

Felix Antelo:Yeah.

Peter Cerda:So walk us through the process, the journey, what you're looking for. How is it going to improve and change the landscape in Colombia?

Felix Antelo:Yeah, so it feels like, you know, decades ago, but when COVID hit, we entered into survival mode, literally. We had to navigate through that storm. Like we said yesterday, 6 months in air shutdown. And basically, Peter, It was a matter of really, you know, surviving to keep the company alive and open, to start flying again when the skies would reopen. And now it seems like it was a piece of cake, but believe me, it was really hard. We laid off— didn't lay off, we worked together with employees and 75% of the employees took unpaid leave.

Peter Cerda:Wow.

Felix Antelo:The 25% of employees that we kept working for Viva, we took pay cuts from 70% in my case to 50% in the pilots, you know, 30% the rest of the people. We started working with you, as you know, with ALTA, loads and loads and many, many hours of interaction with the government to explain the situation, to ask for support. We reached out to every single vendor. Every single vendor. I think that was one of the learnings, you know, you have to be open upfront, explain the situation, what's going on. And we did a private restructuring, as opposed to some of our competitors in the market, which filed either for Chapter 11 or for local bankruptcy. We did that in a private manner, again, from banks to lessors to tax authorities and to every single vendor. So it was a long process, but it was a good process, which left us, you know, in a very good starting point to when the reopening would come. We put a lot of emphasis to— we knew it was going to be very important for the customer, for the traveler to feel safe at the moment we did reopen. And we were the first airline both in Colombia and in Peru to be certified in terms of biosafety protocols.

Peter Cerda:Wow.

Felix Antelo:That also helped a lot. And when, and when, and when we restarted, we knew that, you know, that the model would emerge stronger after every single crisis. And you know this very well, starting with, uh, with the crisis in, in the year 2000, uh, with, with, uh, with, with 9/11, Lehman Brothers, uh, SARS, um, H1N1. After every single crisis, the low-cost model emerged stronger. And, and, and COVID was not, wasn't an exception. Even more, I mean, when you see the landscape now, 2022 versus 2019 in South America and Latin America— Mexico, Colombia, Peru, even Argentina— you know, in every single country, the low-cost companies have gained a lot of space of share. We went from being, having 14% market share to having 25%. I mean, we almost doubled our market share in a period of 4 or 5 months. And we knew that, you know, BFR traffic would come first, tourism traffic would come first, domestic traffic, like you were saying, would come first. When COVID hit us, we only had 5% of our ASKs were international. So it was mainly domestic and that was an advantage also to us. And when we restarted, you know, and we opened up again, We saw, you know, now international will come, will follow domestic. And then we launched Mexico, Cancún, Dominican Republic, Buenos Aires, São Paulo. So now we have 80%, 75%, 80% of our ASKs are domestic, 20% to 25% are international. And what we are seeing right now, there was a lot of talk yesterday of demand. I mean, demand for international travel is even stronger. Yeah. Than demand for domestic travel right now. Um, and I think to close on that, Peter, that, that trend will continue. I mean, I see a market in South America where LCCs and ULCCs will keep gaining share. Um, and, and going to the final part of your question, consolidation— look, um, since we've restarted flying, we, you know, there was a process. We were engaged with with many parties, not only one, which I think took 2 angles here. One was Colombia as a market is very interesting for any airline, one of the fastest growing markets in the region, in the world. So that was one. And then if you want, not Viva, but even the low-cost model, you know, and we were, we are, the leading LCC. So they seen Viva an opportunity to have an attractive value proposition, a good company. And that's how I'm trying to summarize in 2 minutes what took many, many months. And we got to here with announcements around a month ago of Viva Air Group, First of all, of, you know, the new owners, the new ownership of Avianca getting 100% of the shares of Viva. And after that, 2 weeks after that, the announcement of Abra Group, which mainly consists of Avianca and Gol joining in this Abra Group, which will be a group of companies, of different companies, which will include Viva, Once we go through antitrust approval, that antitrust would take, we expect, around 1 year. That's, that's where we are now.

Peter Cerda:So 1 year before you finalize the marriage. So I would assume, could we consider correctly that the new Avra Group is the new IAG or the new Lufthansa Group for Latin America?

Felix Antelo:Yeah, I mean, it's, it's very early stages, but I think that's, that's pretty accurate. Yeah, I mean, we want to I think that what we'll try to build is something very similar, hopefully even better, a better version of IAG. We have the experience and we can, you know, take the, take the positives and the negatives of an IAG. But, but the plan is to operate individual brands, you know, and again, different value propositions. One thing is, is Viva, which is very different from Avianca, which is very different from Gol. And that will give us flexibility. I think you will have the synergies, the obvious synergies, procurement, you know, investment in technology, negotiation with key vendors, obviously Airbus, you know, and, and, and the key vendors. So you will have the synergies, you know, at the bottom, but you will be able to operate, I think, you know, the different brands attacking different segments. And if we do it right, I think, you know, the opportunity that we see is massive. Starting from what we were talking yesterday too, I mean, still in— I'm a little bit repetitive on this, but in Latin America, you know, 0.5 trips per person per year compared to Europe, US, Australia, which are between 2 and 3. There's a long way to go. And we think that, you know, being part of a stronger group financially, from a financial point of view, you know, with—

Peter Cerda:Yeah.

Felix Antelo:way more access to capital, way more access, you know, to deploy technology, uh, to, you know, to be faster, better. Uh, it's, it's the right way to go. Uh, so I'm glad that, you know, that consolidation is finally taking place in the region. It, it took perhaps longer than, than, uh, on other parts of the world, but it finally came. Um, and I think that's, that's what, what's going to happen, you know, moving forward. You have 3, 4 big groups in South America and Latin America, which I think will, will end up with a way more profitable industry, way more sustainable industry, keeping up hopefully, you know, the good operations that you have in the region. We were talking yesterday here with, with Avi from Azul. Traveling today by air in South America and Latin America has nothing, you know, to envy any single, any good part of Europe, US, OTP-wise, safety record-wise. We do need to expand some, you know, point-to-point services. I think there's still, you know, for example, getting here to San Juan from Medellín, it took long and it's gonna take longer even today for me to get back. So you will have, you still have a lot of opportunities of connecting the dots. from mid to small cities, but we need to boost the traffic. You know, we need, we need to keep growing the pie.

Peter Cerda:You're talking about consolidation, how we're progressing as a region, and you've seen possibly 3 or 4 groups. So you do see more synergies, more opportunities moving forward in the region in the years to come?

Felix Antelo:I think, yeah, yeah. I mean, I think again, when you compare ourselves, size of the market and number of companies versus the US, even versus Europe, it's, it's still way, you know, unbalanced. Uh, you have too many companies, I think, for the size of the market that we have. So I do see probably, you know, further consolidation down the road. How and when, I don't know really. It's, it's, it's very hard to tell. But I do think, you know, you will have further consolidation. Uh, and again, 2, 3, 4 tops, you know, big solid groups.

Peter Cerda:Let's talk a little bit about your business and how the region has matured over the years. We see the largest markets in our region, Mexico, very successful in the ULCC market. Actually, the 2 largest airlines right now are ULCCs.

Felix Antelo:70% of the market is ULCC.

Peter Cerda:Great penetration. You've seen what's happened in Chile and so on. The one market that is still a significant challenge for us as a region is Brazil. And when we look at Azul, GOL, they've matured. They may have started possibly as ULCCs or different concept models, but they've matured as airlines. But we don't have natural ULCCs in a country where, you know, half the population doesn't travel. Huge amount of opportunities, vast country. What is Aviva, JetSmart looking at? Why aren't you in that market? Is it just so difficult politically?

Felix Antelo:I mean, Brazil is a continent within a continent, right? Starting by language. So it's a tough country to operate in. I lived in Brazil for almost 2 years when LAN and TAM merged, remember, in the year 2012, 2013. And it's hard. I mean, it's hard from a regulatory point of view. Taxation in Brazil is It's a nightmare. It's— I mean, you need not one MBA, you need 5 PhDs to understand, you know, the taxation code in Brazil. It's expensive to operate in Brazil. It is really expensive from an airport perspective, you know, again, taxes. So it's a very, very hard country to operate in. I think that what's happened in Brazil is that you have 3 strong players which have done the things, I think, very well, in my opinion. Different models, like you said, there is not a low cost there because Gol may have started as an LCC or ULCC, but then it evolved, like you were saying. Azul, the same. So I think it's— I'm not saying you won't ever have a low cost in ULCC in Brazil, but I think it's hard. And things, you know, what we were discussing yesterday, like, you know, at the last minute of the last session of Congress, by law they include you, you know, in your ticket a check bag in domestic traveling or a carry-on, sort of carry-on for domestic travel or check bag by law in the ticket. That definitely, you know, doesn't help. So it's, I think it's going to be a hard period. I'm not saying You won't ever have a U.S.C. in Brazil, but I think it's going to take a while. And and before Brazil, answering your question in terms of Viva, you know why Viva is not in Brazil? We see better opportunity. I mean, you always have to trade off, right? This is a trade off. You don't have infinite resources, infinite time, so you have to pick your battles. And and Brazil on a on a you know cost benefit scenario is is is not in Focus a little bit more on, on Viva in terms of your progression moving forward.

Peter Cerda:Now you have a very modern fleet, countries strategically located in terms of North America, Latin America. You just started service to Argentina. How far more now, particularly with the new group that's being formed, what is Viva going to be looking at? Where are you looking at opportunities in the US? Are you looking further down south? Where are the opportunities? for Viva moving forward?

Felix Antelo:I mean, the, the new— obviously the new group changes everything, right? And but we still have to operate, you know, as a standalone company until we get the approval. But look, I mean, we, we have, like you were saying, we have the 4th most modern fleet in the world. On average, our fleet is mostly composed of A320neos below 1 year of, you know, vintage. We have, we have, we have a very strong presence in domestic Colombia. Got to utilizations, you know, around 12 hours block hour per aircraft per day in one of the shortest stage length trips in the, in the world. Colombia is, it's, it's a very tiny country. It's around 600, 650 kilometers. is our stage length, which it's harder, you know, with such a short stage length to get those utilizations. But on top of that, what we saw, Peter, due to our location, we are located, our main base is Medellín. We operate, have bases in Bogotá, Medellín, and Cali, but our main operation is in Medellín. And the location of Medellín towards the north and the south of the continent paired with the type of aircraft that we operate, A320neos, allow us, you know, to connect from deep South America, Buenos Aires, Santiago, Chile, to North America, even New York or Toronto, with one stop in Medellín with a ULCC model. That's kind of unheard of. And again, we were discussing this with some colleagues and some analysts from the industry, and they were saying, you're getting away from your core business, you're going to start connecting passengers And if on top of that 12-hour utilization you start putting in these flights, long-haul, mid-haul flights, long-haul for us, mainly red-eye flying because those flights operate during the night mostly, you're taking your utilization up to 13, 14 hours. Being able to connect again Buenos Aires with Toronto with a one-stop in Medellín, We've been working very closely with the Rionegro Airport in Medellín. And look, we launched Argentina and we haven't started yet. It will start on June 15th. But believe it or not, we're having 75% of the flights that covers Buenos Aires-Medellín is connecting traffic towards Cancún, Punta Cana, Miami. São Paulo, the same. We are starting service to Brazil at the end of June, you know, more than 50% of the, of that plane will be connecting passengers. So we are starting to build on top of domestic Colombia, uh, you know, something interesting in, in the international market where you have other options. So obviously you have nonstop flights, you have, uh, um, Panama, uh, and they do this, but they don't do it as a, you know, at a low price. They do this at a we think what's mid to high price. And you— we are being able, you know, to give that service to these passengers, which will save on average between $200 and $300 per passenger. For a family of 4, that's between $1,000 and $1,500, which basically with that you pay your, your hotel. And we're gonna do it, you know what, at a profitable level because our CASK, you know, has gone down significantly. We have a Really, really low cost per available seat kilometer. Fuel is impacting, that's another chapter we can talk about that. But in terms of CASK ex-fuel, we are at a level which is really, really low and we'll keep trying to go lower as scale, as we grow and you dilute more fixed costs. But we're seeing a huge opportunity and in the future we We will look, start looking at, you know, beyond Miami, beyond Orlando, which is where we fly now in the U.S. And again, you will have, we will have options, you know, New York, Toronto, Atlanta. I mean, we are studying every single major airport, understanding the implications competitive-wise, you know, from a fair perspective. There's been a lot of, many people ask me why you don't fly more to the U.S. And the short answer, Peter, is that right now the competitive intensity to the US. It's, it's probably at its peak after COVID. You know, the American carriers, um, came back, doubled, even in some cases tripled the seats to Colombia, which put a lot of pressure on yields, mainly because they couldn't fly to Europe or Asia. So they had to deploy the capacity down to South America, and Colombia was one of the markets, you know, they, they attacked the most. So we need to sort out the market still, you know, leave the market to stabilize, and after that we'll probably be more, more active within the US.

Peter Cerda:Let me just focus one minute, one more question on the Avra Group, which is interesting in terms of your— you just focus quite a lot on Medellín as a key point of hub for you. When you look at IAG with Iberia and BA, for example, it's Madrid and and, and, uh, London. You look at Air France-KLM, it's Amsterdam and, and Paris.

Felix Antelo:Paris, yeah.

Peter Cerda:In your case, the 2 largest carriers right now of this group happen to be based in Colombia, uh, with 2 primary hubs in 2 different cities. Do you see that as an advantage moving forward where you may have a low-cost—

Felix Antelo:Absolutely.

Peter Cerda:Inter-regional, uh, hub which may be Medellín, and then you see Bogotá which may be the more traditional More global network?

Felix Antelo:Again, I have to say, Peter, because if not, the lawyer kills me. After we get the approval, you're spot on. I mean, you will have Bogotá, which you know very well, all the pros and cons of Bogotá, which is kind of the main, the big airport, the main airport where you will have a more traditional, probably hub and spoke that Avianca is building for many years. And you will have Medellín, you know, a smaller, leaner, easier airport to operate where you will be able to attack and compete probably against other LCCs, against some of the American carriers. So you will have Bogotá, you will have Medellín, you will have obviously São Paulo. And that's, I think, the beauty of what we will be able to join the dots here and build within the region. And that's, I think that's the starting point. Then we'll see You know, as Avra evolves, hopefully, you know, hopefully more airlines will join. You never know. But starting with Colombia, you know, having strong presence in both key airports of Colombia, Bogotá, Medellín, it's definitely a big advantage for us.

Peter Cerda:You have an election coming up in a few weeks.

Felix Antelo:How are you? In a few days. It's Sunday. Sunday.

Peter Cerda:How worried are you?

Felix Antelo:3 days away.

Peter Cerda:Are you optimistic?

Felix Antelo:Are you concerned? I cannot sleep, really. But Look, being very honest, I mean, and most of the people here, you, many of you living in the region in South America or Latin America. We were talking this at breakfast today with with Ana Maria and Camilo. This, I mean, these are cycles, right? And and you and you need, I mean, when you're in business like ours, you need to navigate through cycles. You could have better years, worse years from a political point of view, economic point of view. But I think that's another good thing of Avra. When you see Avra, when this was closed, it's probably at one of the, you know, more turbulent periods, both from an economic point of view, from a political point of view. And, and, you know, notwithstanding that, the business was announced and the deal was announced in a very complicated, you know, period of time. So this is a business that's going to be here for many, many years, you know, regardless of political cycles, politicians. And that's, you know, what I think we need to look at. Obviously, I have my preference, which I would like to happen. But, you know, you need to operate with whomever is in office. And you got better times and worse times. So we'll see. We can talk on Monday.

Peter Cerda:I always say that's the beauty of our region. It's never boring. If it's not political—

Felix Antelo:I would say too exciting. Too exciting. Yeah.

Peter Cerda:We have just a few more minutes, so I do want to give the opportunity if there are any questions out there to ask Felix. Any questions? Don't be shy because I may come to you. Okay, there we go. Hi, good morning.

Felix Antelo:I'm Wagner from Embraer. You mentioned about this group and looks like IAG, and but there are very different business models, very different fleet types.

Peter Cerda:Yeah.

Felix Antelo:How, how do you see in the future the decisions, the strategic decisions for the group network fleet? Will it be the airline decision or the group decision? So we're changing everything to Embraer. When, uh, when— no, but, uh, look, it's a good question. I think it's gonna be a, it's gonna be a group decision, probably, very likely. It's like you say, it's, um, GOL, as you know, operates Boeing, the rest of us operate Airbus. Um, and I think that's, that's, you know, again, the group and the scale, you know, uh, weighs in. So you, you will start getting more if you want bargaining power, you know, with you guys. And I don't know how it will evolve, but definitely it's gonna be a group decision where you will get the order book coming in and you will deploy the capacity to each carrier depending on what you need at the moment, you know, on the fleet plan and what's, you know, so are we gonna attack more the ULCC segment? Are we gonna go, you know, with a more traditional one? Are we gonna prioritize Brazil over Colombia?

Peter Cerda:Yeah.

Felix Antelo:I think that's going to be for the group to decide once we get the approval.

Peter Cerda:Felix, a quick question as we're coming to an end. The biggest challenge that you see— the region is in a great situation in terms of recovery. We're the fastest recovering region in the world post-COVID or coming out of COVID Huge amount of opportunities, but we still have our limitations in the region. What's the biggest challenge for you as we come out of COVID as you try to establish yourself, grow? Is it going to be political? Is it going to be infrastructure? What's the concern that worries you in terms of your growth in the years to come?

Felix Antelo:Look, I think number one, Peter, is infrastructure. I'm— I think we have a long way to go, as we were saying, doubling, tripling the number of passengers, but we need, we need to work hand in hand with, with the local governments, uh, and, and get the, the infrastructure in place, which is not only hard infrastructure. We have massive problems in terms of ATC, you know, and air traffic control and, and the quality of— so that's, that's one. Um, I'm worried that, you know, another worry is, is in terms of, of labor force. Uh, we don't have pilot shortage right now in the region, but That could come in a year or 2 if the rest of the geographies get more aggressive towards Latin America. So we need to speed up the process of getting pilots trained and ready to fly. That's the second one. A third one is the macroeconomic environment, like we were saying. In the US, I mean, We have fuel right now above $100, which we had before, remember, 2007, 2008. But in the case of Latin America, that comes together with a very, very weak FX. So in local terms, in Colombian pesos, Peruvian soles, Chilean pesos, or whatever, reais in Brazil, you're paying by far the highest fuel bill that you've ever paid. So that's another challenge that we will— and eventually you will have— you will go back to, to, to a balance there. But, but that's another challenge. Um, and I think, I think those are the key ones, Peter. You have many more, but, but those are—

Peter Cerda:So I don't want to end on a downside. Let's end on the upside. What are you most optimistic with Viva moving forward?

Felix Antelo:Look, I, I, I, um, I mean, we all need to be— I mean, to work in this industry Beyond being a masochist, you have to be a— you have to be an eternal optimistic, right? Because if not, we couldn't wake up every single day and come and do this. I'm really bullish, really bullish. I was from the— even in the worst time of the pandemic, you know, I was super optimistic. When you remember when we saw those first predictions, you know, we're gonna lose the full business traffic and people won't fly again because they're going to be scared, they're going to stay at home. I was not naive but very optimistic and bullish that, you know, travel would bounce back, would come back. Um, again, I think there's so many things to do and so much ground, you know, to cover in the coming years within aviation in, in the region. We have an emerging middle class, uh, that's getting stronger and stronger. again, with peaks and valleys, and that people will need to travel. Taking the people away from the buses, which is not only expensive but dangerous, and bringing that emerging middle class to the planes and making them fly and increasing the frequency and impacting quality of life of persons throughout the whole region is what drives me to work every single day. So I'm super optimistic. That we are on the right track. And now, you know, hopefully with the transaction with the Avro Group, I think we're gonna be able to, you know, to boost this more. So I'm really, really optimistic about the future.

Peter Cerda:Felix, thanks very much. Good seeing you.

Felix Antelo:Thank you. Thank you, Peter. Thank you, guys.

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