Startup air­line sets its sights on Ar­gentina

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - FABIOLA MOURA AND ED­UARDO THOMSON BLOOMBERG NEWS

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 low-cost startup car­rier Fly­bondi. “The met­rics in Ar­gentina show an in­com­pa­ra­ble op­por­tu­nity. Much, much bet­ter than Ryanair ever en­coun­tered in Europe.”

Caw­ley, along­side for­mer Wizz Air Hold­ings PLC ex­ec­u­tive Michael Pow­ell and other in­vestors from Ar­gentina, Europe and Asia, just poured $75 mil­lion into Fly­bondi, in a fi­nanc­ing led by Carte­sian Capital Group LLC, the U.S.-based $2.6 bil­lion pri­vate eq­uity fund. And op­por­tu­nity is not just in Ar­gentina — the en­tire re­gion is ripe, 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 sec­ond­largest 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. Its 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 changes made 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 low-air­fare car­ri­ers, 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 1,200 miles — the equiv­a­lent of fly­ing be­tween Wash­ing­ton and Dal­las — for 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 Tues­day 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-air­fare 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 Ban­chileCiti. 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.

Latam shares are up 43 per­cent this year, the third best per­for­mance in Chile’s IPSA In­dex.

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.

In­for­ma­tion for this ar­ti­cle was con­trib­uted by Ana Carolina Sied­schlag and An­drea Navarro of Bloomberg News.

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