Low-cost airline connections grow in Latin America

May 13, 2017

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First, low-cost airlines began operating in Mexico, Brazil and more recently Colombia, now Argentina’s official plans to open its air transport market have all generated a succession of ads from both traditional and low-cost airlines To start or expand its operations in the region.

While Avianca is considering entering the Argentine market to make domestic flights, companies such as Norwegian, IAG, – Iberia owner – and Aeromexico-Delta are looking for ways to increase their flights to and from the region.

In Latin America, passenger traffic from intraregional and domestic flights has increased from 162 million in 2006 to 320 million in 2015 (without double counting), according to figures from the Logistics Development Program for Latin America (LOGRA) of CAF- Development Bank of Latin America.

The consultant specialized in transport, infrastructure and logistics of the Indra group, ALG, reports that the airlines capacity  for their operations in the region, measured by number of seats, has grown at an average of 5% per year in the same period, just behind Asia-Pacific and the Middle East.

The key to the changes in the airline industry in Latin America, which resulted in the consolidation of strong regional companies such as Latam, Avianca-Taca, Copa and Aeromexico, has to do with theregion economic growth and a greater presence as a tourist destination.

The largest operator in the region is Latam, which emerged from the merger between Chile’s Lan and Brazil’s Tam, with some 82 million passengers in 2015. As of November 2016, it had 73% of the Chilean domestic market, measured in quantity of seats, according to data from the consultants CAPA-Center for Aviation and OAG. In Perú, where its hub (operations center) is, it already conquered 60% of the market. While in Brazil it has 30%, only behind Gol, and in Argentina, 25%, behind the state-owned Aerolíneas Argentinas.

Some of the factors that have influenced for years in the lack of a greater development in the flights market  have to do with the lack of connections and the high prices of intraregional air tickets. In several countries there is a structure of taxes and regulations that is very expensive and complex  for airlines and makes difficult their business development.

 

Low cost companies looking to positioning

Although Latam’s leadership in the region does not appear to be threatened, it has plans to offer certain flights at more affordable prices in many of the countries where it operates to confront  with the growing low-cost airlines  penetration , which are already strong in Brazil and Mexico and are growing in Colombia.
There are four strictly low-cost airlines that already operate in Latin America: Azul (Brazil), Volaris, VivaAerobus and VivaColombia. The first that came up in the region with the low-cost model was the Brazilian Gol, but it has evolved into a more hybrid model, which today moves about 52 million passengers a year, just behind Latam.

The Copa group seems to have its own strategy to deal with rising new companies. Last December launched in Colombia a low-cost airline with the Wingo brand, which will make the Mexico-Bogotá and Cancun-Bogota routes, with a total of 18 flights a week.

In spite of the poor results that the airlines of Latin America had in 2015 and 2016, the great potential of growth of the region arouses the investors interest. Last year, the Chinese consortium HNA Group took 24% of Azul, the low-cost Brazilian airline that in 2015 transferred some 28 million passengers, according to figures from ALG. United Airlines bought 5% of Azul and, like Delta, is interested in entering Avianca Holdings, the Colombian-based airline currently controlled by the Synergy group, the bolivian businessman Germán Efromovich.

Between 2011 and 2016, the low cost airlines have taken 53% of the growth of the aerial commercial activity in Latin America, according to ALG data. In Mexico, the growth portion they conquered in that period was 72%. These are companies that arise and develop in markets with high traffic. It is no coincidence that they have started in Brazil, Mexico and Colombia, which are the three largest markets in Latin America for industry.

 

New airs in Argentina

Despite the third largest economy in Latin America, Argentina is in the fifth  place of South America in the number of travelers per capita, behind Chile, Brazil, Colombia and Perú.
Aerolíneas Argentinas has about 75% of the market, but the new government of Mauricio Macri is showing signs of wanting an open skies policy, creating the conditions for the entry of new airport providers. This is how it started an opening road with the routes granting to connect cities of the interior with capitals of other countries without having to pass through Buenos Aires. It is already possible to travel to Lima from the cities of Salta and Mendoza; Or to Panamá from Rosario. The next important step that the “Casa Rosada” wants to give is the expansion of competition on domestic flights. In December, five companies are interested in new routes to access this market: Avian (Avianca Argentina) which is  a Colombian company; Flybondi, a new low-cost airline project; Andes, which already flies to four destinations within the country; Alas del Sur and American Jet, dedicated so far to charter flights.

Long distance bus companies in Argentina are a critical sector with the policy of opening up, as lowering flight fares is expected to be a threat to their business. Carriers transported about 40 million passengers on Argentine roads in 2015, a traffic four times higher than air. If 20% of these travelers started using the airplane, the change would be important for the aerospace industry and would create a place for many new players.

In the long run, the numbers in the region are auspicious for the industry. IATA anticipates that in 20 years Latin America will double the number of passengers and the jobs generated by the commercial sector will increase from 5.4 million in 2015 to around 8.4 million.