Allegiant Air and Viva Aerobus want to disrupt U.S.-Mexico travel with a broad joint venture that could see them add more than 250 new routes in the market.
The proposed pact would effectively “merge” their combined U.S.-Mexico networks — only Viva flies in the market today — and allow the two budget carriers to coordinate schedules, jointly distribute and sell flights, and share revenues among other commercial aspects for at least 15 years, according to details unveiled on Wednesday. In addition, Allegiant would buy a $50 million stake in Viva as part of the deal. The partnership requires both Mexican Federal Economic Competition Commission and U.S. Department of Transportation sign off.
“This is an opportunity that our two carriers together can be stronger on [U.S.-Mexico] international flying,” Allegiant Chief Financial Officer Greg Anderson said in an interview. He cited a strong “cultural alignment” between Allegiant and Viva among rationales for the partnership and investment.
The tie up would also realize Allegiant’s long-held desire to serve Mexico that dates to at least 2004. Most recently, the airline applied for and received authority to launch transborder flights in May 2019 but never began service.
The partnership, while not the first proposed between two budget carriers, is comparable to the broad joint ventures long used by major carriers like American Airlines and Delta Air Lines in numerous international markets. Those pacts include one between Delta and Aeromexico covering the U.S.-Mexico market. In recent years, smaller U.S. carriers have increasingly objected to the tie ups as limiting their ability to enter new markets. For example, JetBlue Airways raised such objections to Delta’s proposed joint venture with WestJet in Canada.
But, when done well, joint ventures can pay off big for airlines. They expand a carrier’s reach into an international market — or markets — without having to make the physical investment in additional aircraft to access more markets. And, for customers, they can offer more travel options and expand the functionality of a loyalty relationship.
The question facing Allegiant and Viva is whether a joint venture, which comes with necessary added complexities, is worth it for two airlines focused on low costs. In addition to IT infrastructure investments, the partnerships include dedicated teams at each airline that coordinate on all aspects of the venture, and then go back to each carrier’s respective management teams for implementation.
“All of that means overlap, redundancy, complexity and inefficiency. Four words that ULCCs hate,” said Aviado Partners Managing Director Shakeel Adam. He questioned whether Allegiant and Viva even need an immunized joint venture to achieve the growth they outlined for the U.S.-Mexico market. For example in Asia, the independent AirAsia Group carriers — AirAsia in Malaysia, Thai AirAsia, etc — will often share the cost of adding a new destination by each launching service at the same time but they do this without a formal joint venture or similar commercial tie up between them.
Adam said he views the deal is a “pure equity investment” by Allegiant into Viva, and questioned whether the commercial partnership will ever come to pass.
Other budget carriers have pursued simpler interline or codeshare agreements to expand their networks internationally. For example, the codeshare between Frontier Airlines and Volaris is widely seen as a successful partnership that comes with none of the complexities of a joint venture.
Asked about added complexity, Anderson said that Allegiant does not anticipate any long-term cost pressure from the venture beyond some upfront IT investment expenses related to implementation. And on the investment, he said it “symbolizes” the airline’s commitment to the partnership. Allegiant will hold a “single-digits” stake in Viva once the deal closes, added Anderson.
Not everyone is as skeptical of the proposed alliance. Conor Cunningham, an airline equities analyst at MKM Partners who covers Allegiant, said the partnership “looks like a good thing for both parties.” He cited the success of the Frontier-Volaris codeshare as an example.
Allegiant and Viva see additional flying opportunities for up to 18 aircraft on top of current growth projections by 2027 under the venture. For the former, that could represent as much as $108 million in incremental annual earnings before interest, tax, depreciation, and amortization (EBITDA) based on its system target of $6 million in annual EBITDA per aircraft.
The airlines also see broad potential consumer benefits from the venture. Targeting U.S. leisure travelers, the carriers see an opportunity to stimulate the market, including potentially adding service on more than 250 U.S.-Mexico routes. This includes 76 unserved U.S. routes from Cancun, 81 from Los Cabos, and 82 from Puerto Vallarta, according to the airlines. In addition, Allegiant could add service to Mexico City, and Viva to several of Allegiant’s bases in Florida under the joint venture.
Anderson described any growth under the proposed alliance as on top of Allegiant’s own planned domestic U.S. growth. The airline has outlined plans to grow capacity in the low double digits year-over-year in 2022, but has not provided longer-term growth plans owing to the pandemic.
Viva serves nine destinations in the U.S. — a number that is capped by the current Federal Aviation Administration safety rating of Mexico — in December, according to Cirium schedules. Only four are also served by Allegiant: Cincinnati, Las Vegas, Los Angeles, and San Antonio.
And, in the carriers’ joint application to the DOT, Viva said that its “lack of brand recognition” in the U.S. has limited its ability to grow in the market, and has forced it to cancel numerous transborder routes it has attempted that target American travelers.
Allegiant and Viva anticipate that together they can control an 11 percent share of the U.S.-Mexico market — behind Delta-Aeromexico, American, and United Airlines, but ahead of all other budget carriers. Viva carried less than 2 percent of the 30.3 million transborder travelers in 2019, DOT data via Cirium show.
Allegiant and Viva target antitrust approval by July or August 2022, and full implementation of their partnership by the first quarter of 2023. However, in many cases DOT approval can take up to two years.
Updated with comment from MKM Partners Analyst Conor Cunningham.