Volaris chief executive Enrique Beltranena has a memento in his office that doesn’t quite gel with the modern confines of the airline’s headquarters in the Santa Fe business district of Mexico City.
It’s a 20-year-old company newsletter dating from April 1995, with a younger Beltranena smiling from its cover, accompanied by a message to employees at Guatemalan airline Aviateca. Beltranena, then in his early thirties, was general director at the carrier, which was part of Central American airline group Taca.
“I’ve been around,” Beltranena says as he proudly shows the newsletter to Airline Business.
In his almost three decades in the airline industry, Beltranena’s last 10 years are arguably the most significant of his career. The now 52-year-old was at the helm of Volaris when it launched flights in March 2006. Rapid expansion and a 2013 initial public offering later, the carrier now serves more than 60 destinations in predominantly Mexico and the USA with a fleet of more than 50 Airbus A320-family aircraft.
Not too bad, considering that the last decade has not been the most glorious in Mexican aviation history. Several airlines have ceased operations, most notably Mexicana, which went bankrupt.
But Volaris has only been expanding its footprint, and if you ask Beltranena what’s next in the airline’s second decade, he will tell you that they are just getting started. “Growth, growth and growth,” he says of Volaris’s coming years. “If anything, we will be making it much more of an ultra-low-cost carrier.”
TIGHT FOCUS
Following a 2014 marked by weaker consumer sentiment and depreciation of the Mexican peso, Mexico’s carriers have found themselves in a stronger position in 2015 as yields improve.
Volaris swung back to the black in the last three quarters with positive operating results, and operating revenue grew 24% to Ps4.1 billion ($240 million) in the second quarter.
Beltranena attributes the airline’s strong financial showing to its relentless focus on costs, which he says is lacking at Volaris’s main rivals Aeromexico and Interjet.
In August, Volaris held a majority 36% share of capacity on flights within Mexico, Flightglobal’s Innovata schedules show. This is more than six percentage points ahead of Aeromexico. Interjet held a 21% share of capacity, and VivaAerobus’s share stood at just under 12%.
“While our average fare is half of Aeromexico’s average fare, our revenue per departure is higher than Aeromexico’s revenue per departure – 195 pesos versus 193 pesos,” says Beltranena. “That tells you a lot. We manage a uniform fleet, we don’t have widebodies, we don’t have that kind of stuff and we still produce higher revenue than any of our competitors in Mexico.”
Volaris has done this while keeping its costs down. The carrier in the second quarter achieved a record low in its unit cost excluding fuel, which dipped to 4.9 cents. This year, Volaris completed a seat densification project to further drive down unit costs, adding five seats to each of its A320s for a total of 179 seats on board.
“Interjet keeps on trying to be a legacy carrier. They maintain their pitch while we increase our pitch,” says Beltranena.
Earlier in 2015, Volaris added its first two A321s and the airline is on the lookout to add more of the largest A320-family variant. Beltranena says the airline is in talks with lessors to acquire more aircraft. An updated fleet plan from June shows that Volaris plans to eventually operate 10 A321s and six A321neos in 2021.
The airline currently has eight A321neos on order, leased from ILFC, Flightglobal’s Ascend Fleets database shows.
The larger A321s will allow Volaris to optimise its slots at Mexico City International airport, which is slot-constrained. “If you remember the way we did it at Mexico City, we started flying with A319s and we upgauged to A320s once the markets matured. We have certain markets that are maturing enough that they can afford the A321,” says Beltranena. In addition, the A321’s unit costs are also attractive to Volaris, he notes.
Aside from adding more seats and taking larger-gauge aircraft, Volaris is pushing to grow its ancillary revenue. Non-ticket revenue in 2014 rose 32% to $18.90 per passenger, Volaris’s financial statements show. In the first six months of 2015, this figure rose 31.3% year-on-year to $21.70.
“I think we can get up to the level of high $30s in two, three years, which puts us pretty much at the level of Wizz or a little bit higher than Ryanair,” says Beltranena. He points out that Volaris will never hit the same figures as US ultra low-cost carriers Spirit Airlines and Allegiant Air because Mexican regulations prevent local airlines from charging passengers for the first checked bag.
While ancillary fees have long been a staple at low-cost carriers around the world, the concept is relatively new in Latin America, which still has a low penetration by budget airlines compared with other regions.
Volaris began charging for carry-on bags in 2013 when it rolled out a new reservations system, and also started selling food and beverages, seat assignment and fare-club memberships.
Beltranena believes there is room to grow ancillary revenue further, and the airline plans to tackle this by offering new products and dynamically pricing ancillary fees through targeted marketing.
“What we are doing today is digital marketing. We are learning a lot about the patterns of our customers. For example, we are identifying segments that use more luggage, or use different types of luggage, or who use seat selection but not checked luggage. All these combinations are things we are learning now with our new digital marketing information, and this is coming along very well. That allows us to do far more targeted selling. In the beginning, it was kind of a generalistic approach of selling ancillaries.”
Volaris carried more than 9.8 million passengers in 2014, up 10% from a year ago and almost thrice the number of passengers it transported in 2009.
Beltranena reckons that about a third of Volaris’s passengers were previously bus passengers, and the airline aims to switch more bus passengers to the air with its promise of low fares.
In the recent year, the airline has taken to Mexico’s bus terminals each quarter, hunting down passengers leaving on bus journeys of 5h and above. “We offered them an exchange for a Volaris ticket,” says Beltranena. The carrier gives away about 20,000 tickets each time.
The effort has paid off, he believes. “This whole thing generates a lot of dynamics,” says Beltranena. “We keep on tracking these passengers and we get their information.” Volaris has seen about $20 million of incremental revenue in each quarter from these former bus travellers, says Beltranena. “It’s working pretty well. When you analyse the size of the growth, Volaris in the last five years has by far the greatest growth of the market.”
The airline prices its fares at levels to lure passengers away from lengthier bus trips. A Volaris round-trip fare from Mexico City to Guadalajara, for example, costs about $120 for a 1h 20min flight each way. In comparison, a round-trip bus journey between the two cities costs just $20 less and takes up to 7h each way.
Volaris is not the only Mexican low-cost carrier seeking to convert bus passengers to the skies – its rival VivaAerobus is also doing the same. Partly owned by a Mexican bus operator, VivaAerobus is also marketing to cost-conscious passengers at bus terminals in a bid to switch them to its flights.
But VivaAerobus’s network is significantly smaller, and Beltranena believes Volaris is growing its market share quicker than its competitor.
“We are completely different from VivaAerobus,” says Beltranena. “The fact is we don’t own any bus companies. We can hit the bus companies straightforward.”
GROWING NORTHWARDS
Unlike its Mexican low-cost rivals, Volaris has rapidly expanded its network in the USA and now serves more than 20 cities in its northern neighbour – more than double the number of US destinations it flew to in 2013.
In the recent year, Volaris’s US growth has been the main driver of its capacity increases, with international capacity rising almost 35% year-on-year in the second quarter. US-denominated revenue makes up about 30% of Volaris’s revenue, the airline’s finance chief Fernando Suarez said in July.
The airline’s US destinations are concentrated in the states of California and Texas, although it also serves Denver, Chicago and New York JFK among others.
Beltranena declines to specify where Volaris could launch services to next in the USA, but points out that the airline has plenty of room to grow. The airline estimates it has potential to add as many as 126 domestic routes and 140 international routes that it currently does not serve.
Of the 140 potential new international routes, most are in the leisure segment, says Beltranena. The airline’s US growth so far has been focused more on the visiting friends and relatives market.
In 2016, Volaris will have even more reason to expand services in the USA when a liberalised US-Mexico air transport agreement comes into effect. Beltranena says the new treaty will allow Volaris to add more flights to cities where services by Mexican carriers are currently restricted, such as Houston and New York.
Looking further ahead, Volaris also plans to add Canada and South America to its route map at some point. Beltranena declined to comment on when this would be. “We are doing one thing at a time,” he says.
The airline, however, made its first foray into Central America this year when it began services to Guatemala City in June followed by Costa Rican capital San Jose in September. The two destinations are Volaris’s first international points outside of the USA, and Beltranena indicates that the carrier could grow further in Central America.
“The decision to start Central America [flights] is kind of in phases,” he says, adding that obtaining traffic rights to operate in Central America is a process that takes time. “We strongly think that pushing the low-cost model into Central America is something that makes all the sense in the world, with the high-yield fares in Central America. We strongly think we can do a very good job there.”
With Volaris’s growth outside of Mexico, it is natural to ask Beltranena if Volaris plans to partner with a foreign carrier, especially with competitor Aeromexico’s plan to form an immunised joint venture with SkyTeam partner Delta Air Lines. Volaris had previously partnered with Dallas-based Southwest Airlines, in a deal that had allowed Southwest passengers to book flights to select Volaris destinations from some of Southwest’s cities. But that tie-up ended in 2013.
Beltranena says the deal had not made “economic sense” to Volaris and adds that the carriers had differing opinions on whether to share ancillary revenue. The Volaris-Southwest partnership never escalated into a full codeshare, even though both airlines had initially planned for that.
Despite Southwest’s recent growth into Mexico, Beltranena indicates that a revival of a deal with the US carrier is unlikely. “Our relationship with Gary [Kelly, Southwest chief executive] and the team is fantastic and we highly respect Southwest and they highly respect us. I think we both understand where we are at.”
Volaris remains open to partnering with other US carriers, but Beltranena cautions that the potential benefit must far outweigh any cost that the airline will bear. The airline’s existing reservations system does not have interlining or codesharing abilities, for example, and would require upgrades.
“We are open to hear about it [a partnership],” he says. “In reality, it’s a matter of cost and the percentage [of revenue] to be shared… To codeshare something with someone with fares priced as low as ours, it has to be something really big to make sense from an economic perspective.”
Beltranena has the same perspective when it comes to Volaris potentially playing a role in the consolidation of the Latin American airline industry, in which there have been several high-profile mergers over the last decade.
While Volaris is open to consolidation, Beltranena reiterates that the airline has no plans to deviate from its low-cost roots.
“It certainly has to fit with our business model. We strongly think the model is doing a great job, it’s working very well in terms of penetration of the market, it’s growing in the market,” he says. “If we do something in terms of an alliance, we would be open to it but it has to be something that at least fits with the model we are operating and can help us.”
Source: Airline Business
