EconomyFinancialThe new era of low cost

The new era of low cost

The profound transformation of the airline sector has brought countless challenges for the airline industry, but also a series of opportunities that the low cost segment does not intend to miss.

The ground gained by the two participants in this segment in Mexico, Viva Aerobus and Volaris, has been noticeable and is on the rise. Both companies went from concentrating just over half of the passenger market – among the four main airlines in the country – to 62% at the end of 2020, an index that rose to 66% in the first quarter of this year. “The low cost market took a quantum leap the previous year as a result of the pandemic and the contractions of our competitors,” says Enrique Beltranena, executive president and CEO of Volaris.

It refers to a sector marked by the indefinite departure of Interjet, which has been on the ground since last December 11 and has not operated in the international market for more than a year. To this is added the financial restructuring of Aeroméxico, which, among other actions, has led it to reduce its fleet and its personnel.

In both cases, financial pressure has been a problem, an area in which low-cost airlines have made the most of their business models.

The key to attracting a passenger niche hit by the economic crisis has been an attractive cost scheme, specialists consider, in which low rates can attract large volumes of users, and in which profitability is derived from Ancillary income, such as food and beverages on board and other services.

“Worldwide, low cost airlines have performed better against legacy carriers or traditional airlines. During the pandemic, this difference was more noticeable due to the fact that their approach is to give a lower and efficient price, even competing with bus trips ”, explains Alejandro González, an analyst at Intercam.

Part of how a competitive cost structure is achieved is in the nature of the low-cost scheme, explains Beltranena, in which unnecessary costs are avoided, as far as possible, such as fixed costs, which added to a renegotiation of contracts due to the pandemic.

“From renegotiations we have 465 million dollars in 2020 and this year we have more than 120 million. In total, we have 585 million [renegotiated] with suppliers and lessors ”, he adds.

In the case of Viva Aerobus, the burning of cash was eliminated since mid-2020, and the agreements and agreements with its suppliers helped to detonate the sales potential they were registering.

“We had agreements with 100% of suppliers, and support that we are paying this year. There were two types of renegotiation: both those who reduced the cost per se, that is, if you paid them 10 and they went down to nine there was a reduction of 10%, and others who offered deferrals “, explains Juan Carlos Zuazua, CEO of Viva Aerobus .

An improvement in the cost schemes allows lower rates to stimulate other types of income, such as seats and luggage, concentrated in the category of complementary income.

“That’s more of a flight customization issue; you give a very low rate, and afterwards people are adding the complements that they want. If you see their income from the ticket fare, it is decreasing and other income is increasing ”, explains Jonathan Félix, analyst at Verum Casa de Bolsa.

In the case of Volaris, additional services –which represent more than half of operating income– generated sales of 3,279 million pesos in the first quarter of the year, an increase of 10.1% compared to 2020, and that at the level of revenue per passenger rose 36%.

Similarly, while Viva Aerobus’ fare revenue per passenger decreased 2.7%, complementary revenue per user increased 18%, totaling 1,413 million pesos, more than 54% of total revenue.

Although there is an expectation that rates may rebound as part of a market with fewer competitors, especially in the case of Interjet, specialists expect it to be gradual.

“It would be a possibility, but something that would surprise us is that they don’t do it gradually. A price increase would not be in a dramatic way, but in relation to supply and demand in the market ”, González points out.

The opportunities

With a business model that has passed the litmus test of the pandemic, low-cost airlines have ambitious plans inside and outside the country.

For the second quarter, Volaris expects to have a capacity 10% higher than that of the same period of 2019, and plans to close the year with a fleet of 98 aircraft, with eight additional aircraft adding to the three initially planned.

“These aircraft are mainly entering Volaris’ core markets: Mexico, Cancun, Guadalajara and Tijuana in the domestic market, and towards the United States, with a very important emphasis on the Mexico City International Airport,” says Beltranena.

For Viva Aerobus, the strategy is similar, with a domestic focus on its five operating bases: Mexico City, Monterrey, Cancun, Tijuana and Guadalajara, says Zuazua.

In the international segment, both companies are looking for a piece of the cross-border market of travelers who visit friends and family, mainly, in states such as Texas.

To the south, the territory that both companies intend to conquer is Colombia, where Interjet had around 40% of the market, and which after its departure has attracted Colombian airlines, such as Avianca and Viva Air – a firm that is also low-cost. , and to Volaris and Viva Aerobus, which plan their foray in the course of this year.

In February, Volaris submitted a request to operate two routes from Mexico City to Bogotá and Medellín, and another from Cancun to the same cities, while Viva Aerobus requested authorization for a route between Mexico City and Bogotá, which will begin operate in August.

“In South America, the first bet in the business plan is the Mexico-Bogotá route, and we will continue to see it later. (…) Probably, by 2022 we will be exploring other countries in Central and South America ”, explains the CEO of Viva Aerobus.

González believes that the Colombian market has great potential, and can be profitable in terms of costs with the new fleet additions. “The A320neo aircraft (which both airlines are adding to their fleets) have greater fuel efficiency and allow them to operate longer routes,” he explains.

Speaking as a whole, Beltranena considers that the low cost segment –which once concentrated up to 70% of the domestic market– is going to stabilize at an index of 63 to 65%, while in the international segment there is a potential to concentrate up to 12% in the cross-border market.

Given this potential, the obstacles are few. “At the moment, we do not see anything that is going to slow down or slow down this growth rate. Their growth opportunities are open and they could continue to grow ”, concludes González.

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