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

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Central America's LCC penetration rate is less than 8%

Central America comprises seven countries - Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama - with a combined population of 45 million. While each country is relatively small, the region overall is relatively large and should, in theory, be able to support more flights - particularly LCC flights.

Central America has approximately 900,000 weekly seats, including less than 70,000 LCC seats. This results in an LCC penetration rate of less than 8% - which is among the lowest of any region or subregion in the world.

Central America is currently served by 10 LCCs, only one of which is based in the region. Volaris Costa Rica became Central America's first local LCC when it launched operations in Dec-2016 with an A320 operating from San José in Costa Rica to Guatemala City. Volaris Costa Rica has since also commenced services from Costa Rica to El Salvador and Nicaragua, and from El Salvador to Guatemala and Nicaragua.

Volaris quickly becomes Central America's leading LCC brand

Mexico-based Volaris initially entered the Central American market in 2015 with the launch of services from Mexico to Costa Rica and Guatemala.

Volaris currently operates 16 weekly flights from Mexico to Central America, while its sister airline Volaris Costa Rica operates 18 weekly flights within Central America. Of the 10 Central America routes operated by Volaris or Volaris Costa Rica, only one is also served by another LCC (Mexico City-Guatemala City, which is also served by Interjet.)

Volaris Group's Central America routes in order of launch date

	Launch date	Route	Frequency flights/week	Operator
1.	May-2015	Cancún-San José	5	Volaris Mexico
2.	May-2015	Guadalajara-San José	4	Volaris Mexico
3.	Jun-2015	Cancún-Guatemala City	3	Volaris Mexico
4.	Jun-2015	Guadalajara-Guatemala City	3	Volaris Mexico
5.	Dec-2016	San José-Guatemala City	1	Volaris Costa Rica
6.	Feb-2017	San José-San Salvador	4	Volaris Costa Rica
7.	Apr-2017	San José-Managua	3	Volaris Costa Rica
8.	May-2017	Mexico City-Guatemala City	1	Volaris Mexico
9.	Jun-2017	San Salvador-Guatemala City	2	Volaris Costa Rica
10.	Jun-2017	San Salvador-Managua	2	Volaris Costa Rica

Source: CAPA - Centre for Aviation.

All 34 of Volaris' flights to and within Central America are operated with single class A320s, generating slightly more than 12,000 weekly seats. While this is a small amount of capacity by most measures - and accounts for less than 4% of total Volaris group capacity - it represents an 18% share of total LCC capacity in Central America.

Volaris Mexico is one of only four Latin American LCCs serving Central America, along with its Mexican rival Interjet, Colombia-based Wingo and VivaColombia. Wingo is a new LCC brand operated by Copa Colombia, which is part of Panama-based Copa Holdings.

Among the four Latin American LCC brands now serving the Central American market, Volaris has already become the largest in terms of number of destinations, routes and capacity. However, with just 34 weekly flights and 10 routes, Volaris is just starting to scratch the surface in an obviously underpenetrated market.

Latin American LCC brands capacity to/from/within Central America: 10-Jul-201 to 16-Jul-2017

LCC brand	Weekly seat capacity	Number of destinations	Number of routes
Volaris	12,200	4	10
Interjet	6,800	2	2
Wingo	6,200	2	5
VivaColombia	4,000	1	2

Note: seat figures rounded to nearest hundred.
Source: CAPA - Centre for Aviation & OAG.

Costa Rica-US is the only country pair with significant LCC capacity

In addition to the four Latin American LCC brands, Central America is served on a year-round basis by three US LCCs - JetBlue Airways, Southwest Airlines and Spirit Airlines - and two Canadian LCCs - Sunwing and WestJet. There are also seasonal services from a few other US and Canadian LCCs.

Spirit, which has been serving Central America from its Fort Lauderdale base for over a decade, has a similar amount of capacity in Central America as Volaris, with slightly more than 12,000 weekly seats (based on OAG schedules for the week commencing 10-Jul-2017). Spirit serves six destinations in Central America (every country except Belize), which is more than any other LCC, although only Costa Rica is served daily.

Southwest, which flies to two destinations in Costa Rica and one destination in Belize, has almost 11,000 weekly seats to Central America. JetBlue, which has two Costa Rican destinations, is much smaller, with slightly more than 5,000 weekly seats. Sunwing and WestJet combined have between 1,000 and 5,000 weekly seats, depending on the time of year (both only serve Costa Rica).

With the exception of the Costa Rica-US market, Central America is underpenetrated by LCCs. Costa Rica-US currently accounts for approximately one quarter of total LCC capacity in the Central American market (and more during the peak winter months); the LCC penetration rate in the Costa Rica-US market is more than 25%.

Panama is the only Central American country that is well served generally

With the exception of Panama, the Central American market is under served generally.

Panama has approximately 400,000 weekly seats - representing nearly 45% of total Central American capacity - as it has successfully developed Latin America's largest hub for international transit traffic. The Copa Airlines Group accounts for a dominating 82% of capacity in Panama, but a majority of its traffic consists of sixth freedom passengers travelling between the four different regions of the Americas (North America, Central America, the Caribbean and South America).

In the other six Central American countries, most traffic consists of local, rather than transit, passengers. The only other country with a hub and significant transit traffic is El Salvador, but San Salvador Monseñor Óscar Arnulfo Romero International Airport is one quarter the size of Panama City's Tocumen International Airport.

Panama is a very different market from those in the rest of Central America, due not only to the strength of Copa's hub, but also because Panama is not included in Central America's common aviation market. Belize, a tiny country of less than 1 million people with a small aviation market that is mainly only served from the US, is also excluded.

The Central American Common Market is particularly under served

Costa Rica, Guatemala, Honduras, El Salvador and Nicaragua are considered one aviation market, and have been part of a regional economic association - the Central American Common Market (CACM) - since the early 1960s. These five countries enjoy full open skies and single aviation market status (similarly to the EU), enabling an airline based in one country to operate services between two other member countries, or from another member country to outside the region.

The five CACM countries have a combined population of more than 40 million but despite their liberal approach to aviation, they have less than a half million seats. The CACM governments has long complained about a lack of air service and high air fares, which have impacted economic growth and tourism.

Weekly seat capacity, including LCC capacity for Central America and CACM countries: 10-Jul-2017 to 16-Jul-2017

Country	Total weekly seat capacity	LCC weekly seat capacity	LCC penetration rate	# of LCCs	Population
Panama	397,000	11,000	3%	3	4 million
Costa Rica*	151,000	30,000	20%	9	5 million
El Salvador*	116,000	4,000	3%	2	6 million
Guatemala*	79,000	11,000	14%	4	16 million
Honduras*	58,000	3,000	6%	1	8 million
Belize	50,000	5,000	9%	1	360,000
Nicaragua*	49,000	4,000	7%	2	6 million
CACM	453,000	52,000	11%	9	41 million
TOTAL	900,000	68,000	8%	10	45 million

Notes: *CACM countries; seat capacity figures rounded to nearest thousand; population to nearest million.
Source: CAPA - Centre for Aviation.

The LCC penetration rate in the CACM is approximately 11%. This is higher than the Central American average of less than 8% due to the very low penetration rate in Panama - where full service network airline Copa dominates - but is still very low by global standards. It is particularly low when taking into account that the CACM consists almost entirely of price sensitive point-to-point traffic.

LCC is the ideal model for stimulating traffic within Central America

There is limited transit traffic in the CACM, and relatively limited premium demand. The LCC or ULCC model is ideal in order to stimulate demand and get a larger proportion of the population to trade long bus rides for flights when travelling within CACM, as well as to neighbouring Panama and Mexico.

The CACM's single aviation market status also makes it an ideal platform for an LCC as it creates a much larger home market. Any of the five CACM countries individually would struggle to support a local LCC. However, combined, the five markets should be large enough.

Volaris Costa Rica has already taken advantage of the ability to operate between other countries in the CACM zone by launching services from San Salvador to Guatemala and Managua at the end of Jun-2017. Volaris Costa Rica plans to add more routes within Central America, from both San José and other CACM countries, as it expands its fleet.

Central America market is full of opportunities, but also challenges

The Volaris Group business plan envisages a fleet of 18 to 22 aircraft for its Costa Rican subsidiary and several routes within CACM, as well as from multiple CACM gateways to North America, South America and the Caribbean.

"It's an interesting market because it's totally under-stimulated", Volaris CCO Holger Blankenstein told CAPA on the sidelines of the Jun-2017 IATA AGM. "There were only legacy carriers operating in that market but it's a market of about 50 million inhabitants. We believe there is ample opportunity to stimulate demand."

However, Mr Blankenstein acknowledged that there are challenges to overcome - in particular, high taxes and airport costs.

For several years these issues have scared away other Latin American LCC groups from launching a subsidiary in Central America.

Taxes on international flights within Central America are very high, broadly USD50 per departure, putting the final price out of reach of most of the population, even if the base fare is very low. Landing fees and handling charges are also high at many of the region's airports. While flights within the region are short - always less than two hours - it is impossible to offer the low all-in fares that are common in Mexico or Colombia.

Volaris and other Latin American LCC groups obviously continue to lobby for lower taxes and airport charges, which would enable true low fares and more stimulation with significant economic benefits. In the meantime, Volaris believes it can still sufficiently generate demand by offering lower base fares than competitors. "Our fares and our cost structure are so low feel we will have a much better offering than our competitors", Mr Blankenstein said.

Volaris Costa Rica breaks Avianca's monopoly on three routes

Volaris Costa Rica is starting conservatively, with limited frequencies. The airline seems to be testing the intra-Central America market, which has never had an LCC offering, to see if it can succeed at stimulating demand before adding more frequencies.

Three of Volaris Costa Rica's initial routes are not just routes without prior LCC competition, but are monopoly routes served by just one airline entirely. The San Salvador-Guatemala, San Salvador-Managua and San Salvador-San José routes were previously only served by Avianca - a Colombia-based airline group which merged with the Central American airline group TACA in 2010.

Avianca offers four daily flights on all three routes. Volaris entered the San Salvador to Guatemala and Managua routes in late Jun-2017 with only two weekly frequencies, while it launched San José to San Salvador in Feb-2017 with four weekly frequencies.

Volaris Costa Rica is also competing against Copa

Volaris Costa Rica competes against Avianca as well as Copa on its other two routes - from San José to Guatemala City and Managua.

San José-Guatemala was Volaris Costa Rica's first route when it began operations in Dec-2016, and is its only route that is served daily. Avianca operates three daily flights from San José to Guatemala, while Copa operates two daily flights.

Volaris Costa Rica launched San José to Managua service in Apr-2017, with three weekly flights. Avianca has a relatively modest six weekly frequencies on this route, whereas Copa operates two daily flights.

Wingo provides another new LCC option for Central American passengers

Avianca has maintained its position as the largest airline group in CACM but has reduced its presence in the region, particularly in Costa Rica, since it completed the merger with TACA. Copa overtook Avianca as the largest airline in Costa Rica in 2013, but Avianca is still larger than Copa in the other four CACM countries.

See related report: Copa emerges as Costa Rica's largest airline as Avianca downgrades San José hub to focus city

Copa could potentially overtake Avianca in CACM if it decides to use its new Wingo brand to pursue expansion on regional routes within Central America.

Wingo operates five routes from Panama City, where it uses the secondary airport - Pacific International Airport - instead of Tocumen, but four of these routes are from Colombia where the airline is based. VivaColombia also operates two of the same routes to Panama City Pacific from Colombia; these are the only routes in the Central American market for the Viva group, which also includes airlines in Mexico and Peru.

Wingo's only CACM route is from Panama City Pacific to San José, which it operates five times per week. Wingo is providing a new LCC option in the Panama City-San José market, which is also served by its full service parent Copa, and Avianca (using Tocumen).

Panama City-San José is an obvious potential route for Volaris Costa Rica. CAPA will look more closely at the outlook for Volaris Costa Rica, including its plans for US flights, in a separate upcoming analysis report. CAPA will also analyse Wingo in more detail in an upcoming report.