VZCZCXRO1664
RR RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0076/01 0291914
ZNR UUUUU ZZH
R 291914Z JAN 07
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC 1647
RUEHME/AMEMBASSY MEXICO 2448
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEANHA/FAA NATIONAL HQ WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 6694

UNCLAS SECTION 01 OF 03 MONTERREY 000076 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EB/TRA/AVP 
 
E.O. 12958: N/A 
TAGS: EAIR ECON EINV BTIO MX
SUBJECT: NEW MONTERREY-BASED LOW-COST AIRLINE VIVAAEROBUS BEGINS 
OPERATIONS WITH AMBITIOUS PLANS 
 
MONTERREY 00000076  001.2 OF 003 
 
 
¶1.  (SBU)  SUMMARY.  Vivaaerobus, a new low-cost carrier 
headquartered in Monterrey, began operations on November 30, 
2006 as the latest in a series of six new airlines to begin 
flying from Monterrey's international airport this past year. 
With the support of the Nuevo Leon state government and with 
financial backing from the Ryan family and Mexico's largest 
passenger bus company IAMSA, Vivaaerobus secured Mexican federal 
civil aviation approval to begin flying in only ten months. 
While the airline has had two highly publicized operational 
problems, it has attracted first-time air travelers with low 
fares.  Like other low-cost carriers operating in Mexico, 
Vivaaerobus hopes to fly to the United States in 2007.  Larger 
airlines like AeroMexico claim not to be concerned with 
Vivaaerobus because their routes and targeted consumer base are 
different.  However, small low-cost airlines have reduced their 
fares in the short-term to compete with Vivaaerobus' low fares 
while larger companies have stepped-up their marketing strategy 
to mitigate Vivaaerobus' appeal.  END SUMMARY. 
 
----------------------------------- 
VIVAAEROBUS IS BORN 
----------------------------------- 
 
¶2. (U)  On November 30, 2006, the Governor of Nuevo Leon 
inaugurated a new Monterrey-based low-cost airline called 
Vivaaerobus.  The airline is a joint venture between the Ryan 
family, the founders of the well-known European low-cost airline 
RyanAir, and Mexico's largest passenger bus company IAMSA. 
RyanMex holds 49% of shares in the airlines while IAMSA has the 
majority stake.  With an initial investment of $50 million, the 
airline began operations with two Boeing 737-300 airplanes, nine 
domestic destinations, and a staff of just over 200, all based 
at Monterrey's international airport.  Currently, the airline 
operates daily flights from Monterrey to Culiacan, Tijuana, 
Tampico, Acapulco, Leon, Veracruz, Cancun, Chihuahua, and Ciudad 
Juarez. 
 
¶3. (SBU)  Vivaaerobus Commercial Director, Carlos Chavarria 
Villareal, told Econoffs that the airline chose Monterrey as its 
hub because it received strong support from the Nuevo Leon state 
government in its negotiations with Mexico's civil aviation 
authority (DGAC).  The DGAC gave their final approval a mere ten 
months later, much to the surprise of industry insiders. 
Chavarria stated that the DGAC's middle managers, loyal to the 
traditional national airlines, were reluctant to cooperate with 
RyanMex at the beginning of the certification process.  Nuevo 
Leon Governor Natividad Gonzalez Paras and the State Secretariat 
of Economic Development (SEDEC) offered the airline its full 
support if it chose Monterrey as its hub.  After Vivaaerobus 
chose Monterrey as its headquarter in July 2006, then Nuevo Leon 
Secretary of Economic Development Gustavo Alarcon immediately 
 
SIPDIS 
pushed the DGAC to expedite Vivaaerobus' entry into the market. 
"We expect great things from this airline," confided one SEDEC 
official, "this is why the Nuevo Leon government supported 
Vivaaerobus so much."  SEDEC expressed their confidence in 
Vivaaerobus' ability to meet its 2007 goal of transporting one 
million passengers and adding USD$280 million to the state GDP. 
 
--------------------------------------- 
LONG LIVE THE AERO BUS? 
--------------------------------------- 
 
¶4. (U)  As the brainchild of RyanAir's founder Dr. Tony Ryan, 
Vivaaerobus subscribes to the traditional low-cost airline model 
found in Europe and the United States.  There is only one 
passenger class, one single type of airplane, unreserved 
seating, and short point-to-point routes.  Vivaaerobus hopes to 
capture an untapped consumer base with its low fares. "Only 4% 
of the Mexican population travels by air," said Chavarria, 
"We're trying to reach the 96% that has never been on an 
airplane."  The airline un-bundles its fares, separating out the 
ancillary taxes and fees to make the advertised airfare appear 
as low as 1 peso, a strategy that seems to be working in the 
short-term.  Anecdotal evidence from Consulate employees and 
outside contacts suggests that at least half of the passengers 
on any given flight are first-time air travelers. 
 
¶5.  (SBU)  According to Vivaaerobus Commercial Director 
Chavarria, the airline is off to a great start, operating at 
full capacity since its second week of service and following 
through on its plan to increase from nine to fifteen domestic 
destinations in 2007.  In addition, they plan to open up to 
under-served U.S. destinations within three-hours of flying time 
by developing a strategic alliance with Allegiant Airlines, the 
Las Vegas based company also partly owned by the Ryan family. 
 
MONTERREY 00000076  002.2 OF 003 
 
 
Despite their ambitious plans, Vivaaerobus is still operating 
with only two planes and has not expanded its routes. 
Vivaaerobus puts its two planes to maximum use, averaging a 
25-minute turnaround time and making flight attendants double as 
cleaning crews.  Perhaps due to these constraints, the airline 
has stranded passengers on at least two occasions, and according 
to press reports, angry stranded passengers complained about 
meager refunds and Vivaaerobus' inability to provide alternate 
transportation. 
 
--------------------------------------- 
THE COMPETITION REACTS 
-------------------------------------- 
 
¶6. (SBU)  American airlines Delta and Continental are not 
concerned with Vivaaerobus or other low-cost Mexican airlines 
because they are not competing for the same market.  Delta is 
not worried about additional competition on intra-Mexico routes, 
but "the greatest threat is coming from the big Mexican carriers 
who will compete for routes to Asia, an increasingly important 
part of the world" for Monterrey.  Similarly, Continental 
Airlines is not concerned that low-cost carriers like Interjet, 
Volaris, or Vivaaerobus will take business away from them, since 
they believe that it is unlikely that any Mexican low-cost 
carrier will be permitted to fly to the U.S.   "Just look at 
AeroCalifornia," said the Continental Airlines airport director, 
referring to the Mexican carrier that operated flights to Los 
Angeles prior to the temporary cessation of its operations in 
Summer 2006. 
 
¶7. (SBU)  In contrast, AeroCalifornia is concerned with the 
entrance of newer low-cost competitors like Vivaaerobus.  When 
the airline resumed operations in August 2006 after four months 
of "regrouping", it had a new Internet-based booking system and 
reduced tariffs in anticipation of Vivaaerobus' entry into the 
market.  In addition, the company is trying to improve customer 
service and efficiency in order to stay competitive with 
Vivaaerobus in Monterrey.  Like Vivaaerobus, AeroCalifornia now 
advertises a 20% cheaper fare for booking on-line. 
 
¶8. (SBU)  AeroMexico's Director of Operations in Monterrey, Raul 
Cardenas Fuentes, says that AeroMexico does not plan to reduce 
its fares or that of its subsidiary AeroLitoral to compete with 
Vivaaerobus, but they will emphasize their superior service in 
new advertising promotions.  According to Cardenas, "Wealthy, 
experienced business travelers in Monterrey do not want to fly 
these new airlines."  AeroMexico has focused its marketing 
campaign on the Monterrey business community, stressing to 
business travelers that AeroMexico and AeroLitoral offer 
superior service, such as "frequent flights, compensation if 
there is a problem, on-time arrivals, a frequent-flyer program, 
and partnerships with other international airlines [SkyTeam]." 
Cardenas added that he does not envision a long success story 
for any of Mexico's low-cost airlines, including Interjet, 
Volaris, and Vivaaerobus.  "The initial boom is positive for 
them, but any problem with any low-cost airline in the world 
affects them because it creates doubt in people's minds," he 
said, referring to the bankruptcy of American carrier 
Independence Air in January 2006 and Spanish carrier Air Madrid 
in December 2006.  Cardenas did admit, however, that AeroMexico 
may have to launch additional flights and lower prices to 
compete with the low-cost carriers when it privatizes in 2007. 
 
----------------------------------- 
COMMENT & ANALYSIS 
----------------------------------- 
 
¶9. (SBU)  Vivaaerobus is off to a relatively good start, 
operating at capacity and, so far, any negative publicity does 
not appear to have affected business.  If the company can appeal 
to a new consumer base, it may be able to expand as planned. 
Given RyanAir's standing as one of the most profitable airlines 
in the world and with a new business model that can appeal to 
casual travelers, Vivaaerobus could be successful.  Mike Szucs, 
the new COO of Vivaaerobus, has many years of experience with 
British Airways and most recently as COO of the European-based 
low-cost airline EasyJet.  However, Vivaaerobus is betting on 
obtaining flight routes to the U.S. to capture the market of 
Mexican migrants traveling between Mexico and the United States 
to visit family.  In order to maintain its low fares, compete in 
the domestic market, and open up U.S. routes, Vivaaerobus 
expects to attract more capital by listing on the Mexican Bolsa 
(stock market) by 2008.  However, it is striking that 
Vivaaerobus is still flying its routes on two planes, although 
they have grand expansion plans for as early as April 2007. 
 
MONTERREY 00000076  003.2 OF 003 
 
 
Vivaaerobus' cost structure is lower than more established 
Mexican airlines because its employees maintain an independent 
union organized under the company's human resources manager, 
thereby minimizing labor issues. 
 
¶10. (SBU)  Established airlines like AeroMexico are counting on 
customer loyalty and service guarantees to maintain their market 
share, despite their higher fares.  Although some business 
travelers may not be price sensitive, it seems likely, based on 
the success of Southwest Airlines in the U.S. market, that many 
travelers may try the low cost alternatives.  Moreover, 
RyanMex's partnership with the passenger bus company IAMSA and 
the growth of bimodal transportation companies like Alma and 
Avolar, which combine air travel to smaller airports with bus 
service to major Mexican and U.S. cities, provides a new 
strategy for growth.  If Vivaaerobus cannot secure U.S. routes, 
it could use bus services to complete passengers' journeys to 
major U.S. cities.  If they can secure additional planes, 
Vivaaerobus should be able to inject some much needed 
competition into the Mexican aviation industry. 
MORENO