Mexico’s Volaris’ Growth Strategy Takes Aim At Bus Travel, Millennials & Ancillaries

by 
David Kaplan
Monday, September 9, 2019
 • 
10
 min read

Ancillaries right now comprise 36 percent of Volaris’ revenues,’ says Volaris’ Holger Blankenstein. ‘We believe we can get that north of 40 percent.’

Mexico-based ultra-low-cost carrier saw available seat miles continue to rise in August, as the airline reported a 15.2 percent gain over the same month in 2018, as demand measured by RPMs (Revenue Passenger Miles) showed a sharp jump of 19.8 percent. Read more in the release.

In part, the growing numbers were due to Volaris’ addition of operations on two international routes from El Salvador, San Salvador to Mexico City, and Guadalajara, Jalisco, respectively. It also launched the sale of an international route from Leon, Guanajuato to Fresno, California.

The company, which carried 1.9 million passengers via its 78 aircraft (24 percent of which are Airbus A320NEOs) across Central America and U.S. in June, bills itself as the “largest ultra-low-cost carrier in Latin America.”

Still, the competition is also getting more intense – and in Mexico, bus travel still outpaces air travel. Mexico has a population of approximately 129 million people and previously, Volaris has calculated that 38 million Mexicans have never traveled by aircraft. During 2018, approximately 1.1 million passengers took Volaris’ flights for the first time, and the airline expects to register a similar volume in new travelers in 2019.

As CAPA has reported, Volaris has estimated Mexico’s bus market comprises more than 3 billion passengers.

But as Holger Blankenstein, EVP of Airline & Commercial Operations, told Kambr Media following his presentation at the Boyd International Aviation Forecast Summit (IAFS) in Las Vegas last month, the carrier is moving determinedly to convert a sizable share of those bus travelers to its aircraft.

Kambr Media: Volaris is a ULCC, but how do you define the company? How do you view Volaris within the wider landscape of LCCs, Hybrids, and Full-Service carriers? Is the differentiation based on pricing, primarily? Or are there other factors that differentiate and define Volaris?

Holger Blankenstein: We are a company that came to Mexico to disrupt the market, and to do things differently. One aspect is certainly the cost, which enables us to have lower fares.

The other thing is talk to our customers in a different way. So, we do marketing campaigns that are fresh, young, disruptive. We take them viral, and we make our product aspirational, for the low- to middle class so they can go to Cancun to visit the beaches, they can visit their friends and family.

It's a fun brand that is very much focused on the lowest fare available to the market. We also communicate that we think it's fair for the customer to have the option to select what other products they want, such as being able to select their carry-on baggage.

Lastly, we also strive to be a digital company. About 30 percent of our sales came from mobile, and that represents 170 percent growth over last year. Visits are higher. We’ve had more visits to mobile devices than from desktop or laptop.

Clearly, we’ve had a lot of success in mobile user acceptance. What we want to do is have the entire travel experience managed through our travelers’ mobile device.

We’ve noticed that Volaris has continued to embark on an aggressive growth strategy, with system capacity growing 22 percent last quarter. How did Volaris deliver this growth and what are expectations for its continuation? 

Let's break that down into the different elements of growth.

One is geographic growth. In Mexico, we're basically everywhere already. Now, it’s about deepening the footprint, getting more people off the buses, and growing frequencies of existing destinations, and possibly adding more point-to-point services in Mexico. That's number one.

We believe there are more opportunities in Mexico to U.S. air travel, particularly in terms of more of the niche markets, and even to larger cities: Chicago, New York, Miami. We're looking at additional routes and frequencies.

The other big geographic play we're doing is Central America. So, we have an AOC [Air Operator’s Certificate] in Costa Rica, and an AOC in El Salvador. We truly believe that the Central American population is very similar to the Mexican population, in the sense that their locals were underserved there as we entered. We can stimulate intra-Central America traffic, and the Central America to U.S. There's Salvadorians, there's Hondurans, there's Guatemalans, there's obviously a lot of discussion about that, but we bring cheap air travel to them so they can visit their friends and families.

The other piece of our goal is clearly on the ancillary’s side. What we're going to continue to do, is we use our average fare, and substitute that with new ancillary products to generate value for the customer. We're launching a travel brand called Yavas.com, where we can package hotels to Millennial travelers and the price-sensitive backpacker.

Yavas has the look and feel of Volaris, but a little bit fresher. We hope to capture some of the big travel spend from those consumers. Air is one part, and then hotels is about 80 percent of the travel spend. And the big profit pools are there. So, this intermediates the OTAs, and we can have our fliers book the hotel when they book the air travel. That's what we strive for.

Do you have that booking connection to the hotel already? Or is that in the works?

We just started the business, so it's growing. Clearly, there's a lot of profit potential there. Mexico, I'm sure you know, is the fifth largest travel destination in the world.

Volaris' Holger Blankenstein at Boyd IAFS

You talked about hotel partnerships, what about partnerships with other airlines. Is there anything you can talk of there that can be done, or what's the news there?

So, the news is the codeshare with Frontier. Frontier and Volaris have the same shareholder base, Indigo Partners. We have the same business model, we have the same reservation systems, and we have a very complementary network. So, we have 20 points that we connect, where Frontier flies into where we fly into, and we've built a product that generates 200 routes between Mexico and the US. Where we can compete very well with the legacy carriers, with fares that are up to 40 percent below a connecting flight to Houston, or Dallas, or Miami with the legacy carriers.

We would like to learn more about V.Club and V.Pass – can you discuss what those products are and what the strategy is behind it?

It’s our take on loyalty. V. Club is like a Costco membership – the program has about a million members. You buy it annually, and you get access to cheaper products, like Costco, and cheaper air fare in Volaris. It’s for the infrequent traveler that wants to save money.

We generate ancillaries with the membership fee, and we inspire the infrequent traveler to travel more. Instead of one time a year, they'll travel two or three times a year. And you can recover the membership after two trips.

V pass is a similar program, but it's geared towards another customer type. It’s more comparable to a Netflix membership. You buy a monthly membership; it's not a yearly membership. It's a much lower fee, and it gives you the right to travel once a month.

You just must commit to a year of membership, and you pay a monthly recurring fee; about $15. You get one flight. And then, if you can't travel, you lose it. If you want to travel more, you have to buy it. And then you can add your ancillaries on top of the booking.

V pass is geared toward the frequent traveler, such as the business customer who knows that they must go to Monterrey every month. They’ll buy that membership. It’s a small program, no other airline does it in the world. We're testing it out, and we've seen positive results so far. But we don't intend to make it as big as the V club.

What’s your view of airline retailing and programs like IATA’s NDC (New Distribution Capability)?

We are an IATA member, but we believe we can sell ancillaries without NDC and things like that. Remember, we are catered towards travelers at bus terminals, so we need to tell them what the ancillary product does for them, how they can choose it, when they need it. We’re concentrating on educating the customer about the different ancillary products, there's a communication effort. And we sell that directly. We don't go through intermediaries. That’s why NDC does not apply.

Travelers just log in with a password and buy the tickets on our website. So that's why our digital focus is so important.

We are very much focused on our digital channels, and customer segments that traditionally go to travel agencies.

Think about how people buy bus tickets. They walk up to the station, buy the ticket, and get onboard. We want the closest thing to that experience. If they are at home in their village, they look at their mobile phone, or, maybe a grandson will help his grandmother purchase the ticket. They don't go to a travel agency.

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 is 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 Volaris’ revenue stream?

Our ancillaries right now comprise 36 percent of Volaris’ total operating revenue. We clearly do benchmarks, and we're within the top six in the world. We believe we can get that north of 40 percent, in the medium-term. Eventually, I would like to see the ticket price be lower than 50 percent of the share of total revenue. That's what thrives in the demand stimulation – that low ticket price. Then the customer can select optional products and services.

We’re currently looking at three things in further developing ancillaries.

Number one, is obviously new products. Ideally, we’re exploring products that are not air-travel related, such as commission-based ideas. Packaged deals with hotels, as I mentioned, is one example of that.

Number two is optimizing the pricing for the ancillary products. We’re doing a lot of experiments with what the ideal baggage price, the carry-on price, the seat assignment price is. We’re looking by route, by season, by advanced purchase, so fine-tune that. And then the third is taking that experience onto the mobile phone.

It’s all about offering the right ancillaries, at the right time. There are ways to drive ancillaries before someone is in the air, say, as they’re on the way to the airport or approaching the gate. That's what we want to do.

How do you inform Volaris travelers of these ancillaries’ options?

We do a lot of customer education. We have video clips that we show where we tell them, if you're going on a three-day trip, you probably only need a carry-on. If you're going on a longer trip, then what fits into your bag. People don't understand what 25 kilos means in terms of how much can you bring on.

We tell them about the seat assignment. If you want to sit together with your family, you're going to have to purchase a seat assignment, otherwise we'll assign you a random seat. It's about talking to the customer, telling them in simple terms what they need.

Looking at Volaris network, where do you think the biggest growth potential for routes/frequencies are? Has the past year seen any notable changes for your network? Can you discuss the recent capacity growth on routes to Chicago and how you plan to satisfy and continue to grow that demand?

Chicago's been great for us. We fly to Chicago’s Midway and to O'Hare. Midway has a lot of Mexican heritage population around that area, they love Midway airport. O'Hare has been a good complement for the leisure and business traffic, and we recently added more flights to both markets.

In terms of other routes, we fly to the center of Mexico, we do have flights to Guadalajara and Mexico City, but our focus has been Morelia, Bahia, Zacatecas, Aguascalientes.

Source, Volaris September 2019

On the other hand, we're adding a lot of new aircraft. We have a purchase order of 80 additional airplanes, and currently have 80-some aircraft. Not all of them will be NEO, but we're going to keep our fleet young and fresh. That should also drive down costs.

Many of our markets require more routes and frequencies, and that's certainly one way to do it. But the most important aspect here is that the fuel burn of the new aircraft is 18 percent below the existing fleet. That’s another thing that should drive down costs as well.

What are your thoughts on Artificial Intelligence and Machine Learning? How is Volaris 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?

Let me give you three examples of where we see uses for AI now.

Revenue management clearly is one, where we maximized revenue for departure, and we have analysts that do manual work. Then as the routes mature, the AI will take over.

We have a revenue management program that we call Autopilot. With Autopilot, the machine will decide at what price and how many seats to sell to maximize revenue for departure.

The second application is everything around cost of service. We recently put in place a chatbot. Many customer services requests that previously would use the call center, now they’ll communicate with a bot on Facebook Messenger. And that bot is learning. As we get more experience on the question’s customers ask, the bot will learn, and then have even more relevant responses.

The other application of AI that we see is in the operations area. For example, airplanes need maintenance. There's limited lifetime when it comes to parts. Predictive maintenance is where AI predicts when a part is going to fail. We can do predictive maintenance, change that part before the airplane must be grounded, which obviously reduces cost and up times for the fleet. Ultimately, it makes the whole schedule more reliable.

Do you run most of this technology in-house? Or do you partner with other outside tech companies? If so, how do you choose the tech company who you work with?

We firmly believe in the digital transformation. It is our way of differentiating ourselves in a competitive market, where at first instance we all do the same: moving customers from one point to another. But through technology we can facilitate the experience of traveling by plane, from the moment of search until landing at a destination and back home. Now it is possible to get a boarding pass from anywhere, without having to go to the counter and without printing it, buy your flights with the help of Chatbot or contact us for any questions through social networks.

This also allows to reduce costs: 80 percent of our customer service is given in digital channels where, instead of having an agent that can handle one call at a time, in the digital world agents can handle 15 simultaneous conversations or better yet, the bot, which can handle 1,000 conversations at once. Another example is the option for customers to re-accommodate a different flight via WhatsApp, with a single click and no need to talk to anyone.

Is it fair to say that the commercial aspects of an airline have grown MORE COMPLEX than they used to be?

The airline industry, by nature, is a complex industry. You have rules and regulations, in different countries that we all must abide by, for one thing.

From the operations perspective, from the consumer perspective, yes, it's a complex industry. Having said that, for us it's important to keep complexity at a minimum, with all the processes and product we manage. To keep it simple, we sell point-to-point tickets. You can book a connecting trip, of course, but usually, 90 percent of our tickets are direct. Our fare structure is very simple. There's a single price point, and then you can only buy one price point at a time.

We try to minimize complexity in distribution, the use of third parties, and so on. It all starts with our internal processes as well. We're just now doing a project which we called KISS: "Keep It Super Simple."

We recognize that after 13 years of operation, things get more complex. We're now a much larger company, there's finance, there's revenue accounting, there's the operational side, and now we fly so many places. We really want to take a step down and say, "Okay, how can we do this simpler? How can we put technology in place to do some of these processes?"

That's the essence of a ULCC – to be crazy about costs. To be radical about costs. To always rethink the business. And not have costs creep in and suddenly, you are uncompetitive. Our goal is clearly to be the lowest cost operator in the world. And you can only do that by complexity reduction.

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