11-Jul-2017 8:28 PM

Avianca Brazil Part 2: new international expansion phase begins with four routes and new A330 fleet

Analysis

Avianca Brazil is pursuing ambitious international expansion with the launch of four international routes in less than six months, starting with the 23-Jun-2017 commencement of services from São Paulo to Miami. The airline previously only operated one international route - a niche, once weekly A319 service from Fortaleza in northern Brazil to Bogotá in Colombia.

Avianca Brazil plans to launch a third international route, from São Paulo to Santiago, in early Aug-2017. The decision to add Santiago and use its newly acquired two class A330s to operate at least one daily São Paulo-Santiago flight was driven by a request from Star Alliance members seeking improved offline access to Chile.

Avianca intends to launch a third widebody international route, which will be announced in Jul-2017, by the end of 2017. It also plans to launch a new narrowbody international route in Sep-2017 - from Salvador in northern Brazil to Bogotá.

CAPA will hold its inaugural Latin America Aviation Summit in Cartagena, Colombia, on 11/12 September 2017. For further information please see Latin America Aviation Summit

This is the second part of an analysis report on Avianca Brazil. The first half focused on the airline's decision to slow its domestic capacity expansion after seven years of rapid double-digit growth, although the airline is pursuing domestic network expansion in 2017, with three new destinations being launched to improve connectivity with Star Alliance partners.

In this report CAPA will examine Avianca Brazil's new strategy for the international market, including how it will improve connectivity with Star Alliance partners. CAPA will also look at Avianca Brazil's fleet strategy, including the introduction of a business class cabin.

Avianca Brazil CEO discusses the airline's international expansion plans and the decision to slow domestic growth due to the uncertain political environment in Brazil

Avianca Brazil begins widebody passenger operations

Avianca Brazil currently operates 43 narrowbody aircraft, which are used entirely in the domestic market with the exception of the one weekly flight from Fortaleza to Bogotá. Over the past two months the airline has taken delivery of two A330-200s, which are now being used to operate the new daily service between São Paulo and Miami.

Avianca Brazil needs two A330s for this route as both sectors operate overnight, which is preferred by business passengers but results in an aircraft sitting in Miami for 12 hours every day. The airline also operates one A330-200 freighter, and plans to take delivery of a third A330-200 passenger aircraft in Jul-2017.

Avianca Brazil fleet summary: as of 29-Jun-2017

Aircraft	In service	On order
Airbus A318-100	7	0
Airbus A319-100	4	0
Airbus A320-200	28	0
Airbus A320-200neo	4	66
Airbus A330-200	2	0
Airbus A330-200F	1	0
Airbus A350-900XWB	0	10
Total:	46	76

Miami became Avianca Brazil's first long haul destination on 23-Jun-2017, when the airline launched a daily flight from its São Paulo Guarulhos hub. As CAPA has previously covered, São Paulo-South Florida is a large but very competitive market which is also served by American Airlines, Azul and LATAM.

The Avianca Brazil service provides the first Star Alliance option since United dropped Miami-São Paulo services more than a decade ago. Avianca Brazil also provides the only nonstop option from São Paulo to Miami outside the American-LATAM partnership, since Azul serves Fort Lauderdale rather than Miami.

Avianca Brazil to operate three routes with its new A330 fleet

Mr Efromovich told CAPA on the sidelines of the 4-Jun-2017 IATA AGM that Avianca Brazil would also be using its new A330-200 fleet to operate one daily flight from São Paulo to Santiago, starting in early Aug-2017.

He added that in Jul-2017 Avianca Brazil plans to announce a third international destination for its A330-200 fleet.

Avianca Brazil is considering potential destinations in South America and North America. Europe is not a consideration in the initial phase of its international expansion.

New Santiago service to give five Star Alliance partners improved access to Chile

Mr Efromovich said it was requests from Star Alliance partners that drove Avianca Brazil's decision to select Santiago as its second destination for the A330 fleet.

Avianca Brazil currently codeshares with five Star members from outside the Avianca family - Air Canada, Ethiopian, Turkish, South African and United. Only Air Canada and United serve Santiago, but with fewer flights than at São Paulo.

Several Star members that serve Brazil still do not codeshare with Avianca Brazil, but some could be added to the airline's portfolio of partners in the coming months. The expansion of the Avianca Brazil network to include three more domestic points (as outlined in the first part of this report) and international destinations increases the attractiveness of Avianca Brazil to potential new codeshare partners.

The volume of traffic connecting from Star partners is low, but is expected to build over time. Mr Efromovich said that while Avianca Brazil formally entered Star in mid-2015, it took a year to put codeshares in place with Star members. "We are still working with some of the airlines to connect the way it has to be", he said.

Avianca Brazil also codeshares with sister airline Avianca and two airlines outside Star, Air Europa and Aeromexico. The Aeromexico codeshare was added in 2016.

Avianca Brazil to offer two daily flights to Santiago, including one A320 frequency

According to the booking engine on the Avianca Brazil website, the São Paulo-Santiago service will start on 8-Aug-2017 with two daily flights, including one A330 frequency and one A320 frequency.

The A330 will be used on the morning departure from São Paulo (09:05) and afternoon departure from Santiago (13:50), arriving back in São Paulo in the evening (18:40). This flight connects best with long haul services operated by foreign airlines, which generally offer overnight flights in both directions, as well as to Avianca Brazil's new São Paulo-Miami service.

The A320 flight departs São Paulo in the evening (20:10) and departs Santiago after midnight (00:55), operating overnight on the return sector and arriving back in São Paulo in the morning (05:55). This flight will likely cater more to price sensitive leisure passengers rather than local or connecting business passengers.

Gol and LATAM are currently the only airlines operating services between São Paulo and Santiago. Passengers in this market had a third option until early 2016, when the Chile-based Sky Airline suspended services to São Paulo.

São Paulo to Santiago one-way weekly seat capacity by airline: Sep-2011 to Jul-2017

Avianca Brazil launches business class product with A330 fleet

São Paulo-Santiago is only a four hour flight, but the airline decided it needed a widebody product for at least one São Paulo-Santiago frequency to meet the needs of Star Alliance partners.

Avianca Brazil has configured its newly acquired A330-200s with 238 seats, including 206 economy seats and 32 lie flat business class seats. All of Avianca Brazil's A320 family fleet are in all-economy configuration. Mr Efromovich pointed out that business class passengers arriving in São Paulo on Star Alliance partners and heading to Santiago expect a business class product on the second leg.

For domestic connections, Avianca Brazil believes offering an all-economy product is sufficient - providing a full service product in the domestic market and offering a relatively generous seat pitch in the economy cabin. It configures its A320ceos with only 162 seats, and its new A320neos with 165 seats. A320s in all-economy configuration can seat up to 186 passengers. Avianca Brazil also operates smaller A318s and A319s, which it configures with 120 and 132 seats respectively.

Avianca Brazil could use A320neos to expand regional international operation

Mr Efromovich said there are no plans - at least for now - to introduce a business class cabin on its A320 fleet. He said if the airline later decides to use narrowbody aircraft to pursue further international expansion it could potentially include a business class cabin on some of its future A320neos.

Avianca Brazil does not believe there is sufficient demand to justify a business class product in the domestic market, but could potentially use a two class A320neo to operate regional international flights. A two class A320neo could replace the single class A320 on the second São Paulo-Santiago flight and be used to launch flights on smaller short/medium haul international routes that would never be able to support a widebody - such as Rio de Janeiro to Santiago, and São Paulo to Montevideo in Uruguay.

Buenos Aires would also be an option, potentially from multiple points in Brazil, given the relatively large size of the Brazil-Argentina market. However, Mr Efromovich said that Buenos Aires is not currently under consideration because most Star members that serve São Paulo also serve Buenos Aires.

Avianca uses initial batch of A320neos to replace A318s

Avianca Brazil took delivery of its first A320neo in Oct-2016 and currently operates four of the type. The airline is slated to receive another four A320neos by the end of 2017.

The initial fleet of eight A320neos (including the four delivered aircraft and the four to be delivered in 2H2017) are all being leased from GECAS. Avianca Brazil also has commitments directly with Airbus for 62 A320neos, which will be delivered from 2018.

Avianca Brazil plans to use the 70 A320neos for a combination of replacements and growth. However, the focus in 2017 is on replacements rather than growth.

Mr Efromovich said the A320neos being delivered in 2017 are replacing A318s. He said the last of Avianca Brazil's A318s are expected to be phased out in the next couple of years. He added that certain of Avianca's Brazil's oldest A320ceos, which the airline started receiving in 2010, will also be replaced with A320neos over the next couple of years.

Avianca Brazil pursued rapid narrowbody fleet expansion from 2010 to mid-2014, growing the fleet from 14 to 39 aircraft. Over the past three years (since mid-2014) the airline's narrowbody fleet has expanded by only four aircraft, but Avianca Brazil has been able to maintain a double-digit rate of capacity growth through upgauging. In 2014 and 2015 Avianca Brazil's fleet of 14 Fokker 100s were replaced, and in 2016 Avianca Brazil began replacing its fleet of 15 A318s.

The rate of capacity growth also slowed from 48% in 2011, 61% in 2012, and 29% in 2013 to a more modest 23% in 2014, 13% in 2015 and 14% in 2016.

See related report: Avianca Brazil slows domestic growth. Perhaps time to expand into the international market

Avianca Brazil to launch second Bogotá route

As discussed in the first instalment in this report, in 2017 domestic capacity growth will be in the single digits for the first time since 2009. However system-wide ASK growth should remain in the double digits due to the expansion of the international operation.

Prior to the launch of Miami, Avianca Brazil had just one international route - a once weekly flight from Fortaleza in northern Brazil to Bogotá. The airline launched the Fortaleza-Bogotá route in 2014, persuaded by an incentive from the state government of Ceará. The route has proven to be successful, prompting Avianca Brazil to plan a second narrowbody route to Bogotá from another northern Brazilian city.

Avianca Brazil plans initially to operate one weekly flight from Salvador to Bogotá from Sep-2017, providing passengers in northern Brazil two options to fly to Colombia without having to backtrack via São Paulo. There are currently no airlines operating nonstop flights from Salvador to Bogotá, and Avianca Brazil is the only operator from Fortaleza to Bogotá.

Avianca Brazil has had an on-and-off international operation for several years

Avianca Brazil operated a daily service in the much larger São Paulo-Bogotá market until 2012, when it transferred the route to its Colombian sister airline Avianca. Two years later it resumed international services with the launch of the weekly Fortaleza-Bogotá service.

Avianca Brazil also had a two-year hiatus of not operating any international services prior to the 2010 launch of São Paulo-Bogotá. In 2007 and 2008, when it was known as Oceanair, the airline briefly operated long haul international services using 767s.

The initial widebody project, which included flights to Mexico and aspirations to serve Africa, did not last long. The 767 fleet was quickly phased out; for a decade the airline only operated narrowbody passenger aircraft and focused almost entirely on the domestic market.

Avianca Brazil international RPKs: 2007 to 4M2017

Avianca Brazil aims eventually to grow widebody fleet with A350s

For the recent resumption of widebody passenger operations Avianca Brazil has opted for A330-200s. The first A330 was delivered in Apr-2017 and the second aircraft in May-2017. These aircraft were briefly operated on domestic routes prior to the launch of services to Miami. The third A330-200 is expected to be delivered prior to the launch of the São Paulo-Santiago service.

While Avianca Brazil has not operated widebody passenger aircraft for nine years, it has operated widebody freighter aircraft since 2014, when it took delivery of an A330-200F. The airline's fleet currently consists of three A330-200s (including two passenger aircraft and one freighter aircraft).

Avianca Brazil has had aspirations to resume widebody passenger operations for several years. In 2008 Avianca Brazil's parent Synergy placed an order for 10 A350s, which had always been earmarked for Avianca Brazil.

The delivery of the A350s has been delayed multiple times, and they are now slated to be delivered in 2020. Mr Efromovich told CAPA the A350s are "still part of the programme but there is still a few years to go".

Avianca Brazil begins new chapter as it expands in the international market

Avianca Brazil is entering a new chapter with the launch of A330 operations and long haul flights.

The airline still has opportunities in the domestic market but is wisely taking a break from domestic expansion after seven years of rapid expansion. It has taken several years, but Avianca Brazil finally has a sizeable presence in Brazil's large domestic market and a network that is large enough to meet the needs of its partners.

International expansion is riskier but strategically necessary, particularly as Avianca Brazil merges into Avianca Holdings. As a group, Avianca strategically needs to develop an international presence in Brazil - Latin America's largest market - as well as to build up its international operation in the region's other main markets.

See related report: Avianca focuses on international expansion, plans new routes to Germany and Argentina