Latin LCCs Diverge on Cross-Border Strategies

The closest thing to a common cause for international expansion is the depreciation of some currencies. Mexico’s peso and Brazil’s real fell 6% and 9% respectively last year. Both are stabilising, but LCCs in Mexico and Brazil have launched or expanded cross-border routes in a search for hard, or least harder currencies, than their own. Nonetheless, the main reasons for cross-border growth lie in Latin America’s diverse dynamics.

Latin America’s seven low-cost carriers are spreading their wings, but each is following its own strategy with little in common with the others.

The closest thing to a common cause for international expansion is the depreciation of some currencies. Mexico’s peso and Brazil’s real fell 6% and 9% respectively last year. Both are stabilising, but LCCs in Mexico and Brazil have launched or expanded cross-border routes in a search for hard, or least harder currencies, than their own. Nonetheless, the main reasons for cross-border growth lie in Latin America’s diverse dynamics.

Volaris and Interjet, two of Mexico’s three LCCs, for instance, were prompted to expand by an event unique to Mexico – the demise of Mexicana. Jumping quickly into the vacuum, Interjet grabbed Mexicana’s Caribbean and Central American routes, while Volaris exploited the high-volume Mexico-US market.

Interjet now seeks to grow its US presence too, but is constrained by the Mexico-US bilateral agreement. With several exceptions, it restricts each country to two airlines per city pair. Southwest Airlines faces the same frustration from the US side and wants the same change so that it can expand into Mexico. Sources report that Mexican and US negotiators are “close” in their efforts to liberalise the bilateral agreement.

In contrast to Volaris and Interjet, VivaAerobus, Mexico’s third LCC, has been a late-comer to cross-border growth. It plans to supplement its one US route (Monterrey-Houston) with several more, including at least San Antonio and Las Vegas. Gradually, VivaAerobus seems to be moving beyond its domestic focus.

Farther south, VivaColombia launched operations with an international strategy already in place. Rather than having cross-border routes thrust upon it, as in the case of Volaris and Interjet, Juan Emilio Posada, VivaColombia’s founder and chief executive, says “international expansion has always been part of our business plan.”

Just over a year after its launch, VivaColombia is starting flights to Panama in August. Quito will be next in October, with Mexico City and Cancun to follow. Posada foresees “more interconnected” routes within 4h of its Colombian hub.

Veca Airlines, El Salvador’s LCC start-up, will follow a similar strategy. When it takes off, now slated for December, it plans to operate cross-border routes from the outset. Its list of likely destinations varies, but it always includes the capitals of neighbouring nations. Indeed, Central American countries are so small that cross-border flights are compelled by geography.

VivaColombia and Veca come closest to conventional LCC strategy in launching cross-border routes. In the kind of high-density, short-haul markets where LCCs thrive, any city within the range of a Boeing 737 or Airbus A320 is a potential destination, regardless of its nationality, and the smaller the airline’s home market, the bigger that potential. Whether an LCC adds that city to its route map is less a question of operations than of aeropolitics.

By contrast, the strategies of Brazil’s two LCCs are anything but conventional. Azul’s plan to lease five Airbus A350-900s and six A330s and start flying long-haul routes to the USA is less about expanding an LCC than about launching a new business unit to exploit an opportunity. Azul currently operates only within Brazil with a fleet of Embraer regional jets and ATR turboprops. It may launch these long-haul routes under the Azul brand, but they effectively will be a new airline.

Azul’s plan is driven by the Brazil-US open skies agreement slated to take effect next year. John Thomas, manager director at Boston-based LEK Consulting and head of its global aviation and travel practice, says, “Azul’s bold move is an effort to pre-empt the boost in capacity we expect next year when the Brazil-US open skies take effect.”

Gol’s cross-border strategy, by contrast, is driven by very different dynamics. With the fourth largest domestic market in the world, Gol has always concentrated on Brazil and never had a large international network. In 2008 it dropped Varig-operated long-haul routes and served some neighboring countries on its own. Three years ago it started a systematic withdrawal from cross-border routes as part of an overall capacity retreat. At one point Gol was only serving Buenos Aires.

Now Gol is growing again. In May it resumed flights to Santiago, Chile, after a two-year absence, and announced plans to boost international capacity by 8%.

The driving forces behind this about-face, says Thomas, are the strong commercial ties Gol has formed with Air France-KLM, TAP Portugal and Delta Airlines. In February, for instance, Air France-KLM invested $52 million in Gol and agreed to pay another $48 million under an enhanced commercial arrangement. In return, Thomas says, “Gol is offering behind and beyond feed to these alliance partners between the São Paulo gateway and cities such as Santiago and Buenos Aires.”

Thus, despite a general trend toward cross-border growth, a closer look at Latin America’s LCCs reveals a far more complex story.

(Reproduced from Airline Business with kind permission from our data partner Flightglobal)

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