Identifier
Created
Classification
Origin
07MONTERREY76
2007-01-29 19:14:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Monterrey
Cable title:  

NEW MONTERREY-BASED LOW-COST AIRLINE VIVAAEROBUS BEGINS

Tags:  EAIR ECON EINV BTIO MX 
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VZCZCXRO1664
RR RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0076/01 0291914
ZNR UUUUU ZZH
R 291914Z JAN 07
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC 1647
RUEHME/AMEMBASSY MEXICO 2448
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEANHA/FAA NATIONAL HQ WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 6694
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


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.

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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