Discount airlines are taking off in Latin America, one of the last big untapped markets, transforming transportation there by enticing an emerging middle class off buses and onto planes.
Aeromexico and bus operators have lost travelers to discount carriers. Bloomberg News
The new low-cost carriers in Brazil, Mexico and Colombia are largely avoiding competition with incumbent full-service airlines. Instead, they are stimulating new traffic by adding cheap, no-frills flights to secondary cities that, for many residents, had long required day-long bus rides.
Largely as a result, the number of airline passengers in these countries has surged. The newfound mobility has opened up the flow of commerce and drastically cut travel times in areas with poor roads, virtually no rail service and stretches of harsh terrain.
“Latin America is one of the last frontiers” for discount airlines, says Barry Biffle, the former No. 2 at U.S. discounter Spirit Airlines Inc. who was hired this past summer as chief executive of VivaColombia. The first low-cost carrier in Colombia, VivaColombia has used fares as low as $15 to capture 6% of the domestic market in less than two years. “People want a good deal. It doesn’t matter what border you’re crossing,” says Mr. Biffle, a Texas native who’s now working on his Spanish in Medellín, Colombia.
The discount-airline sector is increasingly saturated in the U.S., Europe and Asia. In Latin America, government regulation, poor airport infrastructure and the dominance of flag carriers kept airfares high and relegated the vast majority of the population to hours-long bus rides. But now the region is fertile ground for discount carriers, with rising wages, government support, improving infrastructure and the failure or consolidation of some of the region’s biggest full-service carriers.
Latin America has six low-cost carriers, compared with 22 in Southeast Asia, but the airlines’ share of seats in Latin America has increased to nearly a third this year from less than 10% in 2005, according to the Centre for Aviation, a Sydney-based research firm.
The expansion of discounters is expected to help fuel the rapid growth of the region’s aviation market.
In Mexico, low-cost carriers helped drive Mexicana, one of the nation’s two flag carriers, into liquidation in 2010. Since then the nation’s three discounters have quickly filled the gap, boosting their domestic market share to 60% from less than 40% as the overall domestic market increased 10% to 34 million fliers in 2012.
The carriers are targeting one of the largest bus industries in the world, with 2.75 billion bus trips taken last year, according to Mexican government figures. In the prospectus for its initial public offering last month, Volaris, a leading Mexican discounter, said it prices tickets specifically “to compete with long-distance bus fares” because Mexicans on average take less than one air trip every two years but 50 bus trips.
Grupo IAMSA, one of Mexico’s largest bus companies, has tried to retain its longtime customers by starting an airline. It partnered with the co-founder of Irish carrier Ryanair Holdings PLC in 2006 to start VivaAerobus, an ultralow-cost carrier. Ryanair pioneered the ultralow-cost model, a more extreme version of the traditional discount airline that offers cut-rate fares by packing more seats onto a plane, flying at inconvenient times and charging for extras that were previously free.
On a recent afternoon at the Mexico City airport, 14 young members of a musical group called La Nueva Incomparable awaited their first-ever flight nervously. Each ticket on VivaAerobus cost about $40 more than bus fare to Cancun, where the group had a two-month gig playing Banda music, says 19-year-old manager Santiago Guzman. But they expected to save money by not having to buy food during the 24-hour bus trip, and Mr. Guzman figured their bulky brass instruments were less likely to be damaged or stolen on a plane.
VivaAerobus recently arrived in Reynosa, a manufacturing hub just across the border from McAllen, Texas, where Aeromexico flights were often half full because few could afford them, says Adan Cisneros, president of the Reynosa chamber of commerce. But “wherever VivaAerobus goes, it goes full, because it’s the cheapest option,” he adds.
Weekday one-way flights from Reynosa to Mexico City this month generally cost about $120 on two other Mexican airlines. VivaAerobus was recently offering tickets for $50, about half the price of the 14-hour overnight bus ride.
In Brazil, GOL Linhas Aéreas Inteligentes SA began as a low-cost carrier in the early 2000s, drawing many first-time fliers. Gol says it’s still a discounter, with 70% of its tickets selling for less than $140. But Respicio Espirito Santo, a transportation professor at the Federal University of Rio de Janeiro, says the carrier has lost its edge in recent years “and turned into a normal carrier.”
Azul Linhas Aéreas Brasileiras SA has filled that gap, stimulating traffic by connecting secondary and tertiary Brazilian cities with lower fares. From 2009, when Azul arrived, to 2012, the number of fliers in Brazil increased almost 40% to 94.6 million, while interstate domestic bus trips fell 3% to 126 million, according to data from the Brazilian government and the World Bank.
In 2011 alone, 10.7 million Brazilians, or about 5% of the country, flew for the first time, according to the Latin American and Caribbean Air Transport Association, a trade group.
Azul merged with Brazilian regional carrier Trip last year, helping it to build the nation’s most robust domestic network, serving 102 cities in Brazil, more than double the number reached by Gol and the country’s other top carrier, TAM Linhas Aéreas SA.
“There are some places in the Amazon Basin where it was us or a three-day boat ride,” says Dave Neeleman, the founder of JetBlue Airways Corp., who also started Azul.
The mayor of Passo Fundo, Brazil, a city of 180,000, used to have to drive three hours to Porto Alegre to catch a flight to Brasilia, the nation’s capital. In June, Azul entered Passo Fundo with two daily flights to the São Paulo area, where fliers can connect to 49 other destinations. The mayor now flies to Brasilia.
Last year, the Mexican bus company Grupo IAMSA, the Ryanair co-founder and other investors teamed up again to start a cousin carrier in Colombia named VivaColombia. In the first year, bus trips in Colombia fell almost 8% from 2011 to 170.4 million, while domestic fliers increased 17% to 16 million.
The company hired Mr. Biffle from Spirit partly to help lead VivaColombia’s foray into airline fees, an area he helped to pioneer in the U.S. with charges for carry-on luggage and boarding passes.
Mr. Biffle says VivaColombia is even more cost conscious than notoriously stingy Spirit, with a headquarters that costs just $2,000 a month to rent. Low costs and fares are essential to stimulate new traffic, Mr. Biffle says, and VivaColombia relies on that traffic for virtually all of its passengers.
“We grow what we eat,” he says. At the beginning of some flights, he adds, employees ask who hasn’t flown before “and generally about half the aircraft raise their hand.”
—Amy Guthrie and Paulo Winterstein contributed to this article
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