Mexico’s Volaris is continuing to pursue expansion in the US market, despite an unfavourable geopolitical environment. The Trump Administration has impacted demand in the northbound VFR segment of the Mexico-US market, Volaris’ traditional focus, leading to a rare quarterly loss for Volaris in 1Q2017.
Volaris launched nine routes to the US in 1H2017 and plans to launch at least four more US routes in 2H2017. The company is also already committed to launching another five US routes in 2018 – extending its US operation to more than 60 routes.
However, Volaris is diversifying its US operation away from the VFR segment, which should make it easier to absorb the additional capacity. The airline is launching new routes connecting the US with Mexican beach destinations, catering to southbound US leisure passengers, a sector of the market now dominated by US airlines.
Volaris is also doubling its Mexico City-US operation, which typically attracts a different mix of traffic and generates higher yields, using slots that have been divested by Aeromexico and Delta Air Lines as part of their new joint venture.
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Volaris’ international operation relies heavily on the US market
Volaris has pursued rapid expansion in the Mexico-US transborder market since launching flights to the US in 2009. The airline's operations began in 2004, and only serviced the domestic market during the first five years. Its international operation consisted entirely of services to the US until 2015, when it launched services to Costa Rica and Guatemala in Central America.
Volaris has recorded double digit growth in international passenger traffic every year, including 27% growth in 2016, to 2.9 million passengers, and 20% growth in the first five months of 2017, to 1.3 million passengers. These figures exclude Volaris Costa Rica, which launched services at the end of 2016; when its new Costa Rican subsidiary is included, the group grew international passenger traffic by 25% in the first five months of 2017, to 1.4 million passengers.
Volaris' international passenger traffic and year-over-year growth: 2009 to 5M2017
The US accounted for all of Volaris’ international growth from 2009 to 2015. Central America has contributed to a relatively small proportion of the growth since 2015, given the small size of the airline's Central American operation.
Volaris currently operates 16 weekly flights to Central America compared to 236 flights to the US (based on OAG data for the week commencing 10-Jul-2017). Therefore 93% of its international capacity is in the US market. In terms of total system-wide capacity, including its large domestic operation, the LCC has 21% of its seat capacity in the US market.
When Volaris Costa Rica is included, the group has approximately 87% of its international seat capacity allocated to the US market and the remaining 13% in the Central American market. Of the group’s 6.7 million passengers carried in the first five months of 2017, 79% were in the Mexican domestic market, nearly 20% were in the US-Mexico market, and between 1% and 2% were in the Central American market.
CAPA will analyse the group’s position and expansion plans for Central America in a subsequent analysis report. This report will focus on its position and expansion plans in the US market.
Volaris’ market share in the US-Mexico market now exceeds 10%
Over the past five years Volaris has doubled its seat capacity to the US – from approximately 20,000 weekly one-way seats in Jul-2012 to slightly more than 40,000 weekly one-way seats in Jul-2017. The LCC has consistently grown faster than the overall market, increasing its share of total Mexico-US seat capacity from approximately 8% in Jul-2012 to approximately 11% in Jul-2017.
Volaris' one-way weekly seat capacity to the US: Sep-2011 to Aug-2017
Based on May-2017 data from Mexico’s DCT, Volaris captured a 10% share of passenger traffic between Mexico and the US.
Mexico-US market continues to grow rapidly
The overall Mexico-US market grew by 10% in May-2017, to 2.4 million passengers, according to Mexico SCT data. For the first five months of 2017 passenger traffic between Mexico and the US grew by 13%, to 12.8 million passengers.
The continued growth in the Mexico-US market since the inauguration of President Trump is an indication that the change of administration will not lead to a sudden drop in the overall growth rate. Initially the 2017 outlook for the Mexico-US market seemed relatively bleak, given the threat of dissolving trade pacts and Mr Trump's general anti-immigration stance.
In Mar-2017, Apr-2017 and May-2017, the Mexico-US market recorded much faster year-over-year growth than in Mar-2016, Apr-2016 and May-2016. For each month double digit growth was achieved. In Dec-2016, the first full month after the US presidential election, traffic in the Mexico-US market also grew by 16%.
Scheduled monthly passenger traffic between Mexico and the US: Jan-2015 to May-2017
Volaris impacted by new US administration
However, Volaris has been impacted by the change of administration in the US, as demand has been impacted in the segment of the market that has always been its focus – the airline mainly carries ethnic or visiting friends and relatives (VFR) traffic.
Trump’s controversial policies and views have impacted the northbound VFR segment of the Mexico-US market as Mexicans have been more reluctant to travel to the US for holiday or family visits. Volaris cited “a challenging market and geopolitical environment” in reporting a MXP772 (USD38 million) operating loss in 1Q2017. It marked Volaris’ first quarter loss operating loss since 2Q2014 and was in contrast to an operating profit of MXP836 million (USD46 million) in 1Q2016. The LCC will be releasing its results for 2Q2017 on 21-Jul-2017.
Volaris CCO Holger Blankenstein told CAPA on the sidelines of the Jun-2017 IATA AGM that 2016 was a “fantastic” year for both the domestic and international operations, but 2017 has been challenging as some of its customers in Mexico have opted to travel domestically instead of to the US. “2017 is shaping up as a little bit more difficult year”, he said. “We continue to see high domestic growth rates in the domestic market and in the international market but demand has been a little slower due to the different geopolitical environment with the new administration in US and the shift towards domestic traffic.”
Mr Blankenstein said Volaris plans to continue pursuing expansion in the US. However, the company had adjusted its strategy somewhat to focus less on northbound VFR markets.
Volaris starts to target southbound focused leisure routes
For example, Volaris is eager to increase its presence in the leisure segment of the market, particularly given the depreciation of the Mexico peso over the past year. The weaker peso makes trips to the US more expensive for Mexicans, while trips to Mexico become cheaper for Americans.
Volaris has historically not operated many routes focusing on outbound US leisure traffic, which primarily involves connecting US cities to Mexican beach destinations. The company currently only services a handful of such routes, all of which operate from Cancún on a low frequency seasonal schedule. (For the week commencing 10-Jul-2017, the airline has four Cancún-US routes, all of which are also served by US airlines.)
Volaris has identified more than 60 potential new US leisure routes. Two of these, Chicago to Huatulco and Ixtapa-Zihuatanejo, are launching in Nov-2017.
Volaris' US routes served (in purple) and potential US routes (in blue)
Volaris to become first Mexican airline with international services at Huatulco and Ixtapa
Huatulco and Ixtapa are popular beach destinations on Mexico’s Pacific coast that only have international services from US and Canadian carriers.
Volaris currently only serves Ixtapa from Mexico City, and Huatulco from Mexico City and Guadalajara. Mexico City-Huatulco is served with one daily flight, Mexico City-Ixtapa with four weekly flights, and Guadalajara-Huatulco with two weekly flights. The two new routes to Chicago O’Hare will initially be operated with one weekly flight for the winter season.
Volaris will be the only airline linking Chicago with Huatulco. Huatulco has one regular US route, to Houston, operated by United. It also has a seasonal service to Minneapolis by Sun Country, and several seasonal services to Canadian cities operated by a mix of Canadian carriers. In 2016 Huatulco Airport handled only 118,000 international passengers and 545,000 domestic passengers.
Ixtapa has a larger international operation but is small overall. The Ixtapa-Zihuatanejo Airport handled 225,000 international passengers and 333,000 domestic passengers in 2016.
United already operates seasonal services from Chicago O’Hare to Ixtapa. The airport has just two year-round routes to the US, including to Houston by United and to Los Angeles by Alaska Airlines (Delta also has seasonal flights to Los Angeles).
In addition to Chicago (by United and now Volaris) there are seasonal flights to Dallas and Phoenix by American, and to Minneapolis by Delta and Sun Country. There are also limited seasonal flights to several Canadian destinations by Air Canada, Sunwing and WestJet.
Volaris will overlap more with US LCCs as it focuses on southbound leisure segment
The southbound leisure segment of the Mexico-US market is dominated by US and Canadian airlines, which can leverage their strong brands, distribution networks and economies of scale. US and Canadian carriers can also easily redeploy domestic capacity to Mexico beach markets on a seasonal basis to meet demand.
Both legacy airlines and LCCs from North America have a large presence in Mexican beach markets. Southwest Airlines has particularly emerged as a strong competitor in this segment of the market. Southwest has nearly 30,000 weekly one-way seats to Mexico in Jul-2017, which represents a 42% increase compared to Jul-2016.
JetBlue has over 8,000 weekly seats to Mexico in Jul-2017, while Frontier and Spirit both have approximately 7,000 weekly seats. When Sun Country’s 4,000 seats are also included, combined US LCCs have nearly 50% more Mexico-US capacity than Volaris.
Volaris has very limited overlap with US LCCs but will start to compete more as it adds more southbound leisure markets. Mr Blankenstein told CAPA that the airline was considering more southbound leisure markets “to round out our US portfolio of market segments”.
While Mexican airlines have historically struggled to compete in this segment market, Volaris believes it can succeed with the right marketing and partnerships. “We will be cautious in that market. It’s a new market for us however Mexico is a very attractive tourist destination, especially with the peso at 18 to 20 to the US dollar”, Mr Blankenstein said. “We decided to partner up with some hoteliers and they are helping us promote it.”
Volaris has the advantage of lower CASK
Volaris also has the benefit of lower unit costs than any of the US LCCs, including ultra low cost operators Frontier and Spirit. Volaris follows an ultra LCC model and has the lowest CASK (or CASM) in the Americas.
CASM of selected airlines in the Americas: year ending Mar-2017
As it enters US-Mexico beach markets Volaris is also timing the flights to maximise demand from US origin southbound leisure passengers.
The new Chicago flights depart in the early morning, landing in Mexico before noon. The return flight departs Huatulco and Ixtapa in the early afternoon, landing back in Chicago in the evening. This is typical scheduling for a US airline using a US based aircraft, but is unusual for a foreign airline without a US base.
A large proportion of Volaris’ US flights operate overnight. Volaris has discovered there is more demand for midnight departures from several of its US destinations than for an afternoon departure. Overnight flights also drive higher utilisation rates – a key component of the LCC model – as the aircraft used on US routes in the evening and overnight hours can be used in the domestic market during the day, or on shorter US routes to Texas.
Southbound leisure markets are different, and would not work with the normal Volaris flight timings. However, Volaris is able to adapt its schedule to the market by rotating aircraft so they operate overnight on VFR focused Chicago routes, but are operating the new beach routes during the day.
Volaris adds US flights from Mexico City
Volaris is also offering daytime flights from Mexico City to the US using slots divested as part of the Aeromexico-Delta joint venture.
While there is significant VFR traffic from Mexico City to the US, the Mexico City market has a dynamic different from its other gateways for US flights because there is also business traffic and some southbound leisure traffic. Therefore, the flights Volaris is adding from Mexico City help the airline further diversify its US portfolio in what has become a challenging environment in its core VFR segment.
The first of several new Mexico City-US routes using slots divested by Aeromexico and Delta will launch in Sep-2017, when Volaris begins one daily flight to San Antonio. The airline is also adding a third daily flight from Mexico City to Los Angeles on 15-Jul-2017 and a second daily flight from Mexico City to New York JFK in Aug-2017, using slots handed over by Aeromexico and Delta.
At JFK, Volaris has received an afternoon slot pair, which it would not have been able to secure otherwise. Volaris' existing slot pair at JFK is after midnight. At Los Angeles, the new Mexico City flight departs in the early afternoon, complementing a morning departure and a midnight departure.
Volaris to triple Mexico City-US capacity within two years
For 2018 Volaris has committed to adding a second daily flight from Mexico City to Chicago O’Hare and launching services from Mexico City to Denver, Ontario, Oakland, San Jose and Washington Dulles. Each new route will be launched with one daily flight except San Jose and Ontario, which will be served with four weekly and three weekly flights respectively.
Volaris has been awarded eight daily slot pairs in Mexico City overall, with three being used from 2H2017 and five in 2018. These slots will enable Volaris to double its Mexico City-US operation from 56 weekly departures on nine routes to 112 weekly departures across 15 routes by the end of 2018.
Three of its nine existing Mexico City-US routes were launched in 1Q2016 – Houston, New York JFK and Miami. Volaris also launched Mexico City-San Francisco in Oct-2016. When these four new routes are included, Volaris will be more than tripling its Mexico City-US operation in just a two-year period (Oct-2016 to Oct-2018) – from 37 weekly departures on five routes to 112 weekly departures across 15 routes.
Mexico City may overtake Guadalajara as largest base for US flights
Guadalajara, which has 23 routes to the US, will remain Volaris’ biggest base in terms of number of routes. However, Mexico City will likely overtake Guadalajara in terms of capacity. Volaris operates approximately 100 weekly departures from Guadalajara to the US.
The expansion in Mexico City should improve Volaris’ yield in the US market, offsetting yield declines on other US routes.
The new southbound US leisure routes should also generate a yield premium compared to Volaris’ traditional VFR routes from Guadalajara and other points in central Mexico, such as Guanajuato/León.
Volaris continues to add VFR focused Mexico-US routes
While Volaris is focusing mainly on Mexico City over the next year, it continues to open niche VFR routes, following its established strategy in the US of finding unserved routes that can be stimulated with low fares and a relatively low amount of capacity. A majority of Volaris’ 57 routes to the US are not served by any other airline, and 45 of its US routes are served less than daily.
Volaris has continued to expand in Guadalajara over the past year, launching services to San Francisco, Seattle and Austin in 2H2016, and to Miami and Milwaukee in 1Q2017. The launch of Guadalajara-San Bernardino, was also planned for 1H2017 but has been delayed until Nov-2017.
In 2Q2017 the airline has also launched services in four non-Guadalajara VFR focused Mexico-US markets: Querétaro to Chicago and Los Angeles; Oaxaca to Los Angeles; and Guanajuato/León to Ontario. All four routes are initially being served with two weekly flights.
Volaris adds Querétaro and Oaxaca as new gateways
The most recent batch of new US routes for Volaris represent its first US routes from Querétaro and Oaxaca, giving Volaris 15 international gateways in Mexico.
Oaxaca previously only had just one international route – a daily flight to Houston by United Express, with a small regional jet. Querétaro previously had just two international routes but more capacity, since it is served from Houston with two daily United Express flights and from Dallas with three daily American Eagle flights.
Volaris was already operating three US routes from Guanajuato/León to Chicago, Los Angeles and Oakland. Only the Los Angeles route is served by another airline – United. Guanajuato is also served from Houston by United, from Dallas by American and from Atlanta by Delta.
Volaris to become the first airline with flights at San Bernardino
Volaris will add at least one more niche VFR route in 2H2017 with the launch of two weekly flights from Guanajuato/León to San Bernardino in southern California. San Bernardino does not currently have any schedule services – not even from a US domestic airline.
Volaris was initially aiming to begin operating flights to San Bernardino in Jun-2017, but had to push the launch back to Nov-2017 due to a shortage of US Customs and Border Patrol officers. (The San Bernardino Airport is a designated international facility but currently only handles cargo flights.)
Volaris continues to look for other niche VFR opportunities in the Mexico-US market and is confident in the long term growth prospects in this segment. Volaris has identified nearly another 50 potential VFR routes to the US.
Volaris needs to diversify its US operation to maintain high growth rate
However, the main focus for the next phase of US expansion is on Mexico City and Mexican beach destinations. The new opportunities in Mexico City and in the beach markets enable Volaris to continue rapidly expanding in the US – and therefore continue growing its Mexico-US market share – despite the current challenges in its core VFR segment.
Volaris plans to expand its A320 family fleet from 66 aircraft at the end of 1H2017 to 73 aircraft at the end of 2H2017. It plans to expand the fleet by another six aircraft, for a total of 79, in 2018. While the airline has opportunities for expansion domestically and to Central America, it cannot rely entirely on these markets to absorb the additional capacity. Expansion in the US must continue for strategic reasons.
All the additional aircraft coming into the Volaris fleet over the next 18 months are A320neos and A321neos, which also provides Volaris an opportunity to upgauge several US routes (as the A319 fleet is reduced) and launch new, longer range US routes. Volaris is now operating US routes of up to five hours; its longest route, Guadalajara-Seattle was launched in 2016.
A320neo to drive lower costs as competition intensifies
Volaris has not yet used its A320neo fleet to the US as it only took its second of the type in early Jul-2017. However, the A320neos are ideal aircraft for longer routes, particularly from the high altitude of Mexico City. Mexico City to Los Angeles and San Francisco are expected to be operated with A320neos or larger capacity A321neos in the near future.
The introduction of the A320neo and (from late 2017) the A321neo also enables Volaris to reduce its already low unit costs further – and therefore improve its competitiveness. While the airline has built up a strong presence in the US by stimulating demand on niche routes that were not served previously, it is starting to overlap more with other LCCs as it builds up its operation from Mexico City and from Mexican beach destinations.
The expansion into new segments of the US-Mexico market is sensible as it enables Volaris to diversify its US operation during a challenging period for its core VFR segment. However, Volaris will have to overcome intense competition.
Having and maintaining the lowest unit costs in the industry is a huge benefit, but stimulating sufficient demand to fill all the additional capacity in a competitive environment could prove to be challenging.