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Five Boeing 737s may not seem like that much capacity for a country of 45 million people, but in Colombia just five 737-700s have totally changed the competitive landscape. Theseaircraft, placed into service by Colombian carrier Aires between February and June, have driven a sudden double-digit capacity increase in a domestic market that last year had only 10.7 million passengers.

The arrival of the 737s was particularly significant as it coincided with the launch of a third carrier and the first low-cost player on Colombia trunk routes. It also means that Colombia has become the third Latin country to embrace the low-cost carrier phenomenon after Brazil and Mexico. This only leaves Argentina with domestic traffic volumes large enough to potentially support a fully-fledged low-cost marketplace.

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Up until now, Colombia's main domestic routes have been dominated by two carriers, Avianca and Copa Airlines subsidiary Aero Republica, since ACES merged with Avianca in 2002.Aires, which before this year only operated Bombardier Dash 8 turboprops on regional routes, is now operating five 149-seat 737s on nine trunk routes. It is competing against Avianca and Aero Republica on most of these routes with competition the fiercest on the four largest routes - Bogotá to Cali, Medellin, Cartagena and Barranquilla - which last year accounted for 4.4 million passengers. In June each of these markets saw year-on-year passenger growth of 19-25%.

Aires president Francisco Mendez says this growth is primarily the result of market stimulation as low fares have persuaded Colombians who previously travelled by bus to fly. "The Colombian market has really reacted to the low-cost approach. We have seen stimulation of up to 30% on some routes," he says. "We believed Colombia was overpriced. Fareswere too much. That is the opportunity."

Avianca president Fabio Villegas and his counterpart at Aero Republica, Roberto Junguito, agree Aires has been able to create a new market. Junguito says Aero Republica, which has matched Aires fares on a selective basis, also has been able to grow its passenger base and retain its share of the market on main domestic routes in Colombia, but without having to add capacity.

Aero Republica carried 169,000 domestic passengers in June, a 20% increase over June 2008, while increasing capacity by only 1% to 250,000 seats. On the four largest routes in the country, Aero Republica saw its traffic grow 27% in June to 82,000 passengers. "Whenever a new competitor comes in there is market simulation that occurs," Junguito explains. "That market simulation has been captured by Aires and Aero Republica."

Avianca, however, has only seen its domestic traffic increase marginally this year and as a result its market share has slipped. But Villegas is not concerned and says Avianca decided against changing its approach to the domestic market as average fares dropped by about 20%: "We receive a lot of advice from people saying 'it is time for you to go low cost. You have to reduce your level of service. You have the wrong model'. But we want to concentrate on the segment of the market that demands a good level of service. We know there are other airlines that will attend to other segments of the market but we will focus on improving the level of service. We are not going to cut back on that and in the end we hope we will be able to differentiate ourselves from the other airlines."

Avianca and SAM, which Avianca acquired in the 1990s,carried 544,000 domestic passengers in June, only a 1% increase over June 2008. This includes 292,000 passengers on the four major routes in Colombia, representing a 1% drop compared with June 2008. SAM operates 15 Avianca-branded Fokker 100s. It is nowformally folding its operation into Avianca, which flies Airbus A320s, Boeing MD-80s and Fokker 50s on domestic routes.


Avianca also has a codeshare partnership with Satena, a Colombian air force-owned airline that operates a mix of regional jets and turboprops on public service routes that Avianca is not interested in serving. Avianca and Satena combined now carry a commanding 64% of domestic passengers, but this is down from a 70% share a year ago (see chart, p34).

Villegas says the flexibility of the SAM/Avianca fleet has come in useful this year as the carrier has been able to reduce domestic capacity on trunk routes without reducing frequency by down-gauging some flights. Maintaining more frequencies than its competitors is important for Avianca because it focuses mainly on the business sector of the point-to-point market and has a bigger connection business than other Colombian carriers.

Villegas says other carriers are pursuing another sector of the market, which is important for Colombian economic development, but may not be sustainable over the long run. "Basically, what they have done is they have brought to the airline passengers which in the past were not using the airlines. They have created a demand for themselves, especially to the tourist destinations - Cartagena, San Andres and Santa Marta - during the high season. Let's see what happens. I think there is an oversupply and we will feel that in the low season. It is more difficult to create that market in the low season. That segment of the market is not used to flying in that time."

Mendez acknowledges the stimulation factor has been higher in the tourist markets in the Caribbean region, but says "the reservations looking forward are very good" and he does not expect any drop-off in traffic during the off-peak months of September or October.

He says the response has been particularly positive on the Bogotá-Santa Marta route, which was the seventh-largest in Colombia last year with 382,000 passengers, and Aires added a second daily frequency after achieving an 80% average load factor only three months after launching the service.

However, the average load factor for Aires on the largest route in Colombia was only 36% through the first five months of services. On the second largest route the load factor was only 31% in the first three months of operation.Aires carried 144,000 passengers across its domestic network in June with an average load factor of 58%, which was 12 percentage points below the industry average.

But Mendez says the load factor was in the upper 70s in July and August as the Aires brand started gaining more traction on trunk routes. He says in August, which was the first full month Aires fully used its five 737s, Aires carried about 180,000 passengers. Mendez expects that domestic market share "should be close to 20%" by the end of this year.

In June, its share of the domestic market was 14.8%, compared with 10.6% the previous year. Capacity for the entire domestic market was up 7% in June and only 2% for the first half, but both Mendez and Villegas say this figure exceeded 10% in July and is expected to remain in double figures throughout the second half of the year with the increase on trunk routes close to 20%.

In June Aires surpassed Aero Republica in domestic seats offered for the first time. But Aero Republica was able to carry 13% more passengers than Aires thanks to a significantly higher load factor. Junguito says Aero Republica has been able to boost its load factor and improve its product by switching from Boeing MD-80s, the last of which will be retired at the end of this year, to smaller Embraer 190s.

"All of us have taken a hit on the revenue side, but the good news at Aero Republica is we have been proactive at renewing the fleet," Junguito says. "This new fleet allows us to be the most competitive cost wise."

Junguito echoes Villegas in questioning whether the market will be able to absorb the extra capacity created by the off-peak season expansion of Aires and calls the strategy of Aires "a low-fare strategy, but not necessarily a low-cost strategy". He points to the mixed fleet of jets and turboprops at Aires and its thin regional and dense trunk routes, combinations unheard of in the low-cost sector. "There is complexity in that model," he says.

Another Aires competitor, regional carrier EasyFly, also believes Aires is following a flawed business model. "You cannot really turn a carrier into a low-cost carrier. You can try but it is close to impossible," says EasyFly planning director Alfonso Avila Corchuelo.

Avila claims EasyFly is first and only low-cost carrier in Colombia, although it only operates 30-seat British Aerospace Jetstream 41 turboprops, not the typical low-cost aircraft, and focuses on niche regional routes. The Avila family, which founded and owned Aero Republica before selling it to Copa of Panama in 2006, launched EasyFly in late 2007 following the low-cost model.

"We sold it [Aero Republica] off entirely and then saw an opportunity that does not exist in Colombia - to start a low-cost carrier," Avila explains. He adds that, with its low cost base, EasyFly has been able to open new thin markets that were previously not served by any carrier and offer lower fares in markets that previously only had one operator - typically Aires and in one case Avianca.

Mendez, however, claims Aires is really the first low-cost carrier in the country and "you cannot have a low cost structure only on the regional side". He says that while Aires was not a low-cost carrier previously, it had a relatively low cost base which it was able to further reduce as it took on 737s.

"The cost base of Aires was low enough to change the company around. Turning around a legacy carrier on the other hand is very hard to do," he says. "We have a slim airline. We have low overhead - only 800 employees - and high utilisation. We do not have lounges, first class or a frequent flyer programme. We are very basic in the approach."

Mendez says Aires is following "the JetBlue approach" with free first bags and drinks. He says Aires decided against following the pure low-cost model because Colombians react negatively to airlines which "charge for everything" and adds that "our costs are low enough that we do not have to do that".

Junguito saysAero Republica could also be considered a low-cost carrier as it has a simple fleet, only offers economy class and does not have lounges. But the carrier is part of the Continental Airlines OnePass frequent flyer programme and gives elite members seats at the front of the aircraft with more leg room.

Avianca also has a frequent flyer programme and offers first class on some domestic flights. Villegas says the domestic market is an "important" part of the Avianca business, accounting for 55-60% of its revenues, or roughly $1.1-1.2 billon annually. Junguito says the domestic market accounts for about two-thirds of the Aero Republica revenues, or roughly $200 million annually.

Mendez expects revenues for Aires will be $220-230 million this year, almost double its 2008 figure, and be close to $300 million in 2010. He claims the 737 operation, after incurring initial losses, is now profitable and Aires as a whole should turn a small profit in 2009 despite the start-up costs.

Aires is planning to add four more 737-700s by year-end and four 70-seat Bombardier Dash 8 Q400s in 2010. Mendez says the additional aircraft will be used primarily to launch new international flights but Aires also plans to add domestic capacity by increasing frequencies on existing trunk routes, partially by using Q400s to operate off-peak frequencies. Mendez says there are also a few trunk routes that Aires has not yet entered such as Bogotá-Cucuta, which was the seventh largest last year in Colombia with 339,000 passengers. "I think we got the low hanging fruit but there are still some markets not being served," he adds. "The response in the Colombian market has been so high we will take more aircraft."

But Mendez acknowledges competition is already fierce and having three carriers on trunk routes over the long term "will be difficult. Two will be enough." Consolidation in the dynamic domestic market, however, is unlikely because all the carriers say they are not for sale and are not interested in mergers. The market could become even more crowded with several Colombian entrepreneurs aiming to establish new airlines andChile-based LAN, which earlier this year launched a cargo carrier in Colombia, looking at entering the Colombian domestic passenger market. Avila says EasyFly also envisages operating 120-seat jets on trunk routes as its existing turboprop operation, which will consist of nine aircraft by year-end and grow to 12 next year, is only the first phase of its business plan.

EasyFly already has become the fifth-largest carrier in Colombia, surpassing small turboprop operator Aerolineas de Antioquia."We think we can grow into larger aircraft in future to fly internationally and connect bigger domestic routes," Avila says. "But we will have to wait it out because a lot of trunk routes are saturated. There is too much capacity on the main routes. I do not think it is the right time to start an airline."

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