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LatAm’s Low-Cost Airlines Continue to Gain Airspace

With a strategy to compete with the big carriers, budget airlines maintain their growth goals and target public

Interjet and Volaris airplanes sit parked on the tarmac while a Grupo Viva Aerobus SAB airplane prepares to take off at Benito Juarez International Airport (AICM) in Mexico City, Mexico, on Thursday, Jan. 16, 2014. Grupo Viva Aerobus SAB filed for what would be Mexico's second initial public offering of shares by an airline since September as passenger traffic sets annual records. Interjet, Mexico's second-biggest carrier in 2012, may sell shares this year, Executive President Miguel Aleman Magnani said in November. Photographer: Susana Gonzalez/Bloomberg
March 18, 2022 | 02:50 pm

Bloomberg Línea — The Latin American commercial aviation market has undergone changes in recent years, with low-cost airlines gaining airspace as a result of their business model focusing on lowering operating costs, chasing specific routes that do not include capital cities, and with fewer in-flight amenities available.

With attractive ticket prices, such airlines have been able to capture specific passenger demands, an aspect that has allowed them to be more resilient to the crisis unleashed by the Covid-19 pandemic, for example.

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Such is the market share that low-cost airlines have achieved in Latin America that a study by the Centre for Aviation (CAPA) shows that, by 2019, low-cost airlines had already taken a higher percentage of domestic flights in Brazil and Mexico than traditional airlines.

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And a recent study by Market Insights Reports reveals that the global low-cost airline market is expected to have a compound annual growth rate of 7.52% between 2022 to 2027.

Low Costs, High Growth

The demand for more affordable tourism has been key for these companies to establish themselves in the countries of the region, such as Mexico, Brazil, Colombia, Chile and Argentina, to mention a few, and to such an extent that traditional airlines have had to adapt their offerings to attract a larger number of passengers, offering base fares to adjust to user’s needs, but without them losing the benefits they used to provide.

CEOs of low-cost airlines defend the budget travel market as still being their “priority” and their “raison d’être”, Felix Antelo, CEO of Grupo Viva (Viva Air), told Bloomberg Línea.

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“In 2022 we will seek to be the airline with the lowest unit cost per passenger in the world, which will translate into better fares for our travelers,” Antelo said. “We are benchmarks and experts in the super low-cost model, and which generates greater inclusion, in which passengers pay only for what they need. During 2021 we transported 5.2 million passengers on more than 26,000 flights; for 2022 our goal is to transport 10 million passengers.”

For his part, Estuardo Ortiz, CEO of JetSMART, an airline with operations in Chile and Argentina, said the viability of the ultra low-cost model was validated in the region with the pandemic.

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“It showed its resilience against traditional airlines, where, while many needed to rely on state aid and financial reorganization processes, we continue to deploy in the region, and today we have more routes than before the pandemic,” he said, adding that, so far in 2022, the airline’s operations have grown by 34% compared to the summer season of 2019.

"People have understood that services are diverse according to the needs of each passenger," according to Estuardo Ortiz, CEO of JetSmart.dfd

The Air Travel Revolution

According to Ortiz, low-cost airlines’ surge in Latin America has had a big impact because, since then, “the air travel model in South America has never been the same, and we believe that we are largely responsible for having changed the paradigm. Everyone has had to adapt, in terms of their plans and their competitive advantages”.

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It is estimated that low-cost airlines will achieve sales of $13 billion in the next five years, according to Euromonitor.

For Antelo, “both travelers and competitors have understood that the low-cost model is the right one”, pointing out that in the first stage of the pandemic, Viva came out stronger, registering a growth in market share from 12% to 24% in Colombia, and as one of the few carriers that “did not file for bankruptcy protection or seek protection from its creditors”.

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The average variation of ticket prices between low-cost airlines and traditional carriers is almost 43%, taking into account the full fare, which offers all the benefits of each company to the user.

JetSmart believes that the tendency of bigger carriers to adapt their business model is evidenced by the reorganization that Colombia’s Avianca underwent when it emerged from bankruptcy, where it not only reduced debt and added liquidity, but also included in its plans more “point-to-point” routes and offered lower fares to compete with low-cost airlines, as the company’s president Adrian Neuhauser said at the time.

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The International Air Transport Association (IATA) told Bloomberg Línea that the low-cost segment is seen as creating more choice for customers. “However, we are also seeing a convergence of the two business models with traditional airlines,” offering fares at parity, and including “the concept of fare families, where the customer can choose which services they want to have and which ones they don’t”.

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Are Super Low-Cost Airlines At Risk?

Although they continue to be the leading companies in the Latin America market in terms of the number of passengers carried, low-cost airlines are not immune to economic shocks, such as the price of fuel or the devaluation of the local currencies in which they make their sales.

This was highlighted by Grupo Viva’s Antelo, who emphasized that as an airline, “we identified a great challenge for the industry, which has to do with the historically high price of fuel, and this variable does not show many signs of being a short-term issue; fuel, which is airlines’ main expense, is paid for in U.S. dollars, and Viva earns revenues in Colombian pesos, hence the exchange rate has an impact that is felt in all costs and expenses of the operation”.

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Avión Viva Air Colombia, Grupo Vivadfd

A month ago, for example, one U.S. dollar in Colombia was worth close to 4,000 pesos, which led the president of the airline EasyFly, Alfonso Ávila, to tell the media that the devaluation was a factor of concern in the price of tickets, and that “if the devaluation continues at this rate, we will have to make a price readjustment, because 70% of the airline’s purchases are priced in dollars”.

IATA, as it has stated on other occasions, told Bloomberg Línea that it “continues to advocate for the reduction of taxes and tariffs to create a more competitive operating environment”.

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According to the international body, there is now a “general tendency” for both airports and governments to increase fees to “recoup the revenues they lost during the pandemic; this will, of course, hinder recovery”.

Another risk foreseen by Jet Smart’s CEO continues to be Covid-19, as “the risk of new variants appearing that imply more restrictions and/or border closures” remains latent and that could “set back the recovery that we have seen more strongly during the first two months of the year in international supply”.

Sector Recovery

IATA’s most recent report, published in March, states that, in January 2022, global air traffic measured in passenger kilometers transported rose 82.3% compared to January 2021.

Índice de conectividad aérea internacional IATA por región para todas las rutas internacionales, mensual enero 2020 - febrero 2022dfd

“Latin American airlines posted a 157% year-on-year increase, a rebound from December 2021′s 150.8% year-on-year increase,” the report states. “January capacity increased 91.2%, and the occupancy factor climbed 19.4 percentage points to 75.7%, returning to lead the ranking for the 16th consecutive month,” it added.

However, despite the year-on-year recovery, IATA said that total passenger kilometers transported were down 49.6% in January compared to January 2019.

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