Southwest Airlines is considered the first low-cost airline in the world, or at least the first to succeed in a very different model, based on cost savings, fewer passenger services and low fares. The company revolutionized the market in the 1970s. The Southwest effect spread across Europe more than two decades later with the famous Easyjet and Ryanair. And it took more than 40 years to get to Latin America.
The continent is witnessing an expansion in the number of low-cost airlines. Easy Fly, Flybondi, JetSMART, Norwegian, Sky, Live, Volaris, Wingo. The list is considerable. This is not exactly a boom, but it has spread rapidly and affected some major Latin American countries, snapping up significant market shares that were once dominated by traditional airlines.
In Colombia, they represent 21.3% of the domestic market. Just below, in Chile, are expressive 40.1%. In Argentina, which saw the first low cost take off in 2018, they already have a 19% stake. In Mexico, where they arrived a little earlier, it is over 70%. It is no small feat when they share the skies with companies the size of Aerolineas Argentinas, Aeromexico, Avianca or Latam.
This leap was not made when trying to copy practices from Southwest, Easyjet or Ryanair. The point is that the Latin American market has its deepest peculiarities and obstacles that are gradually being overcome, either by the companies’ own insistence or by a more active participation of federal governments in the expansion of the aviation market.
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“Latin American airlines have always used US and European airlines as an example, but have never been able to resemble them. Latin Americans have a number of barriers that do not allow them to achieve the same development in the short or medium term. Basically these barriers are taxes and airport charges,” explains KPMG’s aviation and tourism leader for Latin America, Eliseo Llamazares.
Each country has its obstacles. There is no regulatory or cost uniformity for the industry across nations, leading to unsynchronized advances.
“Latin America as a whole is unlikely to see low-cost airline penetration levels as observed in other major markets such as the United States and Europe. However, due to the low level of use of air modal and the high fares currently adopted, there is a distinct package of opportunities for increasing penetration of low-cost companies in the region,” says ICF Aviation Director Carlos Ozores.
The main strategy adopted by low-cost airlines in the region has been to pick up passengers who use land transportation and have not yet traveled by plane. Thus, they do not necessarily have to compete directly with traditional companies. By pointing to this audience, low-cost companies demystify air transportation as a mode for the rich. In addition, by the way, they still do not have to deal with the behavioral issues of those who are used to flying with traditional companies, such as paying for baggage check, face-to-face check-in, or choosing a seat on the plane.
Low-cost airlines do not create a market from scratch. They take a market that already exists, like the bus, and attract passengers to w new transportation modeCarlos Ozores, ICF Aviation Director.
“The goal of low-costs is not to get legacy passengers to travel at low prices. They are different types of passengers with different motivations. This is the success of low-cost companies in creating demand,” reinforces Llamazares.
The impact of government decisions
There is no low-cost airline without a regulatory environment aligned with the practices of such companies. The most recent example is from Argentina. Taking over the presidency in December 2015, Mauricio Macri led a project called Revolución de los Aviones (The Airplane Revolution). The idea was to deregulate the air sector to promote tourism in the country. It granted new routes, attracted new airlines, invested in airport infrastructure and ended the tariff minimum.
Given these measures, the first low-cost airline to land in Argentina was Flybondi, with its maiden flight in January 2018. Following that came Norwegian, still in 2018, and JetSMART, the following year–in common, all with financial resources from international groups. In less than two years, together, they transported more than 3 million people.
This means that one in five people who travel by plane in the country does so with a low-cost airline. According to data from the Argentine Ministry of Transportation, in this period, between 15% and 20% of passengers made their first trip in air mode.
“The impact is that the domestic market has grown enormously since 2016. A positive number is that Aerolineas Argentinas, always protected by governments, including against market growth, has less market share today, but carries more passengers. Another positive impact is the increasing penetration of air transport, something that had not happened in Argentina before,” observes aviation law expert and former Aerolineas Argentinas executive Diego Fargosi.
The main point for the entry of low-cost airlines in Argentina was the end of the tariff minimum. Before, there was a minimum amount that airlines could charge to issue a ticket. This made $ 1 tickets, as Flybondi sells on some occasions for example, impossible. “The tariff minimum was a protectionist measure for Aerolineas Argentinas, but also for the bus transportation sector. With this elimination, a flight from Buenos Aires to Cordoba, for example, is only 20% more expensive than land transportation,” says KPMG’s Eliseo Llamazares.
Depending on government actions, the market is subject to power exchanges. New President Alberto Fernández, elected in the end of October, can put advances celebrated by low-cost airlines in Argentina in check. His Vice-President is former President Cristina Kirchner, who led the country between 2007 and 2015, and is aligned with a more protectionist policy.
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In this scenario, the concern of low-cost companies is already evident. “There is concern amongst low-cost airlines about the new government and the role Aerolineas Argentinas will play, and the company’s unions that have historically been the main reason for controversy in the aerospace industry and that, at times, worked directly against expanding the market,” says Fargosi.
ICF Aviation analyst Carlos Ozores hopes that policies created under the Macri administration will not be changed by the new president. In favor of maintenance is the fact that low costs created new routes and transported people who had never flown on a plane without necessarily weakening Aerolineas Argentinas. He adds, however, an aspect that may impact the industry. “Everything will depend on the exchange rate, if it will get worse or if the government will seek exchange rate stability. It’s hard to sustain a business, especially in a dollarized market”.
El Palomar Airport: once a model, now a controversy
Within the low-cost model enshrined by European airlines is the use of secondary airports, sometimes further from the central area of the city, but more practical and cheaper for companies. This is the case, for example, with Beauvais, 80 kilometers from Paris, or Girona, 90 kilometers from Barcelona. For the passenger, a cheap ticket is better than the ease of reaching the central area.
In Latin America, the reality is different and there are practically no friendly airports to low-cost companies. “Here low-cost airlines need to operate at the same airports as legacy companies,” comments Llamazares.
There is only one airport that meets the needs of low-cost airlines in the region: El Palomar, located 14 kilometers from downtown Buenos Aires, about five kilometers further away than Aeroparque, the city’s main domestic terminal. The airport functioned only as a military air base, but was adapted by an incentive from the Argentine government in partnership with Flybondi to receive commercial flights.
El Palomar has a small terminal and an even smaller one, a satellite, and two yards for up to 11 aircrafts. No boarding bridges and a few stores and food options. However, this is more than enough for Flybondi and JetSMART, companies operating on-site. Norwegian, another low-cost airline flying in Argentina, uses Aeroparque as its base in Buenos Aires. Between January and September 2019, more than 956 thousand passengers passed through El Palomar.
However, what was a solution turned into controversy. Being located in a residential area, it received criticism and protests, which ended up in court. As a result, since September 26, El Palomar has been operating with take-off and landing restrictions from 10 pm to 7 am, a decision that has affected Flybondi and JetSMART flight schedules. According to the Argentine Ministry of Transportation, 30% of all airline passengers were arriving or departing from the airport in this time slot. The Argentine government itself has appealed the court decision and is awaiting a definition of the case.
Translated by Jennifer Ann Koppe