Low-cost airline connections grow in Latin America

Jan 13, 2019

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Low-cost airlines have began to operate in Mexico, Brazil and more recently in Colombia. Now Argentina’s official plans to open its air transport market have generated a succession of ads from both traditional and low-cost airlines in order start and expand its operations in the region.

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

In Latin America, passenger traffic from intraregional and domestic flights has increased from 162 million in 2006 to 320 million in 2015, according to researches from the Logistics Development Program for Latin America (LOGRA) of CAF- Development Bank of Latin America.

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, resulted in the consolidation of strong regional companies such as LATAM, Avianca-Taca, Copa and Aeromexico, has to do with the region economic growth and a greater presence as a tourist destination.

The largest operator in the region is LATAM, which is a merge between Chile’s Lan and Brazil’s Tam. The airline serverd around 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 their headquaters are, it has 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 is related 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. As a result is more complicate business development for airlines of the region.

Low cost companies looking to position

Although LATAM’s leadership in the region does not appear to be threatened, it has developed a strategy 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 in the market. Brazil and Mexico represent markets in which the low-cost airline have a strong position. While in Colombia they are following the same path.

Azul (Brazil), Volaris, VivaAerobus and VivaColombia are some of the low-cost airlines that have managed to acquire a big market share in the region. Brazilian Gol is the pioneer of low-cost airlines in Latin America, but it has evolved into a more hybrid model, which today moves about 52 million passengers a year.

Copa Group seems to have its own strategy to deal with the rise of new companies. Last December Copa launched in Colombia a low-cost airline under the name of  Wingo, 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 acquired 24% of Azul company shares. United Airlines bought 5% of Azul. Both United Airlines and Delta are interested in entering Avianca Holdings.

Between 2011 and 2016, low-cost airlines have taken 53%  of the aerial commercial activity in Latin America, according to ALG data. In Mexico, the growth market share conquered in that period was 72%. It is no coincidence that these airlines have started in Brazil, Mexico and Colombia, which are the three largest markets in Latin America for the industry industry.

New airlines in Argentina

Despite of being the third largest economy in Latin America, Argentina is in the fifth  position in the number of travelers per capita in South America. Just behind Chile, Brazil, Colombia and Perú.

Aerolíneas Argentinas has about 75% of the national 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. Giving way to the opening of routes that allow connecting inner cities with capitals of other countries without having to go through Buenos Aires. Now it is possible to travel to Lima from the cities of Salta and Mendoza; and to Panamá from Rosario. The next important step that the “Casa Rosada” wants to give is the expansion of competition on domestic flights. Five companies  have shown interest 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 traffic in air. If 20% of these travelers started using the airplane, the change would be important for the air travel 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  to around 8.4 million.