03-Aug-2017 7:00 PM

Colombian LCC Wingo: Copa becomes first Latin American airline group to test out multi-brand model

Analysis

The Panama-based airline group Copa Holdings is testing out the multi-brand model with its LCC brand Wingo, which launched operations in late 2016 and is now operating 17 short haul routes. Wingo has already captured a 2% share of seat capacity in both the group's home markets, Colombia and Panama.

Copa is following a typical multi-brand strategy by using Wingo to take over unprofitable routes that were previously under the full service brand Copa Colombia, as well as launching new point-to-point leisure routes that would not be viable under its normal two-class full service product.

However, Copa has decided not to follow the typical multi-brand strategy of establishing a new airline from scratch; Wingo uses the Copa Colombia operators certificate, providing economies of scale and minimising risk, but potentially limiting the potential benefits.

As the first LCC under a Latin American full service airline group, Wingo is an experiment in many respects. If the initial trial using four single class 737-700s is successful, Copa could use Wingo to expand in Colombia and Panama as well as potential other Latin American markets while other full service airline groups may be compelled to establish their own LCC brands or subsidiaries.

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

Copa Holdings CEO Pedro Heilbron discusses market conditions in Latin America, the group's plans for the 737 MAX 8, and its new LCC unit Wingo

Wingo is Latin America's seventh LCC brand

Wingo began operations on 1-Dec-2016 with services from its Bogotá base to Cancún. It has since launched another 16 routes, mainly within the first couple of months after starting operations, resulting in a network of 17 routes connecting 16 destinations.

Wingo currently operates 81 weekly return flights using a fleet of four single class 142-seat 737-700s. The four aircraft and 23,004 weekly seats make Wingo the second smallest of the eight Latin American LCC brands. Only JetSmart, a new Chile-based LCC which launched operations on 25-Jul-2017, is smaller.

Brazil's Gol and Azul are the largest LCC brands in Latin America (based on seat capacity). Volaris is the third largest, followed by Mexico's Interjet, Viva and Chile's Sky.

Based on fleet size, Azul is largest, followed by Gol, Interjet, Volaris, Viva and Sky. Only Volaris and Viva have bases in multiple countries - Volaris in Mexico and Costa Rica; Viva in Mexico, Colombia and Peru.

Latin American LCC brands ranked by fleet size: as of end Jul-2017

Rank	LCC brand	Number of aircraft
1	Azul	125
2	Gol	116
3	Interjet	73
4	Volaris	67
5	Viva	33
6	Sky	15
7	Wingo	4
8	JetSmart	2

Wingo is the first Latin American LCC brand under an FSC group

Wingo is the first low cost brand or airline in Latin America that is part of a full service airline group. It is only the second LCC brand or airline in the Americas under an FSC, after Air Canada rouge. The multi-brand model is much more common in Asia Pacific - and, increasingly, in Europe.

Copa Holdings is using Wingo as a test bed in Colombia before deciding whether to pursue expansion. Wingo's initial 17 routes include 16 in Colombia - 11 international and five domestic routes - with 10 operated from Bogotá (eight international and two domestic), and six from secondary cities (three international and three domestic).

Wingo routes ranked by number of weekly frequencies versus competitor frequencies: Jul-2017

Rank	Origin	Destination	Wingo weekly frequencies	Competitor weekly frequencies
1	Bogotá El Dorado	Cartagena Rafael Núñez	14	Avianca (125), LATAM (60), Viva (14)
2	Bogotá El Dorado	San Andres	7	Avianca (28), LATAM (32), Viva (14)
3	Cartagena Rafael Núñez	San Andres	7	Viva (7), LAN (4)
4	Bogotá El Dorado	Panama City Pacific	7	Viva (4)
5	Panama City Pacific	San Jose Juan Santamaria	5	N/A
6	Bogotá El Dorado	Cancún International	5	Avianca (14), LATAM (7), Interjet (7)
7	Medellín Jose Maria Cordova	Panama City Pacific	5	Viva (7)
8	Cali Alfonso Bonilla Aragón	San Andres	5	LAN (14), Viva (7)
9	Bogotá El Dorado	Mexico City Juarez	4	Avianca (21), Aeromexico (21), Interjet (14)
10	Bogotá El Dorado	Caracas Simon Bolivar	4	Conviasa (6), TAME (6)
11	Bogotá El Dorado	Havana Jose Marti	3	Avianca (7), Cubana (1)
12	Barranquilla Ernesto Cortissoz	San Andres	3	N/A
13	Bogotá El Dorado	Quito Mariscal Sucre	3	Avianca (29), TAME (6)
14	Cali Alfonso Bonilla Aragón	Panama City Pacific	3	N/A
15	Bogotá El Dorado	Punta Cana	2	Avianca (13)
16	Cartagena Rafael Núñez	Panama City Pacific	2	N/A
17	Bogotá El Dorado	Aruba Queen Beatrix	2	Avianca (11), LATAM (2)

The only route that does not touch Colombia is a five times weekly service from Panama City's secondary airport, Pacific, to San Jose in Costa Rica. CAPA included this route in a recent analysis on the recent expansion of LCCs in the intra-Central American market.

See related report: LCCs in Central America aviation: 8% penetration rate means enormous upside. Volaris leading the way

Panama City-San Jose is one of six routes within Central America that now have an LCC option; the other five have been launched over the past seven months by Volaris.

One of the new Volaris routes, from San Jose in Costa Rica to Guatemala City, was also briefly served by Wingo in Dec-2016 and Jan-2017. This is the only route Wingo has suspended since it began operations; on several routes it has added frequencies, including a second daily flight on Bogotá-Cartagena, and expanding Bogotá-San Andres from three to seven weekly flights.

Eight of Wingo's routes and 13 city pairs were previously served by Copa

Wingo has been mainly used to take over routes Copa previously served under its main full service brand. Of Wingo's 10 Bogotá routes, nine were previously served under the Copa Colombia brand. For most of these there was no gap in service as they were transferred, but for a few there was a gap of several months or even a couple of years.

Bogotá-Panama City Pacific and all seven of Wingo's non-Bogotá routes are new to the group. However, five of the city pairs are not new as Copa links Panama City's main airport, Tocumen, with all five of the destinations Wingo serves from Pacific - Barranquilla, Bogotá, Cali, Medellín and San Jose.

The other three city pairs are entirely new for the group. These connect San Andres, a popular resort island off Colombia's Caribbean coast, with the secondary Colombian cities of Barranquilla, Cali and Cartagena. Copa has historically only served San Andres from Bogotá and Panama City, the group's two bases.

The routes selected by Wingo in the initial phase follow a typical multi-brand model as some supplement the main brand (the Panama City routes), some have been transferred from the main brand (most of the Bogotá routes) and some are entirely new.

Copa uses to Wingo to compete against VivaColombia in Panama City

In its main home market of Panama, Copa Holdings is differentiating the two brands not only from a product perspective but also by using separate airports. Panama City Pacific Airport, a former US Air Force base known in Balboa outside Panama City, is entirely an LCC airport, initially attracting VivaColombia in 2014.

VivaColombia currently competes with Wingo on the Panama City Pacific to Bogotá and Medellín routes. VivaColombia has been evaluating the launch of other routes from Pacific, and the Viva Air Group has been considering establishing a new Panamanian LCC which would be based at Balboa.

The decision by Copa to launch five Wingo routes from Balboa is clearly a competitive response to the Viva group. Copa dominates the Panamanian market and will obviously prefer to expand Wingo to meet growing demand for point-to-point low cost services rather than having a Latin American LCC group launch a subsidiary in its original home market.

Copa Holdings has 82% share of Panama market, including nearly 2% for Wingo

Copa accounts for 80% of total seat capacity in Panama while Wingo provides another 1.6% share, lifting the group's total to 82%. Viva has only a 1% share because its current Panama operation consists of just 11 weekly flights, including seven from Medellín and four from Bogotá.

Panama capacity share (% of seats) by brand: Jul-2017

Copa's 80% share includes flights from Panama City Tocumen to Colombia operated by Copa Colombia.

The group has 173 weekly flights from Panama City Tocumen to eight points in Colombia. Almost all of these flights, 155, are operated by Copa Colombia, with the remaining 18 operated by Panama-based Copa Airlines (based on data in the Copa booking engine).

When the 17 weekly Wingo branded flights from Panama City Pacific are included, the Copa group has 190 weekly flights in the Panama-Colombia market and 12 routes. Copa Holdings accounts for almost 80% of total seat capacity between Panama and Colombia, which is the largest international market from Panama by a wide margin.

Copa Holdings' Panama-Colombia routes ranked by number of weekly frequencies: Jul-2017

Rank	Origin	Destination	Weekly frequencies	Operator
1	Panama City Tocumen	Bogotá El Dorado	49	Copa Colombia (42), Copa Airlines (7)
2	Panama City Tocumen	Medellín Jose Maria Cordova	42	Copa Colombia (42)
3	Panama City Tocumen	Cali Alfonso Bonilla Aragón	28	Copa Colombia (28)
4	Panama City Tocumen	Cartagena Rafael Núñez	18	Copa Airlines (11), Copa Colombia (7)
5	Panama City Tocumen	Barranquilla Ernesto Cortissoz	14	Copa Colombia (14)
6	Panama City Tocumen	Pereira Matecaña International Airport	11	Copa Colombia (11)
7	Panama City Tocumen	San Andres Gustavo Rojas Pinilla	7	Copa Colombia (7)
8	Panama City Pacific	Bogotá El Dorado	7	Copa Colombia for Wingo (7)
9	Panama City Pacific	Medellín Jose Maria Cordova	5	Copa Colombia for Wingo (6)
10	Panama City Tocumen	Bucaramanga Palonegro Airport	4	Copa Colombia (4)
11	Panama City Pacific	Cali Alfonso Bonilla Aragón	3	Copa Colombia for Wingo (3)
12	Panama City Pacific	Cartagena Rafael Núñez	2	Copa Colombia for Wingo (2)

Wingo recently added one weekly frequency on three of its four Panama-Colombia routes, an indication that Wingo has successfully stimulated local point-to-point demand in the Panama-Colombia market. A majority of Panama-Colombia passengers flying under the Copa brand are transit passengers.

Copa Colombia brand no longer used outside Colombia-Panama market

The eight Panama City Tocumen-Colombia routes are the only routes that are still under the Copa Colombia brand. Copa Colombia operates these routes with two class aircraft - mainly Embraer E190s although it also has retained a small number of two class 737s. Copa Colombia also operates for Wingo all four of the group's single class 737-700s, which were retrofitted in late 2016 and previously operated under the Copa Colombia brand as two class aircraft.

The Copa Colombia brand was previously used on several domestic and international routes from Bogotá. However, the Copa group has gradually withdrawn from the Colombian domestic market over the past several years as the market has become extremely competitive.

Several point-to-point international routes from Bogotá (eg routes other than Panama City) were retained but had been loss making for several years. These routes have been transferred to Wingo, leading to reduced losses and, over time, the hope is that they will become profitable.

Copa regains a (small) presence in Colombia's domestic market

Six years ago Copa competed in all of Colombia's main domestic trunk routes. It dropped Bogotá to Pereira in 2011; Bogotá to Barranquilla and Cúcuta in 2013; Bogotá to Bucaramanga, Cartagena and Santa Marta in 2014 and Bogotá to Cali and Medellín in 2016 (according to OAG data).

Copa was only competing in one domestic route from Bogotá, to San Andres, when Wingo was launched. This route was transferred to Wingo while Wingo relaunched Bogotá-Cartagena, which had not been served by Copa for two years. Cartagena and San Andres along with Santa Marta are the most popular domestic holiday destinations in Colombia.

The group could potentially use Wingo to re-enter more domestic routes from Bogotá. However, these routes are extremely competitive, and at least initially the focus is on niche leisure markets that are relatively underserved.

On Wingo's three point-to-point domestic routes from San Andres, there is no competition on one route and limited competition from LATAM and VivaColombia on the other two. Colombian market leader Avianca does not serve any of these routes currently but is launching two of them, San Andres to Cali and Cartagena, on 17-Aug-2017 in a likely competitive response to Wingo.

Wingo could potentially launch other point-to-point domestic leisure routes, depending on the success of the initial San Andres routes. Wingo provides a platform for Copa to re-establish a domestic presence in Colombia, but the group will likely proceed cautiously, given the intense competition in Colombia's domestic market.

In the first five months of 2017 Wingo carried only 106,000 domestic passengers, giving it a 1% share of the overall market. Avianca is the leader in the Colombian domestic market, with a powerful 61.4% share, followed by LATAM with 15.8% and VivaColombia with 13.6%; small regional airlines account for the remaining 8%.

Colombia domestic market share (% of passengers) by brand: 5M2017

Wingo had an average domestic load factor of only 73% in first five months of 2017 (according to Colombian CAA data) and will obviously need to improve its load factor if it is to add capacity in the domestic market.

The airline had an average load factor of 70.9% on its largest domestic route, Bogotá to Cartagena, underperforming by a significant margin its three competitors (Avianca, with an 81.9% load factor, LATAM with an 86.6% load factor and VivaColombia with 85.8%).

Wingo's Bogotá operation focuses mainly on less competitive international market

Wingo has so far focused more on the international market, which accounts for slightly more than half of its seat capacity and approximately two thirds of its ASKs. As explained earlier in this report, Wingo has taken over seven previous international routes from Bogotá which had been under the Copa full service brand, while launching four new routes from Colombia to Panama City's alternative airport, Pacific.

With the seven Bogotá international routes, the group essentially decided to test out a low cost product, since the previous full service product was not profitable. These routes were always challenging as Copa had to rely on point-to-point traffic for these routes (unlike on its Panama City routes).

Copa is better off on these routes with an LCC product, which enables it to offer a more competitive fare compared to the full service airline competitors. Unlike the domestic trunk routes from Bogotá, the regional international routes served by Copa Colombia (and now Wingo) have relatively limited LCC competition, which make them relatively attractive.

Five of Wingo's international routes from Bogotá do not have any LCC competition - Aruba, Caracas, Havana, Punta Cana and Quito. The other three only have competition from one LCC - Cancún (Interjet), Mexico City (Interjet) and Panama City Pacifico (VivaColombia). As previously outlined, all eight of these routes except Panama City were previously served by Copa Colombia.

Wingo enables Copa to maintain large presence in Colombia's international market

In the Bogotá market the Copa full service brand has only been maintained on the Panama City Tocumen route, which is served with seven daily flights. Any future expansion from Bogotá is likely to be under Wingo, given Copa's experience in Colombia the past several years, where the full service brand with the exception of the Panama City routes has been unprofitable.

The Copa brand will continue to be used on the Bogotá- Panama City Tocumen route and the other seven Colombia-Tocumen routes because these flights carry mainly connecting traffic, including significant business traffic.

In the first five months of 2017 Copa as a group carried 788,000 passengers in the Colombian international market, according to Colombia CAA data. This includes 91,000 passengers on Panama-based Copa Airlines and 697,000 international passengers on Copa Colombia.

The Copa Colombia traffic includes passengers carried under the Wingo brand and under the Copa brand; Colombian authorities do not provide a breakdown, as both brands use the same operator's certificate. (The 106,000 domestic passengers carried by Copa Colombia during this period were entirely under the Wingo brand, as the Copa brand is no longer used in Colombia's domestic market.)

The 788,000 passengers gave Copa a 14% share of Colombia's international market in the first five months of 2017. Copa is the second largest airline group in Colombia's international market - and has been for some time - while it is the sixth largest competitor in the domestic market.

Avianca captured a 50% share of passenger traffic in Colombia's international market (includes the Colombian airline and four foreign AOCs), while LATAM captured only an 8% share (includes Colombia and three other AOCs) and VivaColombia just 2%. LATAM Colombia and VivaColombia both focus mainly on the domestic market, whereas Copa has had an international focus in Colombia in the past several years.

Copa is obviously keen to retain its relatively strong position in the Colombian international market. Wingo provides a new, more viable lower cost platform to maintain the several point-to-point routes and potentially grow.

Wingo overtakes Copa as larger brand in Bogotá market

Wingo has quickly been able to capture a more than 2% share of the overall Colombian market.

Copa is still larger for now, due to the huge amount of capacity in the Colombia-Panama market, but Wingo is the growth vehicle. There is not likely to be significant growth in the Colombian market under the Copa brand, while Wingo has ample expansion opportunities - both domestically and internationally.

Colombia capacity share by brand (% of seats): Jul-2017

In the Bogotá market, Wingo has already overtaken Copa as a larger brand.

Bogotá capacity share by brand: Jul-2017

Wingo's rate of future expansion in Bogotá and Colombia overall will hinge on the success of its initial 16 Colombian routes. Wingo carried 334,000 passengers in its first six months of operation but its load factor has been relatively low.

As outlined earlier in this report, the average Wingo domestic load factor in the first five months of 2017 was 73%. An overall international load factor for Wingo branded flights is not available, but the average load factor on its two South American routes (Bogotá to Caracas and Quito) was just 49.6%, and its average load factor for its three Caribbean routes (Bogotá to Aruba, Havana and Punta Cana) was 58.8%.

Wingo has exceeded Copa's initial expectations

Wingo is not yet profitable but its launch has led to reduced losses for the Copa Colombia AOC. Copa Holdings CEO Pedro Heilbron told CAPA on the sidelines of the Jun-2017 IATA AGM that Wingo is "off to a decent start, better than expectations". However, he added "there's still a learning curve. It's not going to happen overnight."

Copa, for at least the time being, has no plans to expand Wingo to other markets. However, the Wingo project shows the group's willingness to experiment and enables Copa to pursue rapid LCC expansion in other markets if conditions warrant.

"The international Intra-Latin America market is a difficult one for any new entrant, given its relatively thin markets, high charges and taxes, no secondary airports and traditional distribution channels", Mr Heilbron said in an interview with CAPA prior to the start of the IATA AGM. "Going forward, Copa Holdings hopes to successfully compete using a two-prong approach, depending on the markets."

Wingo has a separate management team but not a separate AOC

Wingo has a completely separate management team, which sets the fares and decided on the product. "Everything commercial, planning, pricing is run by a separate Wingo team", Mr Heilbron told CAPA during the IATA AGM. "That's how we keep the business models [and] the two cultures separate. We make sure one does not contaminate the other."

Wingo has followed a typical low cost model, charging for seats, drinks, food and even airport check-in services. Wingo does not use any GDS and relies entirely on direct distribution.

However, somewhat unusually for an LCC, Wingo offers 10kg of complimentary luggage and does not operate its own aircraft. Mr Helbron said Copa Holdings plans to maintain the current structure with Wingo using Copa Colombia aircraft as it enables Wingo to benefit from the group's economies of scale.

Wingo may need larger aircraft and dedicated AOC in future phase

The typical multi-brand strategy includes a separate operating certificate in order to avoid passing on legacy costs and union related issues from the full service airline to the new LCC. However, Copa already has very low unit costs and does have the union related issues faced by its North American peers, making the decision to have the aircraft operated under an existing AOC sensible, at least for the first phase.

If the initial experiment with an LCC brand proves successful, Copa may need to re-examine the structure and consider a separate AOC. Larger aircraft will also need to be considered - most likely 189-seat 737-800s - as the 737-700 now used have relatively high per seat costs compared to other LCCs in the region.

While small - Wingo accounts for less than 7% of Copa Holdings' overall capacity - Wingo is only starting to scratch the surface with its initial fleet of four 737-700s. If it is successful, the potential ramifications are significant, as other Latin American full service airline groups may be compelled to follow.