Friday, 23 June 2017

Viva Air Signs MoU For 50 A320 Family Aircraft

Peruvian ultra-low-cost carrier (ULCC) airline group, Viva Air, announced that it had signed a memorandum of understanding (MoU) for 50 A320 family aircraft (both ceo and neo) with Airbus at the Paris Air Show Tuesday. The MoU consists of 35 A320neo jets and 15 A320ceo planes, valuing the deal at $5 billion at current list prices.

The planes will be used by the group’s member airlines VivaColombia and Viva Air Peru. Viva Colombia is based in Bogota and Medellin and was launched in 2012 as Colombia’s first major LCC carrier.

“Our customers are at the forefront of everything we do. This new fleet will allow us to continue leading the development of the low-cost model throughout Latin America. We will be able to offer even lower fares thanks to further cost savings that these new aircraft will deliver,” said William Shaw, CEO and Founder of VivaColombia, a Viva Air company.

Viva Air Peru is the fifth ULCC to be launched by Irelandia Aviation, which helped develop Ryanair, Tigerair, VivaAerobus, VivaColombia, and Allegiant Air. The new startup was announced in early November 2016 and received a permit from the Peruvian Ministry of Transport and Communications to start service on January 19, 2017. The carrier’s first flight was on May 9, 2017, from the Peruvian capital of Lima to Iquitos.

“Airbus is proud that Irelandia is once again entrusting the A320 Family with Viva Air’s growth and modernization strategy,” said John Leahy, Airbus Chief Operating Officer, Customers. “Viva Air will be able to rely on the unmatched productivity and fuel efficiency of the A320neo to renew its growing fleet and expand its network in Latin America.”

Viva Air Peru already has a fleet of two Airbus A320 aircraft, configured with 180 passengers in an all-economy class configuration. Its initial network consists of 10 cities in Peru (nine smaller cities plus the hub in Lima), though the carrier soon plans to start international operations.

The most recent destination to join the network is Cuzco’s Alejandro Velasco Astete International Airport, which serves as the de-facto gateway to the tourist site of Machu Pichu.

Lima’s Jorge Chavez International Airport is a booming hub for Western South America, handling 19.3 million passengers in 2016. That represented 9.7% growth year-over-year versus 2015, and essentially a quadrupling of passenger traffic in the 11 years since 2005 (5.1 million passengers).

The problem for Viva Air Peru is that Lima is also a fiercely contested hub airport. By far, the two largest airline groups on the continent, LATAM and Avianca both have major hubs in Lima, and on the domestic front, smaller carriers like Star Peru (11 planes), Peruvian Airlines (9 planes), and LC Peru (9 planes) are all competing on the same initial routes as Viva Air Peru.

Moreover, Lima is capacity constrained as a single-runway airport with limited terminal space, which doesn’t provide a lot of room for Viva Air Peru to grow operations.

Latin America (other than Brazil, Colombia, and Mexico and Mexico) is also a notoriously tough market for low-cost carriers to operate in. Because it is composed of numerous small countries, many of which have their own national flag or trans-national carrier (mostly LATAM or Avianca in Viva Air Peru’s neck of the woods), getting international route rights is difficult for low-cost carriers.

The only large low-cost carrier in the region is Chile’s Sky Airline, which has just 15 aircraft in its fleet. Viva Air Peru wants to grow to two times that size – and we are skeptical of its ambitions.

VivaColombia already has 11 Airbus A320ceo family aircraft in its fleet, once again configured with 180 seats. It also had 3 outstanding A320ceo orders prior to this new commitment.

Unlike Viva Air Peru, VivaColombia can draw on a massive domestic market to grow its operations in Colombia, which will also help it generate feed and demand. Its strategy also centers on a hub at Medellin, Colombia’s second-largest city in addition to operations from the capital Bogota.

That diversification helps take VivaColombia out of direct competition with Avianca, and we expect the carrier to focus on developing operations further at other secondary hubs like Barranquilla and Bucaramanga.

At Bogota, VivaColombia will have to face competition from continental powerhouses LATAM and especially Avianca. It also must beat back government-owned domestic operator Satena, and Wingo, the Colombian low-cost wing of Copa Airlines (probably the third most important airline in Latin America).

But at Bogota, with 2016 passenger traffic of 35.8 million passengers and fewer restrictions on growth than Lima, the aspiration to more than triple VivaColombia’s existing fleet is more credible.

VivaColombia will still face the rough dynamics of getting international traffic rights within Latin America, though it does already have services to Quito, Panama City, and Lima. Most importantly, it is within narrowbody range of much of the United States, which boosts the number of available destinations.

Still, other than Gol and Azul in Brazil, no South American LCC has actually been able to achieve real scale. Viva Air Group hopes to break that trend.