One very distinct and rather curious aspect of the Latin American online travel market is there for all to see, but few comment on.
NB: This is an analysis by Steve Sherlock, an entrepreneur in residence with the Chilean Government’s Startup Chile program.
For a market with nearly 600 million people, having only six low cost carriers compared to around 18 in North America, 35 in South East Asia and 19 in Europe, seems odd and damned expensive to fly around.
That’s one LCC per 100 million souls!
The home grown LCCs in LATAM are Volaris, Interjet and VivaAerobus from Mexico; Azul and GOL from Brazil and VivaColombia.
Each has pedigree from abroad, for example with Azul having connections with JetBlue, VivaColombia with the Ryan family and its CEO formerly from Spirit.
Apart from Brazil and Mexico, where LCC penetration is relatively high at 43% and 55% respectively, the other LATAM countries (nine in total) are all in single digits, with Chile at 0%.
So that begs the question as to what the hell is going on for such a large part of this market to be so under-represented by LCCs in numbers and penetration, and what it means for distribution?
A conversation with the head of Latin America's largest OTA, Despegar in Chile (Dirk Zandee, formerly of LAN), has shed some light on the topic.
In Latin American there are basically no secondary airports in major capitals, unlike in the US and Europe, nor low cost terminals at existing airports, such as those in Kuala Lumpur and Singapore.
Therefore it becomes a matter of prohibitive economics with LCCs having to pay the same high airport fees that the mainline carriers pay.
Second point is that LAN Airlines is a formidable company to go up against for any LCC in Chile and its subsidiaries in Peru, Argentina, Colombia and Ecuador.
Between 2006 and 2008, LAN set about reducing its cost base by around 40%, applying LCC methods to reduce its cost per available seat kilometre (CASK) from 5.65 in 2006 to 3.99 in 2008.
A strategic move to prepare each airline in the group for the pending LCC competition.
So when GOL tried to enter the Chilean market with three flights from Buenos Aires to Santiago, it was basically doomed from the outset.
LAN simply increased its daily flights from eight to 11 and undercut GOL (who had a cost of available seat-kilometre of $4.40), it basically had no option but to exit the market or go broke - it chose the former.
The knock on effect for LCCs to reduce their costs, is a trend in avoid using OTAs to distribute inventory and instead favouring metasearch.
For example, VivaColombia, VivaAerobus and Volaris have refused to play ball with OTAs such as Despegar and instead are favouring distribution via the likes of Escapar.com.co, Colombia’s only metasearch engine, and Volaris via Kayak.
This shouldn’t be a surprise really, given Viva Group are both invested in by the Ryan family. Despegar however would obviously love to be able to distribute all LCCs.
Furthermore, perhaps there is a desire by the LC´s to further offset the higher airport costs by driving traffic direct to their own sites so that they can also sell their ancillaries such as bags, seats, hotels and cars etc.
Hence by preferring to distribute via metasearch over OTAs, not only do they reduce their cost-per-acqusition, but also increase the overall spend-per-seat-sold.
So what next for LATAM and the much needed entrance of LCCs?
Given the closed markets in Venezuela and Argentina, the solution in those countries would seem to be a political one.
Whereas at more liberal markets such as Chile, Peru and Ecuador would likely need cost factors to change such as low cost terminals, given the strength of LAN and its low cost base.
Additionally, maybe there is a big opportunity for metasearch engines to take the lead role in distributing LCCs inventory as opposed to OTAs.
And, finally as noted by the Centre for Aviation, 95% of all international capacity is supplied by the full service airlines, which points to a LCC international operation as a possible untapped opportunity.
NB: This is an analysis by Steve Sherlock, an entrepreneur in residence with the Chilean Government’s Startup Chile program. He was a founder of number of highly-successful car hire businesses in Australia, the UK, NZ and the US, including VroomVroomVroom and Oodles.
NB2:Latin America airport via Shutterstock.