Analysis: LATAM‘s budget carriers ready to grab market share | Analysis | Airfinance Journal

Analysis: LATAM‘s budget carriers ready to grab market share

As demand gradually returns for air travel, the months ahead will be crucial for airlines in Latin America.

The focus will be on re-establishing networks but airlines in the region are conscious that the recovery from Covid-19 may not follow a linear path.

With three large airline groups currently in Chapter 11 bankruptcy protection, low-cost carriers (LCCs) and ultra-low-cost carriers (ULLCs) are pushing ahead with plans to increase their market share, as they believe they will benefit from a capacity reduction from incumbent carriers.

Viva Air Peru chief executive officer Stephen Rapp believes the Viva Air Group will come out of the Covid-19 “even stronger”.

Viva Air Colombia was grounded for almost six months and started operating in early September. Viva Air Peru started operations again on 15 July.

Currently Viva Air Peru is focusing on rebuilding its network domestically and starting to re-stimulate demand.

“We are starting to see demand returning," said Rapp at the Airfinance Journal Latin America conference in September.

"The whole economy has been affected and people have disposable income. This makes our low fare offering even more attractive. Every sol, dollar, peso invested in a trip counts even more than before.”

Initially the low-cost carrier saw strong demand, but further outbreaks in Peru since have slowed its recovery.

“Today we operate at 15-20% of the capacity we had pre-pandemic,” Rapp says, adding that with Covid-19 now under more control, Viva Air Peru is pushing for more resumptions of services.

Viva Air is working with the authorities to resume international operations by 1 October. The carrier hopes to re-establish some key routes from Lima, Peru, to Medellin and Bogota in Colombia. Viva will also work on restarting Miami routes from Medellin and Bogota.

“Prior to the Covid-19, we were about to announce international expansion plans. From Colombia we were looking at a number of new routes to the Caribbean and up to the USA. Those opportunities are still there. We might see a couple of those routes operating towards the end of the year.”

In Lima, Viva Air has seen more opportunities in the Peruvian domestic market after the closing of Avianca Peru.

“They had control on a number of frequencies to Argentina and Chile and over to Brazil. This presents some opportunities in some markets for next year, but first it will be res-establishing the network we were operating,” he says.

Viva is now targeting corporate business as the “model is now better understood”, he says, adding that the company was gearing up for such a move prior to Covid-19.

“That emphasises the opportunities we have, as low-cost airlines in the region,” he adds.

“There are a number of restructurings in the region and I would question how far they can restructure, how much cost can they take out of their businesses, how close can they get down to our cost levels,” Rapp says.

“Coming into the crisis we were 35-45% lower in costs than those carriers,” he comments. “I would imagine that coming out, even post-restructuring, we will have a significant advantage on the cost point of view.”

In Argentina, Flybondi also believes it is best positioned for when demand returns.

Executive chairman Mike Powell says Argentina has seen the longest and strictest lockdown in the world and all airlines had to suspend flights on 20 March.

The original date to resume domestic and international services was 1 September, but the summer period saw a significant rate of infections in the country, which will trigger a delay in reopening flight operations.

“The new dates have not been defined but the transport minister has talked in recent days about resuming both domestic and international services on 1 October. That would require the health minister’s approval and the president’s approval, of course,” he said at the Airfinance Journal's Latin America conference.

Aerolineas Argentinas restarted domestic services on 22 October, but passengers need a circulation permit to fly.

Flybondi has strongly protested the government’s decision to keep Buenos Aires’ secondary airport El Palomar closed as the country slowly reopens following the coronavirus crisis.

The budget carrier has been impacted since the start of its operations by the economic crisis in Argentina. “The crisis has rumbled on. The peso has depreciated versus the US dollar by 80%.”

The Covid-19 crisis has had a profound effect on the Argentinian economy with a 12% decline in gross domestic product forecast this year. “Inflation is now coming down finally and we are expecting a modest recovery next year,” says Powell.

Flybondi had started to push into Brazil with routes to Sao Paolo and Porto Alegre since the beginning of the year, after opening routes to Rio and Florianopolis in 2019. Powell says more destinations are in the pipeline.

In March, Flybondi had a 9% market share, ahead of Norwegian Argentina and Jetsmart Argentina with 7% of the market each. Aerolineas Argentinas represented about 60% of the market while LATAM Argentina accounted for 16% and Andes for 1%.

“Given the consolidation that has taken place into the Argentine market, going from six airlines down to three, we think that we are very well positioned with our brand with a very low cost base to exploit the opportunities in the post-Covid-19 era.”

“Our investors see that the reduction of airlines in Argentina to three is potentially a great benefit for those surviving the crisis.”

LATAM Argentina has pulled out. “They considered many times before and I think Covid-19 was the last straw for them,” he says.

Norwegian Argentina has been acquired by Jetsmart Argentina and Andes has shrunk to a level where it barely offers services.

“The post-Covid-19 market will be Aerolineas, Jetsmart and ourselves,” claims Powell.

“With LATAM Argentina out of the market, there is a big slug (16%) of the market available domestically.

Aerolineas is going through a major restructuring on its own, which will see it cutting its capacity by as much as 30%. Effectively that is another 18-20% of the market available. We saw prior to Covid-19 that Andes had shrunk from 8% to less than 1% of the market. You can quite easily see that post-Covid the LCCs in Argentina ought to have 40-50% of the market.

“The low-cost market share in Argentina was 19% pre-Covid-19. The advent of LCCs in the region has resulted in doubling, tripling of the market’s size within 10 years. The market has grown by 60% in Argentina and we think there is a long way to go from the 2019-based figures.”

Powell observes that every crisis has pushed up LCCs over full-service carriers. “Consumers are more accustomed to fly low cost because of economic reasons.”

Flybondi received a 58% net promoter score last December, whichPowell sees as evidence of the popularity of LCCs within Argentina. “When you introduce a new concept to the market, the local consumers are amazed they can now fly for the same price as going on a long-distance bus.”

Brazilian market
Gol Lineas Aereas has captured 40% of the Brazilian domestic market.

The Covid-19 pandemic has severely impacted the country, but the fatality rate peaked in July and started to trend down in August, according to chief financial officer Richard Lark.

“Demand in Brazil has since gradually improved every month since May. We expect we will benefit the most from the revival of the domestic market.”

Gol’s domestic traffic was at 30% of pre-pandemic levels in early September.

“We plan to end the year with 80% of frequencies and markets,” he adds.

Viva Aerobus believes its focus on the domestic market will be beneficial.

The LCC currently operates 95 routes, of which 12 are international, versus 127 routes in March.

Viva Aerobus has a network that expands continuously and during the pandemic the carrier opened 10 new routes.

Mexico never closed its skies and transit within the domestic market has been without restrictions, says chief financial officer Jose Golffier.

Last month Golffier says the recovery was happening and the airline expected to finish the month with one million passengers transported.

“The yields are not where we wanted but volumes are picking up quite rapidly,” he says.

“Our market share at the end of 2019 was close to 21%,” notes Golffier.

He believes Viva Aerobus will increase its domestic market share.

The carrier says 90% of its passengers are on domestic operations from five bases: Cancun, Guadalajara, Monterrey, Mexico and Tijuana.

“That has proved our core strength during the pandemic and has allowed the carrier to recover in terms of capacity and load factors faster than some competitors,” he says.

“In Mexico, two-thirds of the population is middle-class,” he says, adding that the domestic market has been expanding at a 10% compound annual aggregate rate over the past five years, mainly due to the low-cost presence.

Between May and August, the domestic market increased at a 43% compound growth rate and Viva Aerobus grew the fastest of any airline, according to Golffier.

The CFO believes Viva Aerobus can more than double its domestic market share within five years.

He says two competitors in Mexico are shrinking capacity significantly and this should provide Viva Aerobus opportunities to grab a 30% market share.

Within five years, Viva Aerobus plans to more than double its domestic market share.

The carrier plans to end the year with a 23% market share, and forecasts market share of 26.6% in 2021 and almost 32% by 2025.

“In the Mexican market there are a lot of secondary cities that need to be connected and we are well positioned for this,” he notes.

Viva Aerobus is part of the largest bus operator in Mexico and Golffier outlines the benefits of converting passengers to air travel. “About 50% of our passengers are first-time flyers,” he says.

He says the government has not provided any incentive for any industry and this has forced airlines to manage their cash carefully. “A couple of competitors have been severely hit and have had to downsize their fleets. A third of Mexico’s total fleet has been grounded or returned to their financiers,” he says.

To stimulate demand Viva Aerobus is advertising fares without taxes and allowing customers to pay taxes at a different date before flying. “We are going to see an impact of this during the recovery of the crisis,” he says.

Chief executive officer Jose Dougnac says Sky Airline represented 26% of the Chilean domestic market before the crisis, while Sky Airline Peru had a 17% market share in Peru.

In Peru, Sky Airline is the second carrier behind LATAM (63%),ahead of Viva Air (11%), Avianca (2%) and others (7%).

“We have made a significant impact in this market and we operated six A320neo aircraft with a 91% load factor at the start of the pandemic. We will continue to stimulate that market and bring the benefits of a simple service at a good price,” he says.

In Chile, Sky Airline had the highest load factor in the 12 months up to the pandemic.

Domestic revenue passenger kilometres (RPKs) plunged 91% year on year in July in Chile.

In Peru, RPKs were down 91% year on year in July and some airports were still closed as Sky Peru restarted operations, according to Dougnac.

Dougnac says Sky will focus on the domestic markets in Chile and Peru to strengthen its positions there rather than pursuing expansion in the region.

International travel is not allowed in both countries, he says, but Sky Airline is preparing for international growth.

The carrier has filed an application to fly to destinations in the USA from Lima and will use the Airbus A321XLR as its aircraft.

“We will have the A321XLR in 2023,” Dougnac says. He confirms that the orderbook for the model with Airbus is “intact”.

Sky Airline signed a purchase agreement with Airbus for 10 aircraft of the type in December 2019. Airbus says the A321XLR will deliver a range of up to 4,700 nautical miles, with 30% lower fuel consumption per seat compared with previous-generation competitor jets, allowing airlines to expand networks by making new longer routes economically viable.

“The order is now more valuable than before,” he says, describing Chile as one of the most restrictive markets in Latin America.

But in the near-term, the focus is on consolidating the carrier’s positioning in Chile and Peru.

Transaction SnapshotLatam | A/c purchase | 09-20 | 4xA319

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