Latin America low cost carrier freakonomics is a distribution headache

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, 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.

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  1. Roberto Garcia

    Hi Steve, very good article!
    I have done my MBA dissertation in this particular topic (Feasibility study of launching the AirAsia business model in Latin America). I discovered that one of AirAsia’s competitive advantage are its lean distribution systems where they are able to offer a wide range of innovative distribution channels that make booking and traveling easier.
    AirAsia has fostered a dependency on Internet technology for its operational and strategic management, and provides an online ticket booking services to travellers online. The channels that they currently use include: Internet, sales offices (limited number), call centre, mobile bookings, third parties (Alliance Bank, ATMs, McDonalds and Post Offices) and travel agents.
    AirAsia has designed an in-house distribution platform that is being used by travel agents and third parties. This tool has helped reduce the carrier’s operating costs, as they do not have to integrate their reservation systems with expensive distribution systems.
    The Latin American air-passenger market has the socioeconomic, population and regulatory trends (except Argentina and Venezuela) that are needed for a successful LCC start-up. I’m very confident that following the AirAsia distribution strategy would be beneficial for any LCC in the region.

  2. Daniele Beccari (@danbec)

    Hi Steve, thanks for this post.
    In terms of distribution, are Latin American LCC’s focused primarily online (web/mobile)?
    Or is the internet penetration still a problem, requing much more call center or even indirect distribution?

    • Thomas Allier

      Online travel penetration is still a big challenge in LATAM (around 25% in average – credit card penetration being the biggest issue).
      However, the lowest fares are only available through LCCs websites.
      Most LCCs are not distributed through the GDS but offline agencies may sell LCCs’ tickets through their websites. It is also possible to book via call center or directly at the airport.

  3. Rodrigo Pinto

    While I enjoyed the article, it’s a mistake to consider Gol a LCC. It was born like one, but as it had plenty of market share to gain from a booming market operated by one big airline (TAM), it slowly shifted into a full flagged airline. Ok, their service is a little worse than TAM’s and the seats are cramped, but they frequently offer higher fares than TAM and are seen as their main competitor in the market.

  4. Thomas Allier

    Thanks Steve for sharing about the complex LCC market of LATAM.

    The truth is VIvaColombia has reached 9% of marketshare in about 18 months and is going for at least 20% of the Colombian airline market.
    It is also credible to see the Viva group (present in both Mexico and Colombia) expand in other LATAM countries such as Chile and Peru which are among the largest airline market lacking a domestic LCC.

    High airport fees are not incompatible with the ultra low cost model. The evidence is VivaColombia opening routes from/to Bogotá El Dorado at still way lower fares than full-service carriers such as LAN, Copa and Avianca.

    As you mentioned, LATAM LCCs mostly profit off ancillary sales which is why OTA will probably remain out of the distribution loop while metasearch should become the alternative.

    • Steve Sherlock

      yeah I think it will be interesting to see how the incumbents react as VivaColombia’s market share continues to grow into double figures. And especially if the Viva group does start flying into Peru and Chile.

      For example I just did a search from Bogota to Medellin on both Viva and LAN (chose similar bag allowance) and Viva was still half the price of LAN! So you make a good point about airport fees in in/out of Bogota not prohibiting lower fares.

      If the Viva model can truly scale their model to Peru and Chile, that will be great for competition and bringing prices down. Though I suspect LAN won’t sit idle if flights start into the home turf Santiago market!

      • Gustavo De La Cruz

        After a year ago from your comment could you make an update in reference to the scenery in Chile for a LCC airline. What do you think about Sky Airline moving towar LCC model. (Viva Colombia model)


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