Earlier last May, the principal shareholders of the 2nd and 3rd largest South American players – Brazilian low-cost carrier GOL and Colombian full-service carrier Avianca Holdings – joined forces to create a single holding company: Abra Group. The newly formed group also comprises Avianca’s recent non-controlling 100% economic interests in Colombian ULCC Viva and a convertible debt representing a minority interest in Chilean SKY Airline.
Summed together, all four airlines of the new holding represent ~39% of the seats offering in South America (2019), slightly above the region’s former undisputed leader, Chilean-Brazilian LATAM Airlines (~35%).
Figure 1. South American seats offering share per airline 2019
Source: OAG, ALG analysis
Avianca, GOL, Viva and SKY present very complementary networks, with potential synergies to compete against LATAM in South America
Despite the initial doubts around the deal regarding the different fleet compositions and competing US financial backers (American Airlines holds ~3% of the shares of GOL, while United Airlines lent $456 million to Avianca’s majority shareholder with shares as collateral), the business combination of the companies seems to be a smart move considering that Avianca, GOL, Viva and SKY present very complementary networks in South America, with almost no overlapping in their operations:
- Avianca: the Colombian full-service carrier has been historically focused on serving South American Pacific Coast with connectivity to the US, Central America and Caribbean destinations.
- GOL: the Brazilian low-cost airline has a strong domestic footprint in Brazil, with recent strategic incursions in Argentina, Chile, Paraguay and Uruguay.
- Viva: the pioneer of the ultra-low-cost model in Colombia focuses on direct domestic connectivity between Colombian regional capitals, with recent developments on international connectivity to leisure destinations in the US and the Caribbean.
- SKY: the former full-service carrier converted into ultra-low-cost, serves high-demand VFR (visiting friends and relatives) and business markets in Chile and Peru, with strategic leisure incursions in Argentina, Chile, Brazil and the US.
In the meantime, LATAM Airlines takes advantage of the strong O&D flows on its stronghold hubs, located at some of the most important economic centers of the continent (São Paulo, Lima and Santiago de Chile), while Copa Airlines takes advantage of its hub’s strategical location in Panamá to capture part of the North-South flows.
Figure 2. LATAM Airlines vs Avianca GOL/Viva/SKY network 2019
Source: OAG, ALG analysis
During recent years, each of the new group’s four carriers was, individually, engaging LATAM on domestic and short-haul routes at LATAM’s stronghold hubs: GOL competed with LATAM at São Paulo-Guarulhos for Dom-Dom connections, Avianca and Viva at Bogotá (and -at least extent- Lima), and SKY at Santiago de Chile. At the same time, Avianca has mainly leveraged its battle against Copa Airlines for Central America↔North America flows in its smaller regional hubs of El Salvador and San José.
With the formation of the new holding, both LATAM and Copa Airlines may expect increased competition on their existing domestic and short-haul O&D routes, but also in their core business: connections traffic related to intercontinental flows between Brazil (and Southern Cone countries) and North American & European destinations.
Avianca may take advantage of its partners’ networks to further increase its market share in South America ↔ North America flows via BOG, by capturing part of the demand currently served by LATAM in GRU+LIM and Copa in PTY
The intercontinental air traffic demand between South America and North America & Europe represents ~30 million passengers per year (~19 Mpax to/from North America and ~11 Mpax to/from Europe), with the airlines strongly relying on hub&spoke strategies to attend this demand.
In both air traffic flows to/from North America and Europe, ~44% and ~29% of the passengers arrive in their destinations by making connections in South American hubs, namely São-Paulo Guarulhos and Lima (LATAM), Panamá (Copa) and Bogotá (Avianca).
Figure 3. Traffic flows between South America and North America & Europe 2019
Source: OAG, ALG analysis
By implementing a joint network strategy centered in Bogotá between Avianca and its partners, the new group could provide competitive (cost & time-wise) connections from Brazil and Southern Cone countries (Chile, Argentina, Uruguay) to North America and Europe, as the current critical mass that feeds Avianca’s hub could be boosted by leveraging on the strong domestic footprint of GOL and SKY and the already consolidated position of Viva at Bogotá Airport.
Figure 4. The competitive landscape for traffic flows between Brazil & Southern Cone and North America
In addition, the new alliance may try to capture (or stimulate) price-sensitive demand from Brazil and Southern Cone countries eager to fly to Europe through Bogotá (+10-30% additional route time when compared to connections via São Paulo-Guarulhos) in exchange for lower fares; this strategy could take advantage from GOL, Viva and SKY’s capabilities to offer more aggressive tariffs on the first segment, when compared to LATAM’s higher rates for less time-consuming connections via São Paulo-Guarulhos.
After the Avianca-GOL-Viva-SKY alliance, further consolidation might be expected among competing South American carriers
Considering the combination of the natural geographical advantage of the Bogotá hub and the variety of products offered by the member airlines (ranging from Ultra Low-Cost models to Avianca’s full-service product), many business opportunities may arise for the Abra Group, threatening LATAM’s and Copa Airlines’ existing hub & spoke strategies in São Paulo-Guarulhos, Lima and Panamá, at least in certain market segments such as the abovementioned.
In recent public statements, both LATAM and Copa Airlines showed confidence that their business models are resilient enough to face these joint forces. Nevertheless, LATAM lacks direct connectivity to many areas in North America (especially on the West Coast where it relies on Delta’s connectivity through Atlanta) and Copa is highly dependent on traffic feeding from Avianca and GOL’s main “fortresses” (21% of all Copa’s arrivals/departures are bound to Bogotá, São Paulo-Guarulhos, Lima, Santiago de Chile and San José Airports).
In addition, the creation of the Avianca-GOL-Viva-SKY alliance may lead to reactions from other South American carriers that are gaining their own space after the impact of the pandemic:
- in Brazil, Azul Linhas Aéreas has leveraged on the smaller regional airports’ demand to rise from the pandemic impact, becoming a head-to-head competitor for GOL and LATAM with 1/3 of the domestic market;
- in the Southern Cone, as LATAM and Norwegian retreated from the Argentinian domestic market, Aerolíneas Argentinas, Flybondi and JetSMART are filling the open spaces in Buenos Aires’ airports (Ezeiza and Aeroparque) with stronger domestic and international connectivity; and,
- in the Andean region, new ULCC players Equair and Ultra Air are starting operations in Ecuador and Colombia, anticipating the effects on local markets of Viva’s consolidation with Avianca.
At the same time, American and United Airlines (which both already have participation or economic interests in the member airlines of the new Abra Group) also hold stakes in some of the South American carriers mentioned above: American recently acquired an undisclosed minority stake in ULCC JetSMART (currently operating in Argentina, Chile and Peru) and United already owns 8% of Azul’s shares.
The recent alliance between Avianca and GOL may be the first chapter of post-pandemic consolidation in the South American air transport market, and reactions from competitors, in the form of M&A operations, are likely to materialize in the coming months.
About the authors
Xabier Iglesias holds a MSc in Aeronautical Engineering and is Engagement Manager at ALG email@example.com
Mauricio Mascarenhas holds a BSc in Business Administration and is Senior Consultant at ALG firstname.lastname@example.org
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