The 5-year average growth rate of air traffic in Mexico has been 9.6 percent, with ULCCs increasing market share, says VivaAerobus CEO Juan Carlos Zuazua Cosio.
Mexican ultra low-cost carrier VivaAerobus is in a unique position: its parent company, Grupo IMASA, is one of the country’s largest bus companies. And the bus is still one of the most popular ways to get around Mexico.
But the number of air travelers is rising significantly. As a result, VivaAerobus gets the advantage being part of the largest form of transportation in Mexico, as well as the highest growing method of travel, says CEO Juan Carlos Zuazua Cosio.
Zuazua has worked at VivaAerobus since its inception more than a decade ago, when the Mexican aviation sector was poised to undergo its most important transformation.
We caught up with Zuazua, along with Felix Velazquez, director of Commercial Revenue, to discuss the changes in the increasingly competitive Mexican airline marketplace, the company’s relationship with its parent company, as well as VivaAerobus’ approach to ancillaries, and its growth plan.
This interview is part of Kambr Media’s ongoing deep dive into the Mexico airline industry. (See our previous interview with Holger Blankenstein, EVP of Airline & Commercial Operations, at Volaris here.)
Kambr Media: How would you characterize VivaAerobus?
Juan Carlos Zuazua Cosio: VivaAerobus fits the “textbook definition of an ULCC.” We have high seat density in our aircraft (186Y for A320 / 240Y for A321neo), high utilization (+12.5 BH per day; +6.5 sectors per day per AC), high load factors, low unit costs, low fares, and high ancillary revenue. Our current position differs from the other carriers in the country in that we truly stick to the value proposition of an Ultra Low-Cost Carrier.
Our main KPIs are evidence of how Viva has truly embraced the ULCC model better than others. We are world leaders on seat production per A/C day, ancillary revenue as a proportion of total, and Mexico bests on LF and passenger growth rates.
We have the lowest unit cost in America, and thus we can consistently offer the lowest fares.
Given that we are owned by Grupo IAMSA, Mexico’s biggest bus operator, we have a unique competitive advantage, in which we are the only carrier which sells airline tickets in more than 300 bus stations in Mexico. The domestic aviation market for 2018 was 50M pax, the domestic bus market for 2018 was 3.0 B pax!
Has it evolved into a ULCC or was it designed that way from the beginning? And how does your airline’s current position reflect and differ from the other competitors in your markets?
In my view, there were many “wannabe” local carriers. Certainly, there was a need to clearly distinguish that we were the real ultra-low cost carrier.
We were born as a ULCC. Many airlines were converted into a ULCC, or they're trying to be converted. And that's much more difficult because many of the costs of this industry are long-term costs. It's very hard to get rid of them.
Everything we do and everything we plan ahead is based primarily on costs. How are we going to reduce our unit cost, and how can we stimulate our revenues with lower costs and higher ceiling revenues, et cetera. That's an important thing.
There has been a lot of capacity dumped into the Mexican market— how is VivaAerobus handling this increase in competition?
By doing one thing very well. Keeping our costs very low, offering very low fares, and constantly increasing our ancillary revenues.
How does VivaAerobus keep its costs down?
As I mentioned, two important elements of a ULCC are seat density and aircraft utilization. We went all the way: 186 with the A320, of which we were the first operator in Latin America, and I believe the second in the world. The rest of the world went from 180 to 186, and now 186 is the new norm for the A320s. With the A321 we certainly were going to be the first operator in Latin America, and one of the very few in the world, to go all the way to 246. Normally, airlines were in the 220 seats. Some of those 230. So we decided to go all the way with the ACF range.
The second important decision we made involves how you ensure you keep the production line very efficient. It means that you're producing a lot of seats per day, per aircraft. That also refers to how many sectors per day can you get out of the aircraft.
Last year, we flew over 6.5 sectors a day per aircraft. You multiply that times 186 – that's a lot of seats on a daily basis per aircraft. Ultimately, your total cost is spread among more seats and your unit cost reduces.
Those are the only two decisions a carrier can take which impacts 100 percent of your costs. The number of seats in the cabin and the number of hours you fly the aircraft, that has a positive impact on every single cost line. Then you can spend a lot of time on how you procure your fuel or how you operate your aircraft. But that's just going to target 30 percent of your cost.
Or, you can spend a lot of time on how you're going to purchase your aircraft or finance them. And that's another 25 percent or 30 percent of the costs of your airline.
We have 410 line costs in our business. There are other places where we can get the best asset utilization of the aircraft. If you fly an international flight out of Mexico, the average turnaround time, instead of being 25 minutes, as we do it domestically, goes to over 1 hour 30 minutes. That takes utilization down for the aircraft – and the aircraft does not make money when it's sitting on the ground.
How has the market share of buses vs. airlines changed in the last few years?
The 5-year average growth rate of air traffic in Mexico has been 9.6 percent, with ULCCs increasing market share. However, we believe market share shifts are not only resulting from air traffic switching carriers, but also from bus passengers traveling by air. The bus market is a mature market which grows 3 to 4 percent per annum, but with a huge base of 3 billion bus journeys!
We’ve a gradual seen a shift of bus passengers on long journeys over 10-hour bus rides, moving to the air (1-hour flight), and gradually shorter segments over 500km we are starting to see this shift.
Do you consider buses competition, even though, as you noted, Grupo IAMSA, is one of Mexico’s largest bus companies?
The reason Grupo IAMSA, which is the biggest bus operator in Mexico, deciding to invest in an airline was a strategic decision. Looking back 13 years ago, they knew that their passenger, the middle-class passenger, will eventually trade up from the bus to the air. So either they invest in an airline, or they will gradually see the shift of many passengers from the bus to the air.
We have seen it in long journey buses. For example, we can give you an example of the Mexico City to Tijuana Market, which is a 30-hour bus ride. Pretty much, the airline has already taken this market. What I can tell you, 10 or 15 years ago, there were pretty much buses every hour to these markets.
Eventually, passengers are going to trade up. However, the bus industry is still very, very mature and big. And the difference is that we only have 62 airports in Mexico, and there are hundreds of bus stations. There are many smaller cities which do not have an airport, but they do have a bus station. So I believe that in the future, the bus industry in Mexico will continue growing. Simply they will continue growing in smaller segments, and the strategy with Viva and Grupo IAMSA is that we complement each other.
Also, we're the only airline in Mexico that sells airline tickets in bus stations. To give you an example, a passenger can go to a bus station in the north part of Mexico. For example, Laredo, which is on the border with Texas, is a 2-hour drive from Monterrey. So, we will sell the bus ticket from Laredo to Monterrey, and then a flight from Monterrey to any of the destinations we serve. So, we will sell the ticket from Laredo, Texas, a complete journey in one single transaction.
Also, we offer the customer a 50 percent discount for the journey every time they buy a bundle. Then we take them from Monterrey to Cancun by air, for example. Normally, airports are very far away. We offer them low-cost connectivity in shuttles. Our parent company operates from the bus terminals to the airports, reducing significantly the total cost of traveling.
That’s just another example of what we do differently to offer a multi-model bus to air offering. About 22 percent of our passengers buy a bus and an airline ticket together. This is huge. So many passengers that arrive every day to Monterrey or Mexico City are not their final destinations; it’s some city. It's some city an hour or two hours beyond that, which is not accessible by air, so they need this bus connectivity after the airport.
Have you struck any new partnerships with other airlines? Any plans to add any new partners?
Not at the moment, but we are open to exploring partnerships if interesting opportunities arise.
How would you describe the state of the Mexican aviation marketplace?
Let's start from a helicopter view down. If you divide 50 million passengers into Mexico’s population of 120 million people, that’s an average of 0.4 trips per capita – that’s the average domestic market penetration our country has. This is the lowest market penetration in Latin America.
So Colombians will fly twice as much as Mexicans on average. Brazilians as well. The Brazilian aviation revolution started much earlier than Mexico’s.
One of the reasons why we have the lowest penetration in Latin America is that for many years, the industry was pretty much controlled by two legacy carriers: Aeromexico and Mexicana.
Then, 13 years ago new regulation happened in Mexico. Local carriers started entering the market and finally, low-cost carriers first started to emerge. That's a reason why the Mexican aviation market is a growth market. It's growing pretty much double digits every year.
Secondly, the reason which we have a very low penetration, we have one of the biggest bus markets in the world. I believe it's the third biggest market after China and India. Mexico and Brazil will be very close in domestic bus journeys. We have a very good infrastructure and very, very comprehensive bus journeys. Clearly, it's a much bigger market than the aviation market. Three billion passengers a year – imagine that. It's huge.
Having said that, I believe we have a huge opportunity: a fast-growing aviation market, a growing middle class. That is speeding up the conversion from bus to air.
What’s the state of the competitive environment in Mexico in particular and Latin America generally?
It's a highly competitive environment. But in the last 13 years, this market has already consolidated a lot. When we started operating 13 years ago, there were 14 carriers in Mexico; right now, it's down to six. There are four big ones, Volaris, Aeromexico, VivaAerobus and Interjet, and 2 small ones, which are TAR Aerolineas and Aeromar.
In 13 years the biggest airline ceased operation, which was Mexicana, which was composed of three different carriers, and many others ceased operation. We have a very healthy market today, an interesting pipeline of orders booked on the horizon, and that's leading up to more sustainable growth, dare I say it.
What are the chief issues and trends in the aviation marketplace that are top of mind for you personally as executives of VivaAerobus?
- High and volatile macros (mainly FX and Jet fuel price).
- High airport charges.
- Simplifying our passenger journey with technology and less regulation
- Mobile penetration
- Cash payments
There has been a lot of debate about whether ancillaries have gone as far as they can go -- What else can be added, subtracted or otherwise changed? We’ve been hearing often that for most low-cost carriers, ancillary revenue are absolutely essential – “lifeblood,” one source told me. Can you characterize the role and strategy of managing ancillaries at your airline – and how essential ancillaries are to VivaAerobus’ revenue stream?
We believe we are still a long way from ancillaries’ products and services reaching their full potential in the airline industry. The biggest pending task is personalization; currently, we are all trying to show all or most of our services to everyone. No matter how neat airlines’ ancillaries’ funnels might look, if viewed from an e-commerce perspective, we are not making offers as relevant and personal as other players in the retail or entertainment industry.
At VivaAerobus, ancillary revenue is very relevant. 49 percent of our total revenue per passenger comes from this type of service. Last year we were the world’s number one by this metric. Therefore, we rely a lot upon making our travel experience to adjust to our individual client’s needs as much as we can.
Another key opportunity is expanding your ancillary revenue stream on all travel-related opportunities (not only flight related), like for example: Ground Transportation (Taxi, Shuttles, VivaBus, RideSharing, Long Journey Buses), Accommodation (e.g., Hotels, Airbnb), Experiences (from a family to a bash party), etc, etc. Given we are saving a lot of money for our passengers on their flight, we are leaving more money in their wallets to spend on their destinations. We are actively working on this.
Lastly, loyalty programs are also another huge opportunity for ULCCs like Viva. We have a pre-paid program (VivaFan), a free one called Viaja+ with our partner bus companies (with over 1M subscribers), and a co-branded card with Mastercard. We see a lot of potential in monetizing these.
Felix, what’s your take on the state of airlines and ancillaries? What do you measure yourselves against to know these strategies are performing well?
Felix Velazquez: As Juan Carlos noted, we still believe there's a long way to go on ancillaries in part because we're not benchmarking ourselves against other airlines. We like to benchmark ourselves against e-commerce in retail and entertainment. In terms of personalizing the shopping experience, airlines as whole still have a way to go.
We are trying to push everything to everyone. Airlines are not actually personalizing the shopping experience. We're still very focused on travel products and services, and there's still a huge opportunity for what we call “on-site spending.” People are saving a lot of money with their low fares, so they have many resources available to pay for buses, for car rentals, for tours and so on.
So there's still a big opportunity in ancillaries. Aside from personalizing your shopping experience and only showing relevant content to the traveler. You only see maybe four or five recommendations for Amazon, and they're not afraid that if they only show you four or five products, you're not going to buy anything else because they're not interested in selling you everything else. They're interested in selling what matters to you, so to speak.
How do you compare airline ancillaries to what entertainment brands do?
FV: In terms of benchmarking against entertainment, the content recommendations you see on Netflix have to be relevant for you. otherwise we'd be switching back to TV and waiting a week to catch the next episode of a show. So that's where we see the opportunity.
We've taken steps towards this already. We've done a lot on dynamic pricing and contextual pricing, but it's still optimization-based. It's not yet experience-based.
Looking at VivaAerobus’ network, where do you think the biggest growth potential for routes/frequencies are? Has the past year seen any notable changes for your network?
We are still pretty much focused on the domestic market and will be for the near future, there’s where we still see a lot of potential. Currently, we operate 5 domestic bases in Mexico (MEX; MTY; GDL; CUN; TIJ).
However, last year we grew our international offer with 3 new destinations: LAS, JFK, and LAX, so we will also keep a part of our focus on international.
What’s VivaAerobus’ approach to loyalty/rewards and frequent flier deals? Is the importance of frequent flier miles changing for airlines?
Our approach to loyalty since day one has been upfront with our passengers with the lowest fares of the market. However, as we have evolved we have seen opportunities:
- Pre-Paid membership program in which passengers have access to discounts, and benefits on bags, etc.
- Co-Branded Credit Card with Scotiabank/Mastercard, which passengers also have some benefits both on price and bags.
- Free Loyalty program called Viaja+, which is offered to Viva passengers and Bus passengers on IAMSA´s brands (such as ETN, Primera Plus, etc). We have over 1M members.
What’s VivaAerobus’ approach in terms of its airline retailing strategies? How well do you think the airline industry is doing in terms of responding to consumers used to the personalized recommendations and efficient purchasing associated with e-commerce brands like Amazon or on-demand ride-hailing like Uber and Lyft?
We have taken important steps in dynamic and contextual pricing, as well as improving our post-purchase efforts to communicate our clients with relevant offers. However, as previously mentioned, the airline industry is still a long way from matching the personalized shopping experience of Amazon, Uber, and Lyft, given that very few airlines are actively spending time on their Ancillary Revenue strategies.
We foresee a big change in the near future, with more data driven, decisions to improve the relevance on 1) Advertising and 2) Product offering to each different passenger.
I believe plenty of airlines still are miles away on where they should be compared to other online retailers. You also see these are working strongly on improving the customer funnel on two fronts.
Number one, retailing needs to be more relevant to the actual ancillary products and services your customer is willing to purchase during the flight. And after you finish the transaction, you already have a lot of information on the customer. When is he or she traveling? How many days? With whom? And so on. You have a huge opportunity to actively retail other potential goods or services of added value and at a discounted price, etc., to your customer on their destination.
That's where we're going to be working strongly on flight-related ancillaries. It’s about developing a strong customer acquisition strategy. How do you go and look for them? There are a lot of new initiatives we're putting in place. We can be much better at being more relevant. In the end, we're in the online retailing business. And we see it every day with the e-commerce strategies of brands like Amazon. It all comes down to gathering passenger information, knowing the passengers better, and tailoring your offering better to those individuals. Juan might have different profiles because sometimes I go to Mexico City alone with no luggage. But the airline should recognize when I'm going with my family and that it's a different type of Juan with a different consumer mindset.
What are your thoughts on Artificial Intelligence and Machine Learning? How is VivaAerobus exploring use cases for AI and Machine Learning, either in areas of revenue management or passenger service/booking or marketing? How actionable and practical do you view those technologies right now?
VivaAerobus is currently on the information gathering stage to fully move to AI and Machine Learning. We have the technology in place and the right partners, but in order to deploy both tools successfully, we have to make sure we have robust data sets in place and start modeling our shopping experience around that.
So far, we are taking advantage of multivariant testing, which is a tool that allows to run tests with a control group and as many variants as we wish, increase the population weight to the winning variant in an automated way, and get statistically significant results in as little as seven days. Also, we use contextual pricing to optimize our ancillary pricing based on the bundles and additional services that our clients choose.