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The skies over Argentina have airline industry veterans lining up planes.
The nation’s vast territory and a young working population in Buenos Aires with links to faraway hometowns are two attractions. Join those with a government willing to open virtually untapped markets — currently served almost exclusively by state-run Aerolineas Argentinas SA — and the potential is huge.
That’s what Michael Cawley is betting on. The former Ryanair Holdings PLC chief operating officer sees similarities between Argentina now and Poland in the early 2000s, countries with comparable populations where high fares and limited competition prevail. After low-cost carriers entered, air travel in Poland tripled.
“Argentina is probably the last such country on the planet where there is an incredible opportunity,” said Cawley, now an investor in Cartesian Capital Partners. “The metrics in Argentina show an incomparable opportunity. Much much better than Ryanair ever encountered in Europe.”
Cartesian just poured $75 million into Flybondi, founded last year in Buenos Aires and chaired by former Wizz Air Holdings Plc executive Michael Powell. Both Powell and Cawley are investors in the $2.6 billion private equity fund that’s taking on the newly opened market. And it’s not just Argentina — the entire region is ripe with opportunity, as evidenced by the arrival of eight discount carriers, including Viva Air Peru — backed by Ryanair co-founder Declan Ryan — and JetSMART in Chile.
Flybondi obtained the right to operate 85 routes in South America’s second-largest country and expects to start with 12 this year. The company aims to offer fares for a third of what its rivals charge — the equivalent of a bus ticket — and hopes to snag 20 percent of the market within five years. Their fleet will be 30 single-aisle Boeing 737-800s, with as many as 189 seats.
There are still plenty of challenges. Many startup airlines have failed, even in countries with less economic and political instability than Argentina. MSCI Inc. last month said it wasn’t yet convinced reforms instated by President Mauricio Macri were solid enough. But investors say the administration’s political will to open the market is a major positive.
“The new government is in its infancy,” said Cawley. “If the government curbs inflation in a year, it is well on its way for proving its method.”
Flybondi expects passengers in Argentina to quadruple to up to 80 million in 10 years. Neighboring Brazil saw its air travel more than triple in 13 years after loosening fare restrictions. In Mexico, the number of travelers soared 60 percent in 11 years after low-cost carriers moved in.
That kind of upside is what’s driving the discounters, said Stephen Trent at Citigroup Inc.
“They understand the opportunities well enough that not one or two of them are launching service in these markets, but eight of them,” Trent said by phone.
The region as a whole is ripe, as evidenced by other carriers making waves. JetSMART Chief Executive Officer Estuardo Ortiz, formerly of Avianca Holdings, claims he can carry a passenger from the Chilean city of Concepcion to Calama, some 2,000 kilometers (1,200 miles) — the equivalent of flying between Washington and Dallas — for 9,000 pesos, or about $13.50, before fees and taxes. He sees similar opportunities across the nation.
The carrier, owned by discount-airline investor Indigo Partners of Wizz Air Holdings Plc and Spirit Airlines Inc fame, plans its inaugural flight on July 25 and is targeting the 93 percent of the population that has yet to fly.
His former employer is taking notice. Avianca CEO Hernan Rincon said low-cost carriers are forcing the company to be more efficient.
Latam Airlines, the region’s largest carrier by market value, is the most exposed to the entry of the new players, according to Banchile-Citi. About 42 percent of its revenue comes from Latin America, excluding Brazil, according to data compiled by Bloomberg.
Latam has changed its pricing model to compete, Jerome Cadier, the airline’s Brazil head, said in a recent interview. He expects a 20 percent drop in the average fare by 2020.
The investors behind the new discount carriers are betting their cheaper flights and faster arrival times will keep people from switching back to long bus rides.
“Once the population of a country had a taste of low-cost airlines and the freedom that it gives them, there’s no going back,” Powell said.
—With assistance from Ana Carolina Siedschlag and Andrea Navarro
©2017 Bloomberg L.P.
This article was written by Fabiola Moura and Eduardo Thomson from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to email@example.com.