ANALYSIS: Low-cost model set for Central America

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Latin America has lagged behind other regions in terms of low-cost carrier penetration, but the business model is now spreading from Brazil, Colombia and Mexico to other countries – especially in Central America.

El Salvador-based Veca Airlines has secured its AOC and plans to launch services before 28 June, starting with two leased Airbus A319s configured for single-class service. Initial routes will include the capital cities of neighbouring nations. “There is a big need for new entrants in Central America,” says chief executive Edgar Hasbun.

Veca – a Spanish acronym for “economical Central American flights” – is privately held by a group of Salvadorian entrepreneurs and affiliate companies of energy group Alba Petroleos. Alba funded a market analysis last year to determine if a new LCC entrant was feasible, and did not invest until it saw the results of that study.

It appears Veca will now be the first low-cost operator based in Central America.

Another potential low-cost entrant is Ticos Air, which plans to base itself in Costa Rica. The airline’s operational start date is less certain, however.

Ticos had hoped to secure all approvals in time to launch flights last December, but that process was delayed for unspecified reasons. Local reports suggest that sole proprietor Gino Renzi – a former hotel manager and television executive who openly admits his lack of aviation experience – is seeking other investors after the death of his initial partner.

VivaColombia has also been tipped with potential interest in El Salvador. The carrier is on a fast expansion track – only two years after its launch, it already gained approval for international flights, which will start later this year to Panama City and Lima, Peru, and earlier this year was reported to be holding discussions with aviation officials in El Salvador.

If so, the carrier will become one of several foreign budget carriers – such as Mexico’s Interjet – that fly in and out of the region.

Turboprop operator Transportes Aereos Guatemalans is adding low-cost flights from Guatemala to El Salvador. Depending on passenger response, TAG says it could extend its network into other parts of Central America.

The region is ripe for low-cost operators. Central American aviation policies and procedures are more closely integrated – and as liberal as any others in Latin America. Intra-region stage lengths are short, and potential new entrants face a better reception than in Venezuela, Argentina or Bolivia, where governments support and favour their own airlines.

Grupo TACA, which dominated Central America along with Panama’s Copa, merged into Avianca four years ago and has disappeared. This produced some rationalisation, such as closing TACA’s old hub in Costa Rica in favour of one Central American hub in San Salvador. How much these changes have created a vacuum is unclear, but the start-ups think there is enough market potential.

Both Veca and Ticos like to boast that they have hired a number of former TACA staff laid off after the merger with Avianca. Tico's Renzi also appeals to native pride in an off-hand comment about Copa and Avianca, pointing out that the choices of Costa Ricans currently are limited to airlines from Panama and Colombia.
Copa and Avianca might dispute it, but Veca’s Hasbun contends that “air travel in Central America is currently very expensive”.

When Alba funded last year’s market analysis into a potential budget airline, project advisor Jose Luis Merino remarked: “El Salvador needs to open up the world with opportunities for cheap flights. It is sometimes cheaper to go to Spain than to fly to Costa Rica or Panama.”

Any new Central America entrant knows it cannot ignore Copa and Avianca. Veca’s strategy will not be to compete for the same traffic with these incumbents, says Hasbun, but to stimulate demand with lower fares. Veca’s goal, he explains, is to “create a new market”.

"We see no problem with new entrants, provided they comply with all regulations and enter the market on equal terms, without subsidies or privileges,” says Avianca.

Copa’s senior vice-president commercial planning, Joe Mohan, sounds less sanguine. “Low prices are not the focus of Copa," he admits to local media reporters, but any new competitor changes the market balance. Even experienced airlines must work, Mohan stresses, to maintain their on-time performance and service standards.

In a warning to any newcomers, he adds that “this is not child's play”.