Skift Take

If you want to make a fortune in business, you need to go where your competitors will not be. Venezuela certainly fits that. But that doesn't mean it's a good idea.

With unrest gripping Venezuela, many international airlines have dropped flights or left completely, fearing pilots and flight attendants may be in danger during layovers. The last U.S. commercial airline pulled out earlier this year, a couple of months before the government banned American carriers from flying there because of safety concerns.

But one foreign airline may want in.

It’s Viva Air, a small but growing ultra-low-cost carrier backed by one of the founders of Ryanair who once called the company the “Ryanair of Latin America.” For now, Viva has operating certificates in two South American countries — Peru and Colombia — but it’s looking to add a third, and Venezuela is intriguing, Viva Air Group CEO Felix Antelo told Skift this week at the Aviation Festival in Miami.

“There’s a huge opportunity there,” Antelo said. “To get to a more stabilized economy with the best infrastructure, it will take years. But if you wait for that, you lose some time. And the first-mover advantage is true. We have the aggressiveness, the fleet, and the flexibility to make the move.”

If Viva jumped in, it would face little competition. But the country’s aviation system has been a disaster for several years, and foreign airlines haven taken some significant hits. People have still wanted to fly, but the government has made it tough for carriers.

First the problem was financial, with the Hugo Chavez-led government refusing to let foreign airlines take money out of the country. Airlines would sell tickets in Bolivars, the local currency, only to be told they couldn’t convert it into their home currency, at least at reasonable rates. Last year, IATA, the international airline trade group, said foreign airlines had been unable to repatriate nearly $4 billion.

Even that didn’t completely deter foreign carriers. In 2016, American Airlines wrote off $592 million trapped in Venezuela, but it kept flying there, generating significant profits by selling tickets only in U.S. dollars and Euros.

But crew safety has been an issue. American finally pulled out in March, after its pilots union complained about danger during layovers and asked its members to refuse trips to the country.

United halted its flights to Venezuela two years earlier, but not before trying an unusual and expensive approach to keep service from Houston to Caracas. At the end, United was making a technical stop in Aruba to change crews, ensuring no pilots or flight attendants would spend the night in Venezuela.

Some Latin American and European airlines continue to fly to Caracas, including Copa Airlines, Air France, Iberia Airlines, and Tap Air Portugal. But some also make stops in the Caribbean to avoid layovers, Bloomberg reported earlier this year.

Opportunity Beckons

Yet for Viva, this means opportunity.

“This is a market that is very constrained right now, because you don’t have capacity,” Antelo said. “You don’t have the money. But you don’t have real competition in Venezuela. You’ve got one or two local airlines, which are small with an old fleet.”

Antelo said the company has not made any final decisions about where to put its third base. But he said it is looking at expanding in late 2020 or early 2021, a little before its parent company hopes to take Viva public. Irelandia had owned all of Viva Air until recently when it sold a $50 million stake to Cartesian Capital Group, a New York private equity firm.

By the proposed IPO, Antelo said the group will have about 40 Airbus A320 aircraft, roughly double what it is flying today in Peru and Colombia. That’s small for the United States or Europe, but “for the region is quite a strong number,” Antelo said.

The company is also looking at several other markets in South and Central America for its third base, Antelo said. But many have some issues, said Jay Shabat, senior analyst at Skift Airline Weekly.

The most mature markets in South America, such as Brazil and Argentina, already have significant low-cost competition. Meanwhile, while Central America has fewer discount options, Mexican carrier Volaris is expanding in Costa Rica and El Salvador. Moreover, Antelo said, many Central American countries have high taxes and fees, though he said a government may be willing to relax them to attract a new entrant.

“If we could break that and get a good deal out of one of those countries, we think there’s space in Central America,” he said.

Regulatory Matters

Before a foreign airline can enter a new country and start flights, it needs approval from the government.

And today, the Venezuelan government is in such flux that Antelo said it’s not clear whether politicians would want Viva Air there. He said the company has not spoken with anyone from the government, and Shabat noted it’s not even clear whom an airline might approach.

But Antelo said Viva executives are talking to people in the private sector about what it might take once the situation is more settled.

“I think in Venezuela, rather sooner than later, there will become a change,” he said. “I know we have been saying this for the last five years, but I think it will happen. And this is a possibility that has not been on the table until six months ago.”

A lot would need to happen, though. Unlike Europe, South America is not a single market. Every country has its own regulations, and some are more airline friendly than others. Viva will be looking to see how a new government in Venezuela views aviation.

Will it let airlines employ foreign pilots? Will it have low taxes or high? Will it allow companies operating in several countries to seamlessly shift airplanes from one nation to another? Will it allow carriers to charge fees for ancillary products?

But if the government is ready, Antelo said the opportunity is ripe. He said Viva could not only fly domestic flights, but also offer routes from Colombia and Peru.

“If you have a Peru, Colombia, Venezuela corridor, it would make great sense for us,” he said.

Shabat said he’s not sure it’s worth the trouble. Today, the country is a disaster, facing hyperinflation and shortages of basic necessities.

“It just sounds like such an aspirational goal,” Shabat said. “Spirit has said also they would have to be in Venezuela. American at one time just made huge profits in Venezuela. But it is almost an unservable market right now.”

He said he understands what Antelo sees, but he said he’s not sure it will turn by 2020 or 2021.

“Venezuela does have the potential to be an incredible market one day, but in the very distant future,” Shabat said. “We are talking minimal three to five years, and that’s very optimistic.”


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Tags: american airlines, united airlines, venezuela, viva air

Photo credit: Viva Air, which operates Airbus A320 family aircraft like this one, already has bases in Peru and Colombia. Now it wants a third. Viva Air

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