Volaris is probably the most successful New York Stock Exchange-traded airline stock you've never heard of. In about a decade, Enrique Beltranena has built the airline into powerhouse in Mexico. Now, he wants to expand. Will it work?
Future of Passenger Experience
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At Volaris, one of Mexico’s leading ultra low-cost carriers, the marketing team asks many prospective customers a simple question: “Why are you suffering?”
It’s a query the airline likes to pose to the millions of Mexicans and Mexican-Americans who have long favored taking the bus over flying. In the past, there was a simple reason they preferred the bus — a ticket was far cheaper than what they could buy on Aeromexico or Mexicana, the two national carriers.
But roughly a decade after Volaris’ first flight, the calculation has changed. Mexicana is gone, a casualty of the 2008 global financial crisis, and Mexico is left with Aeromexico, a full-service carrier, and three ultra low-cost airlines — Volaris, VivaAerobus, and Interjet. All three make it possible for more consumers to fly rather than ride a bus for 10 or 35 hours.
Volaris, with more than 150 routes and 28 percent of Mexico’s domestic market share, is likely the strongest of the upstarts, and it plans big growth soon. By 2020, it expects to add more than 100 new routes, including many to the United States, and 54 new aircraft.
Its strategy is simple. By selling base fares roughly equivalent to the price of a bus ticket, Volaris seeks to persuade more people they can afford to fly. Like most low-fare airlines, it charges extra for nearly everything, from advanced seat assignments, to sandwiches to carry-on bags.
Volaris can match bus fares in part because it has the lowest costs of any publicly-traded airline in the Americas. To measure how much money a carrier spends, the industry uses a metric called cost-per-available-seat mile, or CASM, which measures how much it costs an airline to fly one seat for one mile. In the first half of this year, Volaris’ CASM, not including fuel costs, was 4.7 cents — almost four cents lower than Southwest Airlines, and roughly a cent lower than Spirit Airlines, which has the lowest costs of any publicly-traded U.S. airline.
Enrique Beltranena has been Volaris’ CEO since 2006. We spoke with him recently about the airline’s ambitious growth plans. We also learned about how Volaris relies on facial recognition software to decipher which consumers are serious about buying tickets. This is eighth in a series of airline CEO interviews we plan for the next several months.
Note: This interview has been edited for length and clarity.
Skift: You’re embarking on a major U.S. expansion, with new routes between Mexico and Los Angeles, Denver, Austin, Seattle, among others. Why do you see opportunity?
Beltranena: Because we still have traffic that is [traveling] by buses. Mexico has 1.7 billion passengers [each year] that use buses to move themselves. What Volaris has done with its strategy is switch passengers from the bus traffic to the airline traffic. [In Mexico] the domestic air market has grown from 22 million passengers [annually, a decade ago] to almost 40 million passengers this year. 51 percent of that growth is attributed to the Volaris routes and the Volaris incursion into the market. This phenomenon of busses is also happening the U.S. in the cities where we do have Mexican heritage people that are moving themselves between their hometowns [in Mexico] and the cities where they are residents in the U.S. They take buses. There are a lot of those cities that still have capacity for us to keep on growing.
I also see a lot of price-sensitive customers that do not like to flow through the hubs. So the point-point operation is important to them. We see a lot of carriers in the U.S. still flying from their hubs to Mexico City and our customers are not in Mexico City. Our customers are in the rest of the domestic markets and they want point-to-point service.
Skift: The U.S. and Mexico recently agreed on an new aviation agreement that is allowing more flights on the most popular routes, such as New York to Mexico City or Los Angeles to Cancun. Many airlines are planning new flights. Can the market absorb the capacity?
Beltranena I think the market can absorb it. It is important to say, though, that the new bilateral is only opening the four or five cities that were restricted. The rest of the market was open. We [already] have been adding capacity and airlines have been adding capacity in the markets that were not restricted. Cities like Cancun, Los Cabos, Mexico City, which are examples of cities that were blocked, may receive some more capacity — with the caveat that Mexico City has a limitation in terms of slots.
Skift: What about domestic flights? Is there still room to grow for Volaris?
Beltranena: We still have a lot of customers and a lot of routes that we could be targeting. We still have 57 more domestic Mexico routes in scope for bus switching. Basically what we do is we analyze the traffic of the buses per city pair, and we determine which cities have bus capacity in routes that are beyond five hours.
When I meet with investors in the U.S., they think that the markets are as developed as the markets in the U.S. But this is an an emerging market. It grows at a faster pace. And it still has a lot of places where we can get passengers and change the market model. We have a huge capacity to grow.
Skift: Mexican consumers have been taking buses for years. It may take 30 hours to reach their destination, but they’re used to it. How do you persuade them to fly?
Beltranena: We first do a process of education. We start by asking them, ‘Why are you suffering?’ Or, ‘Why are you spending 30 or 32 hours on a bus?’ [We say,] ‘You should be moving away from there.
We also do geofencing. That’s for when they get to the bus terminals. We send them messages through bluetooth or through their location systems in their cellulars, telling them that a bus ticket [price] for more than five hours is competitive with Volaris. There’s a lot of education. We do it in the shopping malls. We do it in the bus terminals. We do it through the network. We do it directly through their cellulars, et cetera.
Skift: You also give away tickets, right?
Beltranena We use on an average about 20,000 tickets per quarter, which we give away basically. What we do is we repurchase their bus ticket and we tell them, ‘If you give me your bus ticket, I’ll give you in return an airline ticket to the same destination.’ We do that in the bus terminals. What happens is typically, once they take the airline and we show them the cost is equivalent for them, typically they stay with us.
Skift: Are they your customer for life?
Beltranena: It’s pretty much like that. Maybe not necessarily a customer for life. But let me give you numbers. Between 18 and 34 percent of the customers that Volaris [flies] — depending on the city pair — claim that they first rode the busses and then they rode the airlines. And 6 percent of our traffic today are first-time fliers.
Skift: Are busses more your competition than the other three largest Mexican airlines — Aeromexico, Interjet and VivaAerobus?
Beltranena We compete basically with everybody. [With] Aeromexico, Volaris overlaps on 78 percent of routes. If you look at VivaAerobus we overlap on 84-88 percent depending on the season. And if you look at Interjet it’s about 80 percent. So our route network basically overlaps with everybody, and we compete basically with everybody. But typically, the bus switcher in reality is coming with Volaris. Remember,VivaAerobus is an airline owned by a bus company, so they cannot clearly attack the market like the way we attack it. We basically went out with an advertising campaign that is aircraft trips at bus fares.
Skift: You’ve also used facial recognition software on the web to try to get more travelers to buy tickets. How does that work?
Beltranena: We do have face recognition when you make it to our webpage. We can identify based on our practice with face recognition whether the person is only quoting or is reality having the intention to purchase the ticket. Then we go back and we really target customers as a result of the way they act when they are trying to make a booking.
Skift: And you’re using a consumer’s own camera?
Beltranena: Every time you get into a cellular phone or an iPad or a tablet or a computer, now you have the camera on. When you get into our processing of booking, we immediately start doing face recognition. We have some software that helps us to identify, if you’re intention is to purchase or if it is just to quote, or if you are just surfing the page. Once you have taken some steps through the process of the booking, we can push you in with additional support on the web that helps you to make a booking. What we try to do with face recognition is probably not face recognition itself. But we use it in order to turn booking process into sales, more than just intentions.
Skift: Isn’t sort of creepy?
Beltranena: Well, it’s also scary that we can map where you are in a shopping mall or something, if you only have your location services on in your cellular. That’s how technology works. It depends on you, whether you activate those features or not. If you go onto the webpage without the camera, I cannot do it.
Skift: Will I get a better deal if I activate my camera?
Beltranena: What we try to do is push the conversion. It’s not really a better deal, but it’s giving you the features and the weapons so you can make a decision and make a booking.
Beltranena: Where do you find customers book from? Home? Office? Laptops? Desktops? Mobile?
Beltranena: What we see as a trend in our customers is they use the tablets when they are watching TV and doing something else and saying, ‘what if you would go on vacation to x place?’ They are basically looking at prices or destinations or packages. But in a lot of cases we still get the bookings on laptops or desktops.
Skift: How are you able to keep fares so low? Part of it is about packing in the seats, right?
Beltranena: We have always said the aircraft should be managed the way you would manage a piece of real estate so you can get as much utilization per square foot of the aircraft. That’s why for us, it’s so important to have the density on board. But it’s not only about density. It’s also about the market that we target. It’s not a business market so it allows us to utilize the aircraft for far more hours. When a typical airline in the rest of the world uses an Airbus about 8.6 hours per day, Volaris has been flying aircraft 13 or 14 hours per day. That’s because we have almost 30 percent of our operation which flies at night. A lot of our passengers, rather than paying for a hotel, or rather them paying for a night anywhere else, they fly at night with us. That allows us to get much more utilization out of our model.
Skift: Like most ultra low cost airlines, you charge extra for nearly everything, from advanced seat assignments to onboard sodas to carry-on bags. But you can’t charge for checked bags, because the Mexican government does not allow it. Do you hope that changes?
Beltranena: It’s a regulation right now. Unless we change the regulation, which I don’t think is going to happen, we will be limited. As part of the price of the ticket, the law demands us to include a bag, which is of 25 kilos and two personal effects that [passengers] can take with them on board. As a result of that, our ancillary revenues probably will never be able to get to the levels of [Hungarian low cost airline] Wizz [Air] or to the levels of Spirit in the U.S. or Allegiant. They are charging more or less $55 extra per passenger. We are in the process of maturing the process of ancillaries. Today our average is $22 or $23 per passenger. It will eventually get to $35, or the high 30s. But it won’t be more than that because the difference between the 30s and the 50s, where the U.S. carriers are, is basically the first bag.
Skift: You do charge for carry-ons, though, and that’s profitable for you. Are you surprised no full-service carrier has decided to implement a carry-on bag fee?
Beltranena: I guess their models are much more like a full-fledged airline. Because of their cost structure, they cannot reduce their pricing, so it is important for them to include those items as part of their customer equation. But [Volaris] has a cost equation which is the lowest in the continent. I mean why wouldn’t I do it. I can price very low. That’s more important for my customers. My customers are really price sensitive customers.
Skift: Are those price conscious travelers buying a lot of extras?
Beltranena: We do have a lot of ethnic traffic — or VFRs (it stands for Visiting Friends and Relatives) — that are not paying for anything. They are not reserving a seat. They are not even buying a sandwich on board. They just take the plane fare and they use that. What we in reality end up doing is averaging these [to get our] $22 per passenger. For some passengers it is far higher than that, and for a lot of them it’s nothing. It’s part of my proposal. I go out and tell people, ‘If you buy Volaris, you get clean fares.’ If you want something else, here’s for you to decide. It’s your choice. We have been very clear about that. I think implementing this whole process at Volaris has been very different than how Spirit did it in the U.S. or how Ryanair did it in Europe in the beginning. We were clear it was a customer choice.
Skift: In September, Volaris became the first airline in North America to receive the Airbus A320neo, a new and more efficient version of the aircraft already in your fleet. Why is it so important to have the new technology?
Beltranena: You need to understand that Mexico is a very horizontal country when you look at the topography. So we have as an ultra low cost carrier have a much longer average stage length than any other low cost carrier in the world. Low cost carriers in the rest of the world are averaging 500 or 450 miles of a stage length. Volaris averages 1,000. And it’s not because Volaris wants to do it like that. It’s because that’s the topography of the region where we operate. We are an airline where longer stage lengths are part of our DNA. We needed that aircraft and it’s going to help us.
In the beginning, we are using it on two specific routes. The first one is Mexico City to Cancun and the second one is Mexico City to Tijuana, so we can monitor the aircraft and monitor the engines, which is part of the process of bringing in new technology. . Eventually I want to deploy the aircraft to higher stage length routes, because the combination of the Sharklets (a special wingtip) with the new engines produces an almost 19 percent fuel burn savings.
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Photo credit: Volaris CEO Enrique Beltranena is bullish on his airline's future in part because he still views Mexico as an emerging air travel market. Volaris