Two Colombian airlines stop working in a matter of weeks. What’s going on?

Two Colombian airlines stop working in a matter of weeks.  What's going on?

( Spanish) — Two low-cost Colombian airlines announced, a few weeks apart, that they will cease operations in the country for financial reasons, grounding thousands of passengers who had purchased their air tickets in advance.

The first announcement was made by the Colombian airline Viva Air. On February 27, the airline suddenly reported the cessation of operations arguing economic problems, for which in previous months it had accepted the business recovery process, which allows companies in financial crisis to declare bankruptcy.

The Civil Aeronautics of Colombia authorized the merger of Avianca with Viva Air, but with some conditions such as the preservation of the scheme low cost of Viva Air, and the restoration of flight frequencies on the Bogotá-Buenos Aires route, which was especially affected. Avianca said in a statement on March 22 that “it will study the resolution and the implications of the measures put forward by the authority as soon as possible to determine the viability” of compliance with these conditions.

Numerous passengers in Argentina, Peru and Colombia were affected by this measure.

Stranded passengers try to enter the airport in the southeastern city of Cusco, Peru, after Colombian low-cost airline Viva Air abruptly shut down operations, on February 28, 2023. (Ivan FLORES / AFP) (Photo by IVAN FLORES/AFP via Getty Images)

The following announcement was made this Wednesday by another airline: Ultra Air, a company based in Medellín that had only been in operation for a year. In a statement, Ultra announced that as of 00:00 on March 30 it was suspending operations and will not fly on any of its routes. Reasons include, but are not limited to, rising fuel prices, exchange rates, and rising costs for airlines, he said in the statement.

Ultra, which had an 8% share in the Colombian market, according to the company, initially operated with six aircraft, but in recent weeks it was operating with only three.

On the afternoon of this Thursday, President Gustavo Petro announced on his Twitter account that before the cessation of operations of Viva Air and Ultra it ordered that all the planes of the Colombian Air Force, including the presidential plane, “from this moment on be prepared for the transport of the affected users.”

On the situation of Ultra Air, the Minister of Transportation of Colombia, Guillermo Reyes, said “Several attempts were made to capitalize, to sell the airline, [pero] None of them prospered.”

“The decision generates great alarm for us, a great affectation for our travelers,” Reyes said in a communication this Wednesday. The Minister of Transportation added that a contingency plan was activated together with the Civil Aeronautics and the Superintendence, and they requested a list of passengers from Ultra Air to demand the rescheduling or cash payment of the air tickets of those affected.

The Colombian Superintendency of Transportation required the airline to implement a special plan to respond to passengers and maintain communication channels with users. In addition, he requested that the airline’s insolvency process be initiated.

The news comes at a critical moment, before Easter, when millions of people are expected to travel by both air and road transport for this high season day in the country.

The Transport Minister said that he hopes that other airlines such as Wingo, Avianca, Latam, Satena and Easy will be able to transport the affected travelers.

An Ultra air plane arrives at El Dorado international airport, in Bogotá, on May 14, 2022. AFP PHOTO/Daniel MUNOZ (Photo by DANIEL MUNOZ/AFP)

What happened to these low-cost airlines in Colombia?

The world economic crisis, the high price of fuel as a result of Russia’s war in Ukraine, the devaluation of the Colombian peso and an increase in taxes on air tickets are some of the reasons in which the experts consulted by agree on the causes of the cessation of operations of these two low-cost airlines.

“We are experiencing a very important devaluation since 2022, mainly, and the high price of fuel obviously caused the estimated budgets that the airlines had to overflow,” Claudia Velásquez, a consultant in Aeronautical Affairs, Tourism, told en Español. Transport and Infrastructure, based in Bogotá.

In addition to this, says Velásquez, due to the high competitiveness of the passenger air transport market in Colombia, and even more so after the crisis caused by covid-19, the low-cost airline model can be difficult to sustain in the country. .

“There are many operators competing in the market, which therefore creates competition in rates, which sometimes does not allow them to increase the values ​​that should be due to the growth in fuel prices,” added Velásquez.

He added that there is a “substantial increase in an external input, which is fuel and the great devaluation of the Colombian peso that has a huge impact, because 60% of the cost structure of the airlines are in dollars and if the income is in pesos there is no rest to compensate for this gap”.

How did Colombia come to an economic crisis? 1:55

Another factor that experts mention, which could explain the crisis of these airlines, is the high tax burden on air tickets, which in Colombia went from 5% —which was an incentive during the pandemic— at 19%which made them more expensive as of January 2023.

However, the expert clarifies, the cases of Viva Air and Ultra Air are circumstantial, and in Colombia one should not speak of an “airline crisis”, since there are still several companies that can serve the passenger air service market.

“We are saying that we have six airlines in the Colombian market with the capacity to assume the transport of passengers who want to travel for Easter, and those who want to travel for June, July, in case the situation [de las aerolíneas] don’t pull yourself together,” said Velásquez, who warned that it is very possible that air ticket prices will increase in the coming days.

Commercial flights between Colombia and Venezuela resume 2:57

More opportunities for the sector

The exit of airlines from the market is a “quite common” situation in the industry, according to aeronautical consultant René Armas Maes.

“It’s a capital-intensive business with marked seasonality, and high costs including fuel prices that are closely correlated with profitability,” Armas Maes told via email. “Equally, it is a business that when compared to other industries, on average, the margins are lower.”

And while the loss of routes and planes—as in the case of Viva Air and Ultra Air—is always “a loss for the country and consumers,” according to Armas Mae, it is also an opportunity for other airlines.

“The airline business is a dynamic business with opportunities,” the expert wrote to . “When one player disappears from a route or reduces frequencies, others take the opportunity to reposition and grow.”

In this case, the opportunity to take over that sector of the market left empty by Viva Air and Ultra Air will be for the airlines that continue to operate such as Avianca, Wingo, LATAM Airlines, EasyFly, Satena and Copa Airlines.

And the conditions that today create complications for airlines are likely to persist in the near future, warned Armas Maes.

“The cost of fuel, which is expected to rise by April and remain elevated at least through September…and the growth in unit operating costs will continue to present challenges to airlines in the region.

“Likewise, other key macroeconomic concerns persist that may limit demand and revenue generation for airlines, such as accelerating inflation and, therefore, a greater weakness in purchasing power. Likewise, further currency depreciation, an increase in interest rates and high levels of consumer credit card debt, among others, are palpable risks,” Armas Maes wrote.

But, the consultant stresses, what happens now will depend on the regulatory body, which must verify the number of seats, verify the rates and put controls “to ensure that there is healthy competition and that consumers are not affected.”

And when asked why the low-cost airline model is threatened in Colombia, in addition to external variables such as the price of fuel and the devaluation of the Colombian peso, Velásquez points out that in general, in the region, it is necessary for companies to have “greater financial support than in the face of these variables, because they can resist”, and even if hurricanes and economic crises hit, they can continue operating after situations like these.

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