This time last year, the low-cost carrier was a minority in the Latin American airline industry. Aside from a handful of carriers in Mexico and Brazil, the low-cost airline was more the anomaly than norm in other countries.
The region’s legacy carriers – and sometimes even low-cost carriers themselves – pointed to high operating costs and government barriers as reasons behind the low penetration of discount airlines in Latin America.
But in the last few months, the situation has changed thanks to a mix of airline ambition, improving economies, bullish investors and favourable government policies.
As 2016 draws to a close, at least four new Latin American low-cost airlines or affiliates are readying for start-up – a development that could dramatically alter the competitive landscape of the markets they serve.
Copa Airlines’ Wingo begins flights today, a day after Volaris Costa Rica's inaugural flight. While plans for Volaris Costa Rica were unveiled earlier this year, Copa’s Bogota-based Wingo took everyone by surprise.
“Copa is known as being very conservative,” acknowledges Copa’s chief executive Pedro Heilbron. But drastic as it sounds, Heilbron believes Wingo is needed to turn around Copa’s loss-making operations in Colombia due to a product mismatch for the mostly leisure passengers on the flights.
“We are now flying with a full-service product, a very expensive product,” he says.
Wingo will take over most of Copa Colombia’s flights operating to northern cities in South America, as well as Central America and the Caribbean.
It will compete against Volaris Costa Rica on a couple of routes right off the bat. While Volaris Costa Rica has so far firmed up only one route – San Jose to Guatemala City – the airline has wider ambitions to serve key cities from its base in San Jose.
These include San Salvador, Managua, San Pedro Sula, Liberia, Panama City, Bogota and Lima, says Volaris chief executive Enrique Beltranena. Volaris Costa Rica’s entry on many of these routes will introduce low-fare competition against the full-service offerings of Avianca and Copa.
“Fares of our competitors on these routes are really high,” says Beltranena, who believes that Volaris Costa Rica can replicate the success of Volaris in Mexico, which is positioned as the airline of choice for price-conscious passengers who are visiting friends and relatives.
Before Volaris Costa Rica, Irelandia Aviation had announced plans to launch a third Viva-branded low-cost carrier in San Jose but plans were shelved due to high operating costs.
Beltranena acknowledges that taxes and fees in Central America are high, but believes that Volaris can sustain its low-fare model. Volaris has already been testing the fare environment with its routes to San Jose and Guatemala City from Mexico, and its experience has given it the confidence to launch Volaris Costa Rica.
“While we can't manage the tax environment, I believe we can sustain the low-cost model,” says Beltranena.
Irelandia, in the meantime, has trained its sights on Peru for its next Viva-branded low-cost carrier. Irelandia senior partner John Goode says Peru has many elements that make it an ideal home for a low-cost carrier. Among these: a large population, a stable economy and challenging ground transportation infrastructure.
First flight of Viva Air Peru will likely take place in the second quarter of 2017, with an initial two Airbus A320s sub-leased from sister carrier VivaColombia.
Irelandia is likely to launch additional Viva carriers in 2018, says VivaColombia chief executive and co-founder William Shaw, who is helping to set up Viva Air Peru. New Viva carriers could include one in Argentina and another in a country yet to be determined.
With a wider Viva group of airlines, Irelandia will likely seek proposals for a substantial order of aircraft to fund the group’s growth.
Irelandia is not the only company eyeing Argentina as the base for a low-cost carrier. Start-up Flybondi plans to begin flights in the third quarter of 2017, flying mostly within Argentina and to a few South American cities.
Argentina has stirred interest from low-cost airlines as the government opens up its aviation market, with the country’s civil aviation regulator believing that low-cost carriers can help stimulate traffic growth in the domestic market through the offering of lower fares.
LEGACY RESPONSE
Among Latin America’s legacy carriers, only Copa has made a move to enter the low-cost business.
LATAM Airlines Group, while reiterating it has no plans to set up a low-cost carrier, recently announced it would unbundle its economy fares on domestic flights in six countries from 2017.
LATAM chief executive Enrique Cueto says the unbundled fares will make the airline more relevant to price-sensitive leisure passengers, which are expected to grow substantially in the coming years.
“We can’t let that segment grow and have it taken by someone else,” says Cueto. “We must be competitive against the low-cost carriers.”
This is even as LATAM continues to prioritise its premium-paying business passengers, he adds.
Latin America’s other large airline group, Avianca, has no plans to unbundle its fares further or launch a separate low-cost brand, says chief executive Hernan Rincon. Rather, the airline believes in competing on service, he adds.
“We welcome all the LCCs,” says Rincon. “We are all better as a result of the competition. But we are positioned as a full-service airline.”
Likewise, Aeromexico says it has no plans to go into the low-cost carrier business. Its chief executive Andres Conesa says it could lead to further complexities for the airline that might not yield benefits in the future.
With the flurry of recent low-cost carrier growth, Latin America’s low-cost pioneers see it as a sign of the region catching up to other parts of the world and a vindication of their own strategy.
“We are finally seeing the low-cost model penetrating Latin America,” says Volaris’ Beltranena, who has been at the helm of the carrier since its start in 2006. “The market is mature enough to start segmenting.”
VivaColombia’s Shaw, who recounts the scepticism that greeted the airline’s launch in 2012, says: “When we announced the launch of VivaColombia people said we wouldn't succeed… There’s a great saying: imitation is the best form of flattery.”
Source: Cirium Dashboard
