Viava Colombia Low Cost Airline

Volume 15
Issue 4
December 2017
HEC195
VivaColombia: The Challenge of Growing a Low-Cost Airline in

Latin America
Case 1 prepared by Elkin RAVE 2 and Juan FRANCO 3
On December 29, 2015, the board of directors of VivaColombia, a low-cost Colombian airline, met
to review the strategic plan they had to approve and execute over the next three years. In particular,
they had to decide whether to consolidate the airline’s position in the Colombian market or open a
new air route to Brazil. The Brazilian option seemed to be a promising growth opportunity, but
consolidating local operations was also a priority since the airline had been experiencing quality
issues. The most recent service-related incident had made headlines 4 just a few days before the
meeting after passengers protested the cancellation of their flight.
VivaColombia was established in 2008, although it did not begin operations until May 2012. It
now operates in both domestic and international markets. It provides passenger transportation
services, flying to major and intermediate cities in Colombia and to major cities internationally.
Domestically, VivaColombia grew from transporting 558,000 passengers in 2012 to 2,670,000 in
2015. Internationally, it grew from transporting 65,000 passengers in 2014 to 249,000 in 2015. In
its first year of operations in the international market, it entered Panama, Ecuador, Peru, and the
United States. In 2015, it had nine Airbus A320 aircraft and served 21 routes in Colombia and six
international routes in North, Central, and South America. It had over 500 employees. In 2015,
VivaColombia carried over 2.9 million passengers, with sales of US$119.2 million and profits of
more than US$971,000.
Although the board was satisfied with the results achieved to date, they disagreed about how to
proceed. Some board members believed that VivaColombia should consolidate its domestic market
position. They were concerned about the large number of customer service complaints.
Specifically, 20% of customers had said they would not fly with VivaColombia again. 5 In addition,
1 This case is to be used for academic purposes only as a basis for class discussion. Some data and figures have been modified, and
the case scenario is fictitious.
2 Elkin Rave is an assistant professor at CEIPA Business School in Sabaneta, Colombia.
3 Juan Franco is an assistant professor at CEIPA Business School in Sabaneta, Colombia.
4 The following headline had appeared in a national Colombian newspaper a few days before the meeting: “Protests at El Dorado
airport in Bogota and Alfonso Bonilla Aragón International Airport in Cali following cancellation of several flights by
VivaColombia” (www.elespectador.com/noticias/pasajeros-viva-colombia).
5 Semana, interview with VivaColombia’s vice-president (http://www.semana.com/nacion/articulo/vivacolombia-un-caos-un-
modelo-de-negocio/382418-3)
© HEC Montréal 2017
All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited.
The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 00 2017 004 with the HEC Montréal Case Centre, 3000, chemin de
la Côte-Sainte-Catherine, Montréal (Québec) H3T 2A7 Canada.
This document is authorized for use only in Arroyo Welbers, Alejandro's CCO 78 + 89_OPERACIONES Y LOG?STICA_ARROYO course at Universidad Argentina De La Empresa (UADE),
from May 2018 to October 2018.
VivaColombia: The Challenge of Growing a Low-Cost Airline in Latin America
two low-cost international companies, Wingo and Norwegian, were planning to enter the
Colombian market (offering both domestic and international flights), 1 which the board feared
would jeopardize VivaColombia’s position in the domestic market.
Other board members thought VivaColombia should expand into Brazil, a major Latin American
market. Specifically, they thought VivaColombia should take advantage of the opportunity
presented by Aerocivil, Colombia’s civil aviation authority, which had authorized VivaColombia
to operate the Bogotá, Colombia – Sao Paulo, Brazil route. 2 The company still had no link to the
Brazilian market, although the number of passengers travelling between the two countries had been
growing at more than 20% annually. At that time, approximately 90% of the Colombia-Brazil
market was served by just three airlines, including VivaColombia’s two main competitors, Avianca
and LAN Colombia. 3
Although they favoured different options, the board members agreed on the following four points:
First, the airline could afford to carry out just one of the two projects within the next three
years. Second, they wished to maintain the current capital structure without going into greater debt
by tapping new financial sources. Third, they had to decide quickly since the Aerocivil aviation
authority allows just one year to begin servicing new routes. Fourth, whichever project
VivaColombia chose had to yield a minimum rate of return of 8%.
The origins of VivaColombia

VivaColombia was founded in May 2008 under the name of Fast Colombia. It was the brainchild
of William Shaw, who came up with the idea of creating a low-cost airline during his postgraduate
studies and discussed it with Juan Emilio Posada, Gabriel Migowski, and Fred Jacobsen. All four
men had significant experience in the airline industry: Shaw was former CEO of British Airways;
Posada was former CEO of Avianca; Fred Jacobsen had been CEO of Tampa Cargo from 1998–
2007; and Gabriel Migowski was a former executive with Brazilian Air and a former consultant
for Bain & Company. All four company founders were convinced there was a growing need for a
low-cost airline in Colombia. 4
Between May 2008 and July 2010, the partners focused on funding the project. Financial resources
were scarce, however, and they decided to retain an investment bank to analyze the risks and
prepare an investment appraisal, which attracted the interest of over 100 potential investors. 5 In
August 2010, when sufficient investors had signed on to the project, Aerocivil authorized the
1 El Colombiano (http://www.elcolombiano.com/negocios/empresas/wingo-otra-aerolinea-de-bajo-costo-en-colombia-
FC5206340)
2 This is a hypothesis made to enliven discussion.
3 Calculations made by the case authors based on operational statistics published by the Aerocivil aviation authority
(http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-aeronauticas/boletines-operacionales).
4 Enrique Patiño, “Viva Colombia: Así nace una aerolínea”, Revista Diners, May 30, 2012
(http://revistadiners.com.co/articulo/58_557_viva-colombia-asi-nace-una-aerolinea).
5 Ibid.
© HEC Montréal 2
incorporation of the airline. VivaColumbia is owned by four shareholder groups: 1 Grupo Fast,
Grupo Bolivar, Grupo Iamsa, and Irelandia Aviation (see Exhibit 1 for details).
For the first two years, until February 2013, Fred Jacobsen (former CEO of Tampa Cargo) served
as president and CEO. During his tenure, the company carried 400,000 passengers. Between
February and August 2013, Milke Szucs served as CEO. Szucs was a former CEO of Viva Airbus
in Mexico, former CEO of Spanair in Spain, and former operations manager of Easy Jet, a low-
cost British airline. During his tenure, the company carried 923,821 passengers. 2 Between August
2013 and July 2014, Barry Biffle was CEO. Biffle had eighteen years’ experience in the aviation
sector, having managed the business model of Spirit Airlines, a low-cost American carrier, and
been responsible for the expansion of its routes to Central America, the Caribbean, and South
America. 3 During his tenure, the company carried 1,873,679 passengers. 4 In July 2014, Biffle left
VivaColombia to become CEO of Frontier Airlines, a low-cost American airline based in Denver. 5
Biffle was replaced by Juan Emilio Posada, who was still CEO in 2015, at the time this case was
written. During Posada’s tenure, the company has carried 4,061,000 passengers.
VivaColombia originally operated out of the José María Córdoba de Rionegro International
Airport, 29 kilometres from Medellin, capital of the department of Antioquia. In June 2014, it
opened a second operations centre at the El Dorado International Airport in Bogotá to serve more
routes and flights from that airport.
VivaColombia’s business model

VivaColombia, which began operations in 2012, was Colombia’s first airline to adopt a low-cost
business model. 6 Low-cost airlines (also known as no-frills, discount, or budget airlines) focus on
reducing expenditures so they can offer low prices. 7 The following are the main differences
between low-cost and traditional business models.
Tighter seating. VivaColombia makes maximum use of its aircraft space. Its A320 aircraft hold
between 180 and 189 seats, 20% more than the same aircraft used by traditional airlines. This
reduces the idle capacity. In comparison, traditional airlines such as Avianca and LAN Colombia
have an average of 128 seats on their domestic flights. Fewer seats mean greater comfort but also
higher opportunity costs.
1 VivaColombia, About us (https://www.vivacolombia.co/en-co/info/about-us)

2 Aerocivil aviation authority, air transport statistics (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-
aeronauticas/boletines-operacionales)
3 Viva Colombia (http://vivacolombia.org/nuevo-presidente-en-vivacolombia/) (retrieved on April 6, 2016)
4 Aerocivil aviation authority (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-aeronauticas/boletines-
operacionales)
5 Frontier – Low Fares Done Right (www.flyfrontier.com) (retrieved on April 8, 2016).
6 Southwest Airlines, founded in Texas in 1967, was the first low-cost airline in the U.S. Low-cost airlines also exist elsewhere.
Ryanair Ltd. is an Irish low-cost airline founded in 1984, and Tigerair, founded in 2003, was a budget airline headquartered in
Singapore.
7 Maria C. Williams, “Do low-cost subsidiaries work? – Competing in low-cost airline world”, Aviation Industry Conferences,
London, November 2004.
© HEC Montréal 3
Single passenger class. VivaColombia offers a single passenger class. Traditional airlines such as
Avianca and LAN offer a business and an economy class. Business class is roomier, with seats that
recline – sometimes to a full horizontal position. This means the aircraft can carry fewer
passengers.
Shorter trips. VivaColombia offers short, non-stop flights, without connections, generally less than
four hours long. This offers many advantages: 1) lower fuel consumption, 2) shorter airport waiting
times, 3) less difficulty coordinating crew shifts. Traditional airlines offer both short- and long-
haul flights. Transatlantic flights, such as those offered by Avianca, and flights all over the
American continent, such as those offered by LAN, entail long routes, connections, and aircraft
transfers. All of this increases operating costs.
Single aircraft type. VivaColombia uses just one aircraft model: Airbus A320. This simplifies
maintenance operations and crew training. Thirty to fifty employees are needed to operate an A320.
A smaller aircraft has a shorter turn (or turnaround) time – the time required to unload an airplane
after its arrival at the gate and to prepare it for departure again – and thus spends less time parked
at the gate. Cooling (air conditioning) and parking costs are lower. Avianca and LAN both use
Boeing and Airbus aircraft, requiring an average of 100 employees per plane.
Online ticket sales. At VivaColombia, most tickets are sold online. No paper tickets are issued. The
company thus saves on staffing, paper, and ink. If a customer requests a paper ticket, an extra fee
is charged. Traditional airlines sell tickets through intermediaries or at their own points of sale.
Tickets are printed, and customer service representatives working at call centres sell tickets. All
this increases ticket costs.
No numbered seats. VivaColombia does not number its seats. Passengers choose their seats after
boarding. This speeds up boarding, with the whole process taking only about thirty minutes,
thereby decreasing the time and cost of aircraft parking at gates. Fuel costs related to cooling the
cabin while the plane is on the ground are also lower. Unlike VivaColombia, Avianca and LAN
have numbered seats, which complicates the boarding process. Passengers must search for their
designated seat, so the process takes about twice the time, resulting in higher parking and fuel costs
and longer turn times.
No free in-flight services. VivaColombia does not offer passengers free food or beverages. Any
food or beverages served must be paid for. Avianca and LAN provide various types of in-flight
services. On long flights, traditional airlines provide breakfast, lunch, or dinner, depending on the
time. They also offer beer and wine. Traditional airlines also offer entertainment options with
individual touch-screens and earphones enabling passengers to enjoy movies, TV programs, music,
and video games.
No frequent flyer program. At VivaColombia, frequent flyers can’t accumulate miles to earn free
tickets, hotel and car rental deals, or other benefits. Avianca’s LifeMiles program enables
customers to accumulate “life miles” by flying with Avianca or any of the Star Alliance airlines.
These accumulated miles can be redeemed for free tickets, discounts on hotels and car rentals, or
other benefits. LAN’s loyalty program, called LANPASS, offers similar benefits to its members.
© HEC Montréal 4
Compared to traditional airlines, all of the above factors combined enable VivaColombia to save
more than 50% 1 in operating costs resulting from such factors as the streamlining of boarding
procedures, crew specialization, tighter seating, and no free in-flight services. For more information
on the savings achieved, see Exhibit 2.
The price of a ticket includes basic customer service, and passengers pay extra for upgraded
service. For example, passengers can freeze their ticket price for 72 hours by paying a non-
refundable fee of US$1.67 for domestic flights and US$5 for international flights. Other services
that must be reserved and paid for in advance include taking carry-on luggage exceeding 6 kg
(purses and laptops are considered carry-on luggage), seat assignment, priority boarding, and using
the express line. To learn more about VivaColombia’s supplemental fees, see Exhibit 3.
VivaColombia’s target market is Colombians with a monthly family income of between U$900
and US$1,000, or 36% of the Colombian population. Such families usually have four or five
members. 2 In the words of the company’s executive assistant CEO, “We have made air travel
accessible to low income earners.” 3
Fast Growth of VivaColombia

VivaColombia was the first Colombian airline to adopt a low-cost business model, ensuring its
rapid growth. The company’s market share grew from 3% in 2012 to 10% in 2015. During that
period, the Colombian air travel market grew by 6.5 million passengers, 2.6 million of whom were
carried by VivaColombia. In other words, VivaColombia had cornered 40% of the new passenger
market. 4
When VivaColombia began operations on May 25, 2012, it had 100 employees, eight domestic
routes, and three Airbus A320 aircraft (see Exhibit 4). Between July and October 2012, the airline
acquired two more aircraft, ending 2012 with five aircraft and having carried 558,120 passengers.
By December 2012, it had racked up sales of US$15.6 million,5 with a net loss of US$5.8 million.6
For details of the Colombian aviation market, see Exhibit 5.
In June 2013, the airline acquired its sixth A320 aircraft. That year, it carried 1,837,135 passengers
on eleven domestic routes. It had 225 employees. In fiscal 2013, its sales were US$53.3 million,
with a net loss of US$2.94 million.
1 VivaColombia. Quoted in Dinero, “¿Cómo funciona una aerolínea de bajo costo?” August 12, 2011
(http://www.dinero.com/negocios/articulo/como-funciona-aerolinea-bajo-costo/133166).
2 El tiempo (http://www.eltiempo.com/archivo/documento/CMS-16379821)
3 Semana, Interview with VivaColombia’s Executive Assistant CEO (http://www.semana.com/nacion/articulo/vivacolombia-un-
caos-un-modelo-de-negocio/382418-3).
4 Calculations made by the authors based on Aerocivil statistics (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-
actividades-aeronauticas/boletines-operacionales).
5 Exchange rate for COP to USD is COP 3,000 per USD 1 (January 4, 2017).
6 Aerocivil aviation authority (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-aeronauticas/Paginas/estadisticas-
financieras.aspx).
© HEC Montréal 5
In the second quarter of 2014, VivaColombia opened its first international routes: Medellin-
Panama, Bogotá-Panama, Bogotá-Quito (Ecuador), and Bogotá-Lima (Peru). 1 In 2014, it carried
2,217,585 domestic flight passengers and 65,480 international flight passengers. It did not acquire
any new aircraft, but the number of employees increased to 300. Its sales were US$78.2 million,
with a net profit of US$3.3 million.
In 2015, the airline acquired three more aircraft, for a total of nine, all of them Airbus A320s. 2 The
airline carried 2,670,393 domestic flight passengers and 249,271 international flight passengers. It
had 21 domestic routes and, in December 2015, added two new international routes: Medellin-
Miami and Bogotá-Miami. By the end of 2015, the number of employees had grown to almost 500
and sales were US$119.2 million, with a net profit of US$971,653. For a map of the company’s
domestic and international routes, see Exhibit 6.
During 2012–2015, VivaColombia launched some international routes, but they involved just short
flights to neighbouring countries, so no changes were made to the business model. The company
continued to use the same aircraft and crews it used in the domestic market.
Rapid growth leads to service complaints

The company’s rapid growth led to complaints of poor service. Approximately 20% of the
passengers on VivaColombia’s domestic and international flights said they would choose a
different airline next time. 3 Some of this dissatisfaction resulted from the fact that the airline
operates in emerging economies, where traditional airlines are still the rule. Customers are not used
to the low-cost business model and are surprised when they experience a no-frills flight for the first
time. Other problems encountered by VivaColombia are discussed below.
Poor customer relations: Some complaints related to the treatment of customers by airline
employees. For example, a 77-year-old passenger with surgery-related mobility problems asked a
VivaColombia employee for a wheelchair. 4 The employee refused to help because the passenger
could not provide proof of the surgery. On another occasion, a domestic flight was delayed for two
hours. The unsympathetic and unhelpful response of employees led to the filing of numerous
complaints. 5
Misinformation: An example of misinformation was reported at El Dorado airport in Bogotá.

Passengers who had purchased their tickets online arrived at the airport at the designated time. The
employee at the check-in counter directed them to the wrong gate, causing eleven passengers to
miss their flight. The airline did not respond to their complaints, and the passengers had to buy a
second ticket at two or three times the initial price. The civil aviation authority reported that there
1 VivaColombia newsletter (https://www.vivacolombia.co/co/info/boletines)

2 Ibid.
3 Semana, interview with VivaColombia’s vice-president (http://www.semana.com/nacion/articulo/vivacolombia-un-caos-un-
modelo-de-negocio/382418-3).
4 Semana (http://www.semana.com/nacion/multimedia/vivacolombia-niegan-silla-de-ruedas-mujer-de-77-anos/381874-3)
5 El tiempo (http://www.eltiempo.com/archivo/documento/CMS-11972985)
© HEC Montréal 6
had been a problem with the airport screens that day; in addition some VivaColombia employees
had confused the names of some flights and misinformed passengers, who had thus been delayed. 1
Flight delays and cancellations: On June 25, 2012, just one month after the company’s inaugural
flight, passengers protested the delay of a flight between Bogotá and Cartagena. Fred Jacobsen, the
company’s founding president, went to the airport to speak to customers and explain to them what
had happened. 2 In his words, “Demand is high. We are hiring additional call centre staff, and we’re
also training new pilots. We’re not blaming the passengers. This is our responsibility.”
In September 2015, a flight between Bogotá and Monteria was cancelled. Angry passengers
protested on the runway of El Dorado International Airport, in Bogotá. Jacobsen’s answer was
firmer this time. 3 “Nothing justifies passenger rioting. We have a plane on scheduled maintenance,
and a plane was damaged on Thursday night, so it can’t fly for safety reasons. The problem is being
handled; we are buying the spare part that is needed, and this left us without a plane, forcing us to
cancel the flight.”
Need to adapt to a new business model: Most tickets are sold online, and the company’s website
clearly explains that fees will be charged for additional services such as extra baggage, preferential
boarding, seat assignment, and airport check-in (for those who fail to check in online). The problem
is that many customers don’t see this information before buying their ticket. For full information
about the supplemental fees charged by the airline, see Exhibit 3.
More information on customer complaints can be found in Exhibit 7.
Colombia’s aviation market

Between 2012 and 2015, there was an increase in both supply and demand. The supply (available
seats) grew from 35.4 million in 2012 to 47.5 million 4 in 2015. The demand (seats sold) increased
from 27.5 million in 2012 to 37.3 million in 2015.
Factors boosting Colombia’s aviation market included economic growth and the size of the middle
class. Although the country’s economy decelerated between 2012 and 2015, 5 its GNP grew at an
average annual rate of 4.1% during the same period. The Colombian middle class represented
30.5% of its total population. In other words, in 2015, 14.7 million of Colombia’s 48.3 million
inhabitants belonged to the middle class. 6
Between 2010 and 2015, the number of foreign visitors to Colombia grew by 4.5%. The regions
posting the greatest increase in number of visitors were the Asia Pacific region (5.4%), North and
1 La FM Radio Station News Program (http://www.lafm.com.co/nacional/pasajeros-viva-colombia-denuncian-fallas-la-atencion/)
2 El Tiempo, June 25, 2012 (www.eltiempo.com)
3 El Espectador, September 11, 2015 (www.elespectador.com/noticias)
4 Aerocivil aviation authority supply and demand statistics (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-
5 National Statistics Department – DANE – National Accounts (http://www.dane.gov.co/index.php/estadisticas-por-tema/cuentas-
nacionales/cuentas-nacionales-trimestrales#pib-oferta-y-demanda)
6 Semana (www.semana.com/nacion/articulo/dane-colombianos-de-clase-media-superan-los-pobres/442938-3)
© HEC Montréal 7
South America (5%), and Europe (4.7%); 1 79.5% of the 2.28 million foreigners who arrived in
Colombia in 2015 came from North and South America, and about 18% came from Europe. In
terms of country, the largest number of travellers came from the U.S., followed by those from
Venezuela, Brazil, Argentina, and Ecuador. 2
In descending order, Colombian nationals living overseas visit primarily from the U.S., Spain,
Panama, Canada, and Chile. The six countries most visited by the 3.85 million Colombian nationals
who travelled in 2015 were, in descending order, the U.S., Venezuela, Panama, Brazil, Mexico,
and Ecuador. However, travel agency sales figures for this period indicate that the most popular
travel destinations were the U.S., Mexico, Panama, Brazil, Spain, and the Dominican Republic –
the discrepancy is due to the fact that most Colombians book their flights online, not through
agencies. 3
To attract visitors from Brazil, Colombia’s tourism office promotes tourism experiences in the
vacation segment related to nature, culture, sun, and beaches, particularly destinations in
Cundinamarca, Chocó, Meta, Bolívar, San Andrés, and Magdalena.
Current competitors of VivaColombia

Colombia’s aviation market is dominated by large multinationals. In December 2015, seven
airlines, including VivaColombia, offered flights within the country. Four of those seven airlines
also offered connections between Colombia and other countries. The international market is served
by 35 companies, 16 of which cover 88.7% of the market.
In 2015, the main competitors in the domestic market were Avianca, Lan Colombia, Copa Airlines
Columbia, Satena, Easy Fly, and Aerolíneas de Antioquia. (For details about these airlines, see
Exhibit 8.)
The decision
A strategic decision must be made at the board meeting on December 29, 2015. This decision will
determine where to invest the company’s limited financial resources.
Option A: Consolidate the company’s position in the domestic market
Some managers felt that consolidation was needed to increase customer satisfaction. Market studies
showed that consolidating its market position could help reduce customer dissatisfaction from 20%
to 5% over three years and increase demand by an average of 17% annually between 2016 and
2018. Failure to consolidate its market position would leave customer dissatisfaction at the same
level, and demand would increase by just 8% annually between 2016 and 2018.
1 Anato, Colombian association of travel and tourism agencies (www.anato.org)

2 Procolombia. Foreign tourism in Colombia (www.procolombia.co/node/1540)
3 Anato, Seasonal surveys (www.anato.org/es/investigaciones)
© HEC Montréal 8
Managers who favoured consolidation were also concerned about competition – both from traditional
competitors and from Wingo and Norwegian, two low-cost airlines that were poised to enter the
Colombian market. VivaColombia was still the only low-cost airline in Colombia, but the entry of
competitors offering new routes could put VivaColombia at a competitive disadvantage.
Wingo, set to start operations in December 2016, is a subsidiary of Copa Holdings, parent company
of Copa Airlines (both well established in the Colombian and international markets). Wingo will
operate routes between major Colombian cities and in Latin America, with routes between Colombia
and Mexico, Cuba, the Dominican Republic, Ecuador, Panama, Aruba, Costa Rica, and Venezuela.1
Norwegian, a Norwegian airline, was founded in 1993. It is the third largest low-cost airline in
Europe, operating 450 routes to over 150 destinations around the world. Its main destinations include
Europe, North Africa, the Middle East, the Caribbean, Asia, and the United States. In the coming
months, Norwegian will open a route from Madrid, Spain, to Buenos Aires, Argentina. Within a few
years, it aims to connect the entire South American and Caribbean markets with Europe. 2
To consolidate its position in the Colombian market, major investments would be required. First, the
company would have to purchase two additional A320 aircraft to increase the number of daily
frequencies (round trips) and reduce customer complaints about flight cancellations and delays.
Second, it would have to hire 100 additional employees to handle operations and customer service.
Third, it would have to launch a communication campaign to raise awareness of its business model.
Fourth, it would have to provide customer service training for all its employees. Fifth, it would have
to pay a one-time fee of US$1,000,000 for the operating rights for the two new aircraft. Further details
regarding this option can be found in Exhibit 9.
Option B: Expand into Brazil
Other board members thought that expansion into Brazil represented a unique opportunity. They
argued in favour of the new route, presenting the following arguments:
Growing demand. This market grew by 12% in 2013, 18% in 2014, and 25% in 2015. 3 According to
the Aeorocivil aviation authority, 500,000 people flew between Colombia and Brazil in 2015, 4 and
this market is expected to grow by 20% annually between 2016 and 2018. Based on demand studies,
the directors estimate potential market penetration of 15%, 17%, and 20% in 2016, 2017, and 2018,
respectively. Over one million people are expected to fly between Colombia and Brazil in the next
five years. 5 In addition, Sao Paulo offers the main air connections between South America, Asia, and
Africa. According to Migration Colombia, the cities most visited by Brazilian travellers are Bogotá,
Cartagena, Medellin, San Andrés, and Cali. 6
1 Wingo (https://www.wingo.com/en/about-us/our-company)
2 Norwegian (https://www.norwegian.com/uk/about/our-story/)
3 ProColombia, agency attached to Colombia’s Ministry of Commerce, Industry, and Tourism (www.procolombia.co/actualidad-
internacional/mice/turismo-de-brasil-hacia-colombia)
4 Aerocivil aviation authority, air transport statistics (http://www.aerocivil.gov.co/atencion/estadisticas-de-las-actividades-
5 Procolombia, op. cit.
6 Ibid.
© HEC Montréal 9
The Bogotá-Sao Paulo route recently approved by Aerocivil. This route had to become operational
within a year; otherwise the company would have to reapply for an operation permit and pay a
monetary penalty for non-execution. In addition, the Aerocivil aviation authority authorizes only a
limited number of international routes, 1 so there was a risk that this opportunity would be lost if they
waited.
The size of Brazil’s economy and its trade relations with Colombia. In 2015, Brazil ranked among
the world’s top eight economies, 2 and it is expected to be the world’s sixth largest economy by
2030. Economic relations between Colombia and Brazil are improving; with the creation of the
Pacific Alliance trade bloc, Brazil has been strengthening trade ties with Colombia. An average of
four macro business rounds are carried out between Colombian and Brazilian entrepreneurs every
year – two in Sao Paulo, one in Bogotá, and one in Medellin. Bi-national trade is expected to grow
by over 20% annually starting in 2016. 3
The competition. Only three major airlines currently fly between Colombia and Brazil – LATAM,
Avianca, and Copa Airlines – so it would be possible to quickly acquire a significant market share.
In 2015, most Brazilian companies were traditional, but low-cost airlines were gaining ground. We
found no information about the entry of Brazilian airlines in the Colombian market. To learn more
about Brazil’s major airlines, see Exhibit 10.
Expansion into Brazil would require major investments. First, the company would have to acquire a
larger aircraft for long-haul flights: the Airbus A350-800 XWB, a large, modern aircraft providing
the necessary comfort for long flights. Second, it would have to hire an additional 100 employees:
80 for aircraft operations and 20 for administrative work. Third, it would have to pay the Brazilian
civil aviation authorities a one-time fee of US$1,000,000 to acquire the rights to operate the route.
More information about the costs and operating expenses of expanding into Brazil can be found in
Exhibit 11.
Notwithstanding the benefits of expanding into Brazil, some managers worried about the difficulties
involved in combining the low-cost with the traditional business model. The business model of low-
cost airlines is based on using just one type of aircraft, and this would have to change if the airline
expanded into Brazil. Offering two business models could also create confusion among the target
audience. There was also the danger of pilot dissatisfaction: pilots hired for the A350-800 would earn
more to fly the larger plane on long-haul flights. This could give rise to discontent on the part of the
older staff, and possibly a labour conflict.
Both sides made excellent points, and the board members wondered which option would be in the
company’s best interest. Their decision would affect not only VivaColombia’s current market
position but also its competitive position and would have a major impact on the company’s
development over the short and long term.
2017-09-25
1 This was invented by the authors.

2 El País, News FMI (https://economia.elpais.com/economia/2015/04/15/actualidad/1429060990_180502.html)
3 Some of this data was invented by the authors.
© HEC Montréal 10
Exhibit 1
VivaColombia shareholder groups
Grupo Fast: the four entrepreneurs who founded the company (William Shaw, Juan Emilio Posada,
Gabriel Migowski, and Fred Jacobsen). This group raised the initial capital and has a share
participation of 25%.
Grupo Bolívar – through its affiliate company Sentido Empresarial: Grupo Bolívar has over
70 years’ experience and has investments in the financial, construction, and publishing sectors,
among others. This group has a share participation of 25%.
Grupo Iamsa: A Mexican bus operator that operates a fleet of over 11,000 coaches and transports
350 million users annually in 22 Mexican states. The group includes Grupo Flecha Amarilla and
Grupo Toluca. Grupo Iamsa founded VivaAerobús, a low-cost airline serving Mexico, with
Irelandia Aviation. This group has a share participation of 25%.
Irelandia Aviation: An Irish company owned by the Ryan family that specializes in developing
low-cost carriers (LCC). It was founded by Declan Ryan, chair of VivaColombia’s board of
directors. To date, it has developed 5 LCCs – Ryanair, founded in Ireland in 1985; Tiger Airways,
founded in Singapore in 2004; Allegiant Air, founded in the U.S. in 2005; VivaAerobus, founded
in Mexico in 2006; and VivaColombia, founded in Colombia in 2012. This group has a share
participation of 25%.
© HEC Montréal 11
Exhibit 2
Operational savings achieved by VivaColombia*
Fewer employees 2%
Lower ticket sale and reservation costs 3%

Savings generating factors
No sales commissions 6%
No free in-flight food or beverage service 6%
Lower parking charges 10%
Single aircraft type 2%
Less expensive airports 6%
Lower equipment costs 3%
Shorter turn times 3%
Tighter seating 16%
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

Saved %
* Percentage of operational savings compared to traditional airlines
Source: VivaColombia, 2015
© HEC Montréal 12
Exhibit 3
Supplemental fees charged by VivaColombia
VivaColombia passengers may pay for additional services not included in the basic fare. These
services may be purchased on the company’s website, through the call centre, at the counter, or at
the boarding gate. The following fares apply per person per trip. 1
Asegura tu tarifa* (Freeze your fare)

Minimum fee in USD Maximum fee in USD
Domestic routes 1.67 1.67
International routes 5 5
Asigna tu silla (Choose your seat)
Check-in en el aeropuerto** (Airport check-in)
Equipaje a bordo*** (Carry-on luggage)
Domestic routes 9.67 23
Equipaje documentado. Primera pieza**** (Checked luggage. First bag)
Domestic routes 8.34 15
Segunda pieza documentada (Checked luggage. Second bag)
Domestic routes 15 21.67
1 Source: VivaColombia (https://www.vivacolombia.co/en-co/additional-services/addi/additional-services-fees)
© HEC Montréal 13
Tercera pieza documentada (Checked luggage. Third bag)

Additional kilogram per checked piece
Express line
Pets. Only for domestic flights and a maximum weight of 10 kg
International routes n/a n/a
Carry-on musical instruments or sports equipment
Checked sports equipment or musical instruments
* This service allows passengers to freeze the fare for 72 hours while they decide whether or
not to buy a ticket.
** If passengers don’t check in online four hours before the flight, they must arrive at the airport
one hour before the scheduled departure time and pay for this service at the VivaColombia
counter.
*** With this service, passengers can take a 12 kg 55 x 45 x 25 cm bag in the cabin with them
and have boarding priority
**** Purchasing this service allows passengers to check a bag weighing up to 20 kg.
Source: VivaColombia (https://www.vivacolombia.co/en-co/additional-services/addi/additional-services-fees)
© HEC Montréal 14
Exhibit 4
A320 and A350 XWB Airbus Aircraft Family 1
The A320 is a single aisle, short- to medium-haul aircraft with a range of about 3,500 nautical
miles. As a result of an optimized cabin space and increased exit limits, the A320 accommodates
165 passengers in two classes or up to 189 in a high-density configuration.
The A320’s advanced technology includes the extensive use of weight-saving composites, an
optimized wing that is 20% more efficient than those of earlier designs, and a centralized fault
display to facilitate problem solving and lower maintenance costs.
The A320’s right-sized fuselage is seven inches wider than that of its competitors, enhancing
passenger comfort and increasing revenue opportunities for airlines. The A320 is one aircraft in
four sizes (A318, A319, A320 and A321) meaning it is the most successful and versatile aircraft
family ever, offering more spacious seats, wider aisles, and larger overhead storage bins.
A350 XWB (Xtra Wide Body) Aircraft Family. This is Airbus’s new wide-body aircraft family.
It includes the A350-800, A350-900, and A350-1000 aircraft. The A350 XWB is setting a new
efficiency standard in its class with 25% less fuel consumption compared to its current long-range
competitors. It also offers greater passenger comfort, more personal space, and 18-inch-wide
economy class seats. These aircraft are for medium and long-range operations.
A350-800 is the shortest version of the new A350 XWB body. It can hold 280 passengers in a
typical three-class cabin and offers 8,200 nautical-mile flight autonomy.
The A350-800 is one of the first Airbus aircraft to incorporate the company’s innovative new
concept in jetliner cabins with the “Airspace by Airbus” brand, bringing together an enhanced
experience for passengers and optimum performance for airlines based on four dimensions:
comfort, ambience, service and design. It maximizes both passenger and crew comfort and
operating efficiency.
1 Retrieved from AIRBUS Commercial aircraft:

http://www.aircraft.airbus.com/aircraftfamilies/passengeraircraft/a320family/
http://www.airbus.com/aircraftfamilies/passengeraircraft/a350xwbfamily/
© HEC Montréal 15
Exhibit 5
Seat supply and demand in Colombia’s aviation market
between 2012 and 2015
Passenger seat supply and demand
in the Colombian market 2012 2013 2104 2015
Seat demand in the domestic market 18,845,477 21,511,442 23,026,738 25,378,658
Seat demand in the international market 8,661,481 9,881,799 10,850,179 11,949,538
Total seat demand 27,506,958 31,393,241 33,876,917 37,328,196
Seat supply in the domestic market 24,135,710 27,049,889 29,438,262 32,327,865
Seat supply in the international market 11,271,109 12,723,513 13,705,406 15,257,626
Total seat supply 35,406,819 39,773,402 43,143,668 47,585,491
Number of passengers carried per

airline in the domestic market 2012 2013 2104 2015
Avianca 11,544,762 12,584,058 13,839,652 15,424,402
Lan Colombia 3,595,512 4,035,633 4,407,048 4,637,217
VivaColombia 558,120 1,837,135 2,217,585 2,670,393
Satena 751,401 791,389 930,145 1,017,092
Easy Fly 632,534 742,974 797,519 935,875
Aerolineas de Antioquia 260,371 274,988 289,446 341,235
Copa Airlines Colombia 1,502,777 1,245,265 545,039 352,444
Total 18,845,477 21,511,442 23,026,434 25,378,658
Number of passengers carried per

airline in the international market 2012 2013 2104 2015
Avianca 3,541,834 3,830,325 3,617,956 4,104,073
Copa Airlines 1,356,333 1,460,640 1,679,032 1,609,570
Lan Colombia 96,228 346,652 405,290 403,896
VivaColombia 0 0 65,480 249,271
Colombian air transportation

market growth 2012 2013 2104 2015
Market growth in millions of
passengers in the domestic market 2,421,566 2,665,965 1,515,296 2,351,920
Market growth in millions of
passengers in the international market 1,013,767 1,220,318 968,380 1,099,359
Source: Aeronáutica Civil Colombiana, Statistics 2016
© HEC Montréal 16
Exhibit 6
VivaColombia’s existing routes in the Colombian and international markets
International Routes Domestic Routes
Brazil
Sao Paulo
Source: VivaColombia, 2016
© HEC Montréal 17
Exhibit 7
Percentage of service complaints in the Colombian market per airline between
2012 and 2015
Complaints per airline – domestic passengers. Between 2012 and 2015. Percentage of
complaints x 100,000 passengers
2012 2013 2014 2015

COPA COLOMBIA 12.52% 4.01% 0.36% 0.97%
LAN COLOMBIA 31.87% 32.22% 16.40% 14.13%
AVIANCA 36.91% 33.44% 39.04% 23.41%
SATENA 4.07% 4.01% 2.67% 13.85%
EASYFLY 2.60% 2.45% 2.32% 4.71%
VIVA COLOMBIA 10.89% 20.18% 36.90% 37.81%
AEROLINEAS DE ANTIOQUIA 1.14% 3.68% 2.32% 5.12%
TOTAL DECEMBER 2015 100.00% 100.0% 100.0% 100.00%
Complaints per Airline – international passengers. Between 2012 and 2015. Percentage
of complaints x 100,000 passengers
2012 2013 2014 2015

COPA COLOMBIA 10.05% 7.51% 6.25% 7.19%
LAN COLOMBIA 3.83% 7.51% 2.50% 5.40%
AVIANCA 34.93% 38.15% 37.08% 28.78%
VIVA COLOMBIA 0% 0% 7.92% 15.11%
Source: Complaints report. Aeronáutica Civil Colombiana, 2016.
© HEC Montréal 18
Exhibit 8
Top competitors in the domestic market
AIRLINE DESCRIPTION
The commercial brand that represents the Latin American airlines integrated in
Avianca Holdings S.A. This airline has a traditional business model and over 20,000
employees. Specialized in air cargo and passenger transportation, Avianca serves 105
direct destinations in 28 countries in America and Europe. It flies to major and
intermediate cities in Colombia and international destinations. Through its
membership in Star Alliance, 1 it offers connecting flights to over 1,300 destinations
AVIANCA in 192 countries on five continents. Avianca has operated routes between Colombia
and Brazil for over twenty years. In 2010, it merged with Taca, the biggest airline in
Central America, in an alliance that includes Aerogal from Ecuador and Tampa Cargo.
The company has a fleet of 180 short-, medium-, and long-haul aircraft. In 2015,
Avianca carried 19.5 million passengers in the domestic and international markets. In
fiscal 2015, its sales were US$1,788 million, with a net loss of US$116.5 million in
the domestic and international markets.
In August 2010, LAN and TAM merged to create a single airline called LATAM
Airlines Group. LAN was founded in Chile in 1929 as the national airline specialized
in the transportation of passengers, cargo, and mail. It has a traditional business model.
LAN TAM Líneas Aéreas was founded in Brazil in 1976. LATAM has over 40,000
COLOMBIA – employees and 280 aircraft. It serves 115 destinations in 23 countries on the American
LATAM continent, flying to major and intermediate cities. Lan Colombia has offered flights to
Brazil since June 2012. In 2015, it carried 5.04 million passengers in the domestic and
international markets. In fiscal 2015, its sales were US$280.6 million, with a net loss
of USD 22.3 million in the domestic market.
Established in 1947 in Panama under the name of Compañía Panameña de Aviación,
this airline has a traditional business model and provides air cargo and passenger
transportation services. It opened its first routes to Colombia in 1969–70. With a fleet
COPA of 100 aircraft, it serves 76 destinations in intermediate and major cities in 31
AIRLINES countries in America. It began flying to Sao Paulo, Brazil, in 2005. In 2014, Copa
COLOMBIA started to shut down its domestic operations to focus on international destinations. In
2015, it carried 1.9 million Colombian passengers, 1.6 million of whom travelled to
international destinations. In fiscal 2015, its sales were US$278 million, with a net
loss of US$44.87 million.
Servicio Aéreo a Territorios Nacionales S.A. – SATENA is a state-owned Colombian
airline founded in 1962 to serve regions not served by other airlines. It has a traditional
business model and provides both air cargo and passenger transportation services. The
SATENA company is linked to the Colombian Ministry of Defense, and by 2015 it had a fleet
of 15 aircraft, each with a seating capacity of between 17 and 76 passengers. It has no
international flights. In 2015, the airline carried 1.1 million passengers. Its sales were
US$64.5 million, with a net loss of US$15.3 million.
A Colombian airline founded in 2007. It has a traditional business model and provides
EASY FLY both air cargo and passenger transportation services. It serves medium-sized
Colombian cities. By 2015, the airline had 15 aircraft, each with a seating capacity of
1 Star Alliance is the largest global airline alliance in terms of daily flights, destinations, countries of destination, and number of
member airlines. Established in 1997, it boasts the largest network of routes to almost every country in the world, offering global
prestige and integrated services for international travellers. (www.Avianca.com). June 2016.
© HEC Montréal 19
between 30 and 50 passengers. In fiscal 2015, it carried 935,875 passengers; its sales
were US$47 million, with a net profit of US$268,719.
A Colombian airline founded in 1982 to offer regional executive charter flights within
Colombia. It has a traditional business model and offers no international flights. Its
AEROLÍNEAS
operations centre is in Medellin. In 1998, the company became a commercial airline
DE
connecting Medellin to other medium-sized cities within the same department. It
ANTIOQUIA
offers air cargo services on all its routes. It has a fleet of 12 aircraft, each with a seating
– ADA
capacity of between 19 and 39 passengers. In 2015, the airline carried 341,235
passengers; its sales were US$18.6 million, with a net profit of US$148,254.
© HEC Montréal 20
Exhibit 9
Operating costs and expenses to consolidate domestic market position
Two new aircraft would have to be acquired through a lease agreement requiring monthly
payments. When leasing aircraft, depreciation costs are not deductible.
The company would have to pay a one-time fee of US$1,000,000 to acquire the operating
rights to the two aircraft. One hundred new employees would have to be hired: sixty for aircraft
operations and forty to improve customer service.
Each aircraft would complete four frequencies (round trips) daily, 362 days a year, and would
have three maintenance days per year.
In 2016, the operating costs and expenses (including leasing) to become firmly established in
the Colombian market would be US$18,811,000. These operating costs and expenses would
increase by 20% in 2017 and by 22% in 2018. This would not include the initial US$1 million
investment to obtain operating rights for the two new aircraft.
These costs and expenses are associated with the operation of the two aircraft (fuel, airport
parking, taxes, etc.) plus administrative, staffing, communications, and miscellaneous
expenses.
In 2015, the average price of a single VivaColombia domestic flight ticket is US$85. In an
industry that is witnessing increased competition, this price would decrease to US$80 in 2016,
US$78 in 2017, and US$76 in 2018.
The income tax rate in Colombia is 33%.
© HEC Montréal 21
Exhibit 10
Top Brazilian airlines
AIRLINE DESCRIPTION
Formerly TAM Airlines – the Brazilian brand of the Latam Airlines
Group. Currently the largest Brazilian airline by market share and fleet size. It
has a traditional business model. In 2015, LATAM had a fleet of 164 aircraft
LATAM
and flew to over 116 national and international destinations. It held 36.7% of
AIRLINES
the domestic and 78.5% of the international market share in terms of
BRAZIL
passenger-kilometres flown. In 2015, LATAM carried 32.2 million passengers
and reported operating results of US$152.3 million, with a net profit of
US$65.6 million. LATAM has 26,300 employees.
A low-cost Brazilian airline. It is the second largest airline in Brazil and the
third largest in Latin America with 37% of the domestic market and 15% of
GOL
the international market. In 2015, GOL had a fleet of 144 aircraft, flew to 64
AIRLINES
national and international destinations, carried 50 million passengers, and
reported revenues of US$222.8 million. It has about 16,000 employees.
A low-cost Brazilian airline. It is the third largest airline in Brazil. In 2015,
Azul had 17.0% of the domestic and 7.8% of the international market share in
AZUL terms of passenger-kilometres flown. In 2012, AZUL announced a merger with
BRAZILIAN TRIP Airlines. By 2015, it had a fleet of 120 aircraft, mainly Embraer jets that
AIRLINES fly to over 99 national and international destinations. AZUL flies to Argentina,
the United States, Portugal, Paraguay, and French Guiana. In 2015, it had a net
profit of US$187.3 million.
A traditional airline based in Sao Paulo. It is part of the Synergy Group – the
major shareholder of Avianca Holdings. In 2015, Avianca Brazil had a fleet of
AVIANCA
47 aircraft and flew to 24 destinations. In 2015, it had 2.54% of the domestic
BRAZIL
market, carried more than 2.1 million passengers, and was the fourth largest
airline in Brazil.
Source: www.total.com.br/institucional/historia, 2015
© HEC Montréal 22
Exhibit 11
Operating costs and expenses of expanding into Brazil
To fly between Colombia and Brazil, an A350-800 XWB aircraft would have to be acquired
through a lease agreement requiring monthly payments. The aircraft would complete four
frequencies a week. Maintenance would be carried out twice a year.
One hundred new employees would have to be hired: eighty for aircraft operations and twenty
for administration.
In 2016, the operating costs and expenses of expanding into Brazil would be US$40,350,000.
These would increase by 20% in 2017 and by 20% in 2018. They would include the leasing
payments and the annual cost of the foreign exchange hedge (FOREX hedge) for USD
transactions carried out in the expansion operation plus operating costs and expenses
associated with taxes, fuel, airport parking, operations, and administration.
A route analysis determined that it would be possible to complete four frequencies per week
in the first years and increase to five frequencies per week in the second year and six
frequencies per week in the third year. This strategy would meet projected demand for the
next three years, enabling the airline to use its installed capacity for the A350-800 to explore
growth in other international markets.
The average price of a round-trip flight between Colombia and Brazil would be US$450 in
2016, US$400 in 2017, and US$350 in 2018. The income tax rate in Colombia is 33%.
The company would have to pay a one-time fee of US$1,000,000 to acquire the operating
rights to the new route.
When leasing aircraft, depreciation costs are not deductible.
© HEC Montréal 23

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Volume 15

VivaColombia: The Challenge of Growing a Low-Cost Airline in

The origins of VivaColombia

VivaColombia’s business model

1 VivaColombia, About us (https://www.vivacolombia.co/en-co/info/about-us)

Fast Growth of VivaColombia

Rapid growth leads to service complaints

Misinformation: An example of misinformation was reported at El Dorado airport in Bogotá.

1 VivaColombia newsletter (https://www.vivacolombia.co/co/info/boletines)

More information on customer complaints can be found in Exhibit 7.

Colombia’s aviation market

Current competitors of VivaColombia

Option A: Consolidate the company’s position in the domestic market

1 Anato, Colombian association of travel and tourism agencies (www.anato.org)

Option B: Expand into Brazil

1 This was invented by the authors.

Lower ticket sale and reservation costs 3%

No free in-flight food or beverage service 6%

Lower parking charges 10%

Single aircraft type 2%

Less expensive airports 6%

Lower equipment costs 3%

Shorter turn times 3%

Tighter seating 16%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

* Percentage of operational savings compared to traditional airlines

Source: VivaColombia, 2015

Asegura tu tarifa* (Freeze your fare)

1 Source: VivaColombia (https://www.vivacolombia.co/en-co/additional-services/addi/additional-services-fees)

Tercera pieza documentada (Checked luggage. Third bag)

Source: VivaColombia (https://www.vivacolombia.co/en-co/additional-services/addi/additional-services-fees)

1 Retrieved from AIRBUS Commercial aircraft:

Number of passengers carried per

Number of passengers carried per

Colombian air transportation

Source: Aeronáutica Civil Colombiana, Statistics 2016

International Routes Domestic Routes

Source: VivaColombia, 2016

2012 2013 2014 2015

2012 2013 2014 2015

Source: Complaints report. Aeronáutica Civil Colombiana, 2016.

The income tax rate in Colombia is 33%.

Source: www.total.com.br/institucional/historia, 2015

When leasing aircraft, depreciation costs are not deductible.

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