You may not have heard of Mexico's Volaris yet, but that should change soon. It is planning a major U.S. expansion.
When travelers arrive at a bus station in Mexico, they sometimes receive a targeted ad on their smartphone, asking if they might prefer flying over a long, cramped bus trip.
These ads come from Volaris, Mexico’s decade-old discount airline, a scrappy upstart with a model similar to Spirit Airlines, Ryanair, and EasyJet. Volaris is among the world’s fastest growing airlines, and while there are many reasons for its success, one stands out — Volaris has persuaded consumers there’s a more efficient way to travel than by bus.
“The bus market is about 100 times bigger than the air market,” Holger Blankenstein, the airline’s chief commericial officer, said in an interview. “We said, ‘We needed to get people off of buses and onto planes.’ The way to do that is to lower fares.”
Internationally, Volaris has kept a low profile, but that should change. The U.S. and Mexico this month enacted a new aviation agreement, allowing more airlines to add cross-border flights. Volaris, which had not flown some key routes because of antiquated regulations, plans to expand significantly, adding flights to larger cities like New York, and smaller ones such as Cleveland. Its fares should remain roughly equivalent to the price of a long-haul bus ticket, though like other discounters, Volaris charges fees for most extras, including food, drinks, and advanced seat assignments. (It does not charge for checked baggage, because Mexico’s laws do not allow it.)
It is not a great time to be a Latin America carrier, with large airlines such as LATAM, GOL, and Avianca reporting second-quarter losses, partly due to economic woes in South America. But Mexico’s economy is stable, and because Volaris flies mostly within Mexico and to the U.S., its business remains robust.
Volaris, a publicly traded corporation with far lower costs than its competitors, earned about $51 million in net income in the second quarter, with a net margin of 18.2 percent, an increase of almost 10 percentage points, year-over-year. That’s a big profit for an airline with fewer than 70 narrowbody aircraft.
“They have gone from one of several startups in Mexico 10 years ago to probably being the strongest low-cost carrier in Mexico with a very strong North-South market to the U.S.” said Michael Miller, CEO for the Americas at CAPA – Centre for Aviation, an industry analysis firm. “I give them credit for changing the way people travel. People for the first time thought they actually could fly on an airplane.”
Changing dynamics of air travel
When Volaris started a decade ago, it wanted to disrupt two bloated competitors — Mexicana, the 90-year-old flag carrier, and Aeromexico, the smaller upstart with relatively high costs.
But Mexicana folded in 2010 after filing for bankruptcy protection, making it perhaps the biggest airline casualty of the 2008 global financial crisis. That left more opportunity than Volaris had expected, but the size of the potential market was not obvious then.
According to Volaris, Mexico’s entire domestic air market in 2006 was about 22 million passengers, a tiny number compared to the 2.8 billion bus trips Mexicans take annually. Fares were so high many travelers didn’t even consider flying.
“Air travel typically used to be something that was very much for the elite,” Blankenstein said.
To stimulate demand, Volaris implemented the same strategy used by carriers in developing nations in South America and Southeast Asia — they sought to introduce consumers to a new form of travel.
“They actually had to educate the public on flying, because they were taking people who didn’t know about airport security or fastening their seatbelt,” Miller said. “It really was a wholesale education on how to fly.”
Volaris still engages in aggressive advertising to entice new travelers, not only at bus stations, but also at shopping malls. One of its favorite promotions is to give away tickets to people who usually take the bus.
“It’s almost like when you get a sample of medicine or something,” Blankenstein said. “We give you a ticket and let you try it out.”
First-time flyers are less prevalent now, but they still exist. The last time Volaris surveyed its passengers, Blankenstein said, it found about 6 percent were first-timers. About 30 percent of customers surveyed had seriously considered another form of travel, such as busses.
In addition, a small but sizable group of Volaris passengers do not have credit cards, so the airline offers several options to pay in cash. And since many of its customers do not have computers, Volaris makes it easy for passengers to book on mobile phones.
“People don’t have a desktop or laptop, but almost everyone in Mexico now has a smartphone,” Blankenstein said.
By the end of last year, Mexico’s domestic air travel market reached 37 million passengers, according to figures provided by Volaris. Volaris has about a quarter of that market share, up from 8 percent in 2007. Other key players, besides Aeromexico, are two airlines, Viva Aerobus and Interjet, with similar low cost models.
Meanwhile, about 10 million people last year flew Mexico’s carriers on international trips, up from seven million in 2006. Volaris, which did not fly internationally until 2009, has about 23 percent of that traffic.
As of May 2016, Volaris flew 148 routes to 63 destinations in Mexico, Central America and the U.S.
Growing in the United States
Before August, Volaris was limited in what U.S routes it could add because of an old bilateral agreement governing how many airlines could fly each route.
The two governments usually only allowed two or three airlines from each country to serve each city pair, and Volaris was shut out of some routes, especially to New York and Miami. That forced Volaris to be creative, adding routes other airlines avoided, such as Guadalajara to Fresno, Oakland, Sacramento, and Las Vegas, and Zacatecas to Chicago and Los Angeles.
Now, Volaris is planning a major U.S. expansion, telling the U.S. Department of Transportation in July it wants to add flights from Chicago, Kansas City, Minneapolis/St. Paul, St. Louis, Cleveland, Detroit, Philadelphia, Washington, D.C., Baltimore, Boston, New York, Houston, New Orleans, and Miami. It will fly to a mixture of leisure and business destinations across Mexico, including Acapulco, Hermosillo, Mexico City, Toluca, Monterrey, Oaxaca, Guadalajara, Puerto Escondido, and Tampico.
Other airlines will add flights too, but Blankenstein said there’s so much pent-up demand that many carriers can make money with new routes. He said Volaris does not even have enough aircraft for all the routes it is considering.
“Consumer confidence is high, and GDP growth has been quite solid,” he said. “The emerging middle class is growing. We have an air travel market that is literally booming.”
Still, it’s not always easy to launch new international service, especially to a country where travelers are not familiar with an airline’s brand. Southwest, while mostly successful with international flights, has struggled at times selling tickets outside the United States, including in Mexico. Since neither Volaris nor Southwest appears on most booking engines, casual consumers sometimes don’t even know the airlines exist.
But Volaris does not need to sell tickets to Americans. Instead, since so many Mexicans live in the United States, Volaris is focused on reaching them. In Fresno, it stimulated demand by sending teams to produce farms to give away tickets. In the U.S., the airline also goes to the Mexican consulates to ask for help, and sends workers to Mariachi festivals and Cinco De Mayo celebrations.
Volaris knows where recent immigrants to the United States want to travel.
“When we look at markets, we say, ‘How many bus runs are there between Mexico and those cities?'” Blankenstein said.
CAPA’s Miller predicts Volaris’ strategy should succeed, saying he expects it to double in size in the next decade. But he noted two potential concerns. First, Mexico’s aviation infrastructure is highly dependent on Mexico City International Airport, which does not have room for new flights. A new airport with more capacity is being planned, but it is not expected to be finished until the next decade. A second concern is Aeromexico, which seeks a joint venture with Delta Air Lines that could make it a stronger competitor.
But unlike the U.S., Mexico’s air market is not mature, so Volaris has many opportunities. Plus, while other low cost carriers, such as Brazil’s Azul Airlines, have hit snags when their nations dipped into prolonged recessions, Mexico’s economy likely will remain stronger than others in Latin America.
Over the long term, Volaris plans to diversify its operations, which could insulate it from problems in the Mexican market. It soon plans to start an airline in Costa Rica with nearly the same model. It wants to bring low cost air travel to another country that does not have it.
“The Mexico market still has a lot of growth in it, and Costa Rica as well,” Miller said. “These are markets with still high airfares.”
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Photo credit: A Volaris Airbus A320 taxis at Los Angeles International Airport. Volaris is planning a major U.S. expansion. Alan Wilson / Flickr