NEW MONTERREY-BASED LOW-COST AIRLINE VIVAAEROBUS BEGINS

UNCLAS SECTION 01 OF 03 MONTERREY 000076 SIPDIS SENSITIVE SIPDIS STATE FOR EB/TRA/AVP E.O. 12958: N/A TAGS: EAIR ECON EINV BTIO MX SUBJECT: NEW MONTERREY-BASED LOW-COST AIRLINE VIVAAEROBUS BEGINS OPERATIONS WITH AMBITIOUS PLANS MONTERREY 00000076 001.2 OF 003 ¶1. (SBU) SUMMARY. Vivaaerobus, a new low-cost carrier headquartered in Monterrey, began operations on November 30, 2006 as the latest in a series of six new airlines to begin flying from Monterrey's international airport this past year. With the support of the Nuevo Leon state government and with financial backing from the Ryan family and Mexico's largest passenger bus company IAMSA, Vivaaerobus secured Mexican federal civil aviation approval to begin flying in only ten months. While the airline has had two highly publicized operational problems, it has attracted first-time air travelers with low fares. Like other low-cost carriers operating in Mexico, Vivaaerobus hopes to fly to the United States in 2007. Larger airlines like AeroMexico claim not to be concerned with Vivaaerobus because their routes and targeted consumer base are different. However, small low-cost airlines have reduced their fares in the short-term to compete with Vivaaerobus' low fares while larger companies have stepped-up their marketing strategy to mitigate Vivaaerobus' appeal. END SUMMARY. -------------- VIVAAEROBUS IS BORN -------------- ¶2. (U) On November 30, 2006, the Governor of Nuevo Leon inaugurated a new Monterrey-based low-cost airline called Vivaaerobus. The airline is a joint venture between the Ryan family, the founders of the well-known European low-cost airline RyanAir, and Mexico's largest passenger bus company IAMSA. RyanMex holds 49% of shares in the airlines while IAMSA has the majority stake. With an initial investment of $50 million, the airline began operations with two Boeing 737-300 airplanes, nine domestic destinations, and a staff of just over 200, all based at Monterrey's international airport. Currently, the airline operates daily flights from Monterrey to Culiacan, Tijuana, Tampico, Acapulco, Leon, Veracruz, Cancun, Chihuahua, and Ciudad Juarez. ¶3. (SBU) Vivaaerobus Commercial Director, Carlos Chavarria Villareal, told Econoffs that the airline chose Monterrey as its hub because it received strong support from the Nuevo Leon state government in its negotiations with Mexico's civil aviation authority (DGAC). The DGAC gave their final approval a mere ten months later, much to the surprise of industry insiders. Chavarria stated that the DGAC's middle managers, loyal to the traditional national airlines, were reluctant to cooperate with RyanMex at the beginning of the certification process. Nuevo Leon Governor Natividad Gonzalez Paras and the State Secretariat of Economic Development (SEDEC) offered the airline its full support if it chose Monterrey as its hub. After Vivaaerobus chose Monterrey as its headquarter in July 2006, then Nuevo Leon Secretary of Economic Development Gustavo Alarcon immediately SIPDIS pushed the DGAC to expedite Vivaaerobus' entry into the market. "We expect great things from this airline," confided one SEDEC official, "this is why the Nuevo Leon government supported Vivaaerobus so much." SEDEC expressed their confidence in Vivaaerobus' ability to meet its 2007 goal of transporting one million passengers and adding USD$280 million to the state GDP. -------------- LONG LIVE THE AERO BUS? -------------- ¶4. (U) As the brainchild of RyanAir's founder Dr. Tony Ryan, Vivaaerobus subscribes to the traditional low-cost airline model found in Europe and the United States. There is only one passenger class, one single type of airplane, unreserved seating, and short point-to-point routes. Vivaaerobus hopes to capture an untapped consumer base with its low fares. "Only 4% of the Mexican population travels by air," said Chavarria, "We're trying to reach the 96% that has never been on an airplane." The airline un-bundles its fares, separating out the ancillary taxes and fees to make the advertised airfare appear as low as 1 peso, a strategy that seems to be working in the short-term. Anecdotal evidence from Consulate employees and outside contacts suggests that at least half of the passengers on any given flight are first-time air travelers. ¶5. (SBU) According to Vivaaerobus Commercial Director Chavarria, the airline is off to a great start, operating at full capacity since its second week of service and following through on its plan to increase from nine to fifteen domestic destinations in 2007. In addition, they plan to open up to under-served U.S. destinations within three-hours of flying time by developing a strategic alliance with Allegiant Airlines, the Las Vegas based company also partly owned by the Ryan family. MONTERREY 00000076 002.2 OF 003 Despite their ambitious plans, Vivaaerobus is still operating with only two planes and has not expanded its routes. Vivaaerobus puts its two planes to maximum use, averaging a 25-minute turnaround time and making flight attendants double as cleaning crews. Perhaps due to these constraints, the airline has stranded passengers on at least two occasions, and according to press reports, angry stranded passengers complained about meager refunds and Vivaaerobus' inability to provide alternate transportation. -------------- THE COMPETITION REACTS -------------- ¶6. (SBU) American airlines Delta and Continental are not concerned with Vivaaerobus or other low-cost Mexican airlines because they are not competing for the same market. Delta is not worried about additional competition on intra-Mexico routes, but "the greatest threat is coming from the big Mexican carriers who will compete for routes to Asia, an increasingly important part of the world" for Monterrey. Similarly, Continental Airlines is not concerned that low-cost carriers like Interjet, Volaris, or Vivaaerobus will take business away from them, since they believe that it is unlikely that any Mexican low-cost carrier will be permitted to fly to the U.S. "Just look at AeroCalifornia," said the Continental Airlines airport director, referring to the Mexican carrier that operated flights to Los Angeles prior to the temporary cessation of its operations in Summer 2006. ¶7. (SBU) In contrast, AeroCalifornia is concerned with the entrance of newer low-cost competitors like Vivaaerobus. When the airline resumed operations in August 2006 after four months of "regrouping", it had a new Internet-based booking system and reduced tariffs in anticipation of Vivaaerobus' entry into the market. In addition, the company is trying to improve customer service and efficiency in order to stay competitive with Vivaaerobus in Monterrey. Like Vivaaerobus, AeroCalifornia now advertises a 20% cheaper fare for booking on-line. ¶8. (SBU) AeroMexico's Director of Operations in Monterrey, Raul Cardenas Fuentes, says that AeroMexico does not plan to reduce its fares or that of its subsidiary AeroLitoral to compete with Vivaaerobus, but they will emphasize their superior service in new advertising promotions. According to Cardenas, "Wealthy, experienced business travelers in Monterrey do not want to fly these new airlines." AeroMexico has focused its marketing campaign on the Monterrey business community, stressing to business travelers that AeroMexico and AeroLitoral offer superior service, such as "frequent flights, compensation if there is a problem, on-time arrivals, a frequent-flyer program, and partnerships with other international airlines [SkyTeam]." Cardenas added that he does not envision a long success story for any of Mexico's low-cost airlines, including Interjet, Volaris, and Vivaaerobus. "The initial boom is positive for them, but any problem with any low-cost airline in the world affects them because it creates doubt in people's minds," he said, referring to the bankruptcy of American carrier Independence Air in January 2006 and Spanish carrier Air Madrid in December 2006. Cardenas did admit, however, that AeroMexico may have to launch additional flights and lower prices to compete with the low-cost carriers when it privatizes in 2007. -------------- COMMENT & ANALYSIS -------------- ¶9. (SBU) Vivaaerobus is off to a relatively good start, operating at capacity and, so far, any negative publicity does not appear to have affected business. If the company can appeal to a new consumer base, it may be able to expand as planned. Given RyanAir's standing as one of the most profitable airlines in the world and with a new business model that can appeal to casual travelers, Vivaaerobus could be successful. Mike Szucs, the new COO of Vivaaerobus, has many years of experience with British Airways and most recently as COO of the European-based low-cost airline EasyJet. However, Vivaaerobus is betting on obtaining flight routes to the U.S. to capture the market of Mexican migrants traveling between Mexico and the United States to visit family. In order to maintain its low fares, compete in the domestic market, and open up U.S. routes, Vivaaerobus expects to attract more capital by listing on the Mexican Bolsa (stock market) by 2008. However, it is striking that Vivaaerobus is still flying its routes on two planes, although they have grand expansion plans for as early as April 2007. MONTERREY 00000076 003.2 OF 003 Vivaaerobus' cost structure is lower than more established Mexican airlines because its employees maintain an independent union organized under the company's human resources manager, thereby minimizing labor issues. ¶10. (SBU) Established airlines like AeroMexico are counting on customer loyalty and service guarantees to maintain their market share, despite their higher fares. Although some business travelers may not be price sensitive, it seems likely, based on the success of Southwest Airlines in the U.S. market, that many travelers may try the low cost alternatives. Moreover, RyanMex's partnership with the passenger bus company IAMSA and the growth of bimodal transportation companies like Alma and Avolar, which combine air travel to smaller airports with bus service to major Mexican and U.S. cities, provides a new strategy for growth. If Vivaaerobus cannot secure U.S. routes, it could use bus services to complete passengers' journeys to major U.S. cities. If they can secure additional planes, Vivaaerobus should be able to inject some much needed competition into the Mexican aviation industry. MORENO