Allegiant and Viva Aerobus Think the Sum is Greater Than the Parts

I did not have this one on my bingo card. Ultra low cost carriers Allegiant and Viva Aerobus will be teaming up, and not just for some janky, limited codeshare. They are forming a true, metal-neutral joint venture to cover travel between the US and Mexico, if the governments allow it. The airlines say this is a clear winning proposition in their regulatory filing, and for travelers, that’s certainly true. But is it worth it for the airlines?

Allegiant has talked about flying to Mexico for years, but there just always seemed to be a better opportunity that took precedence. Flying internationally takes some work, and Allegiant still hasn’t felt the need to go down that road, despite the obvious demand for those flights. You can imagine a place like Cancún looking a lot like South Florida does for the airline with nonstops to small cities scattered around the US.

Meanwhile, Viva Aerobus has been a fast-growing, successful outfit that has primarily focused on bringing cheap fares to pull Mexican travelers off of buses and into the air. The two strategies couldn’t be more different, as evidenced by Viva’s US route map.

Viva Aerobus March 2022 US Route Map

These are not the routes you’d fly if you were targeting the US leisure traveler. Well, at least, none of them are except for that goofy Cincinnati – Cancún standout. Viva handles visiting friends and relatives (VFR) traffic in the markets it serves in the US along with a little leisure sprinkled in, but two-thirds of its US business is sold in Mexico.

In its broader network — according to Cirium data — Viva has 5 airports with more than 100,000 departing seats scheduled during March. Those are, in descending order, Mexico City, Monterrey, Cancún, Guadalajara, and Tijuana. These are not big leisure markets with the exception of Cancún, and that’s a market that benefits from domestic leisure travel. The reality is that getting Americans to buy tickets from Mexican carriers is hard.

Now, Viva and Allegiant are coming together, and there’s an investor presentation out there talking about how this is going to be great. Here’s what happens.

• A full joint venture between the US and Mexico that is “metal neutral,” meaning that the airlines don’t care which airline passengers fly.
• Allegiant invests $50 million in Viva and gets a board seat.
• Joint marketing, sales, revenue management, network, IT, and reciprocal codesharing will be in effect. In fact, there are restrictions on network decisions being made unilaterally.
• Shared ground handling and co-locating facilities will happen at shared airports.
• Full loyalty earning and burning in each other’s programs, though they don’t have traditional programs, so we’ll see what that looks like.
• All new routes will share revenue at a 50/50 split once the operating costs are pulled out. Meanwhile, existing routes for Viva will start at a 2021 baseline and Allegiant will share in any upside.
• Threesomes are permitted if both airlines are interested in spicing things up with a new partner, but otherwise, no cheating is allowed.

This is a serious alliance, so now the question is… is there enough to gain? If you ask the airlines, they say there are great synergies. On the cost side, they can share training facilities, join together for greater purchasing power, and better utilize crews at stations where both airlines operate. Allegiant also says it will be much easier to get up to speed on IT requirements for international travel by using Navitaire — the system Viva Aerobus uses — to handle all the international flying. I get this, but that’s not overly compelling. To me, success will hinge on revenue opportunities.

Allegiant points to Cancún as an example of what will be possible here. Today, it obviously serves nothing. And on its own, Allegiant thinks this is its 20 year potential:

Why is it so small? The issue is more about operational constraints than anything. These are Allegiant bases in the US that could support nonstop service. With Viva, however, it looks like this:

But why? The red circle is around South Bend, and Allegiant calls that out as a perfect sample market to explain its issues. South Bend is not a city where Allegiant has a base, and all pilots are required by contract to return to their home base each night. In theory Allegiant could try to change that in a contract negotiation, but that’s not easy.

So, if Allegiant wanted to fly from South Bend to Cancún today, it would have to have an airplane start at a base in the US, fly to South Bend, go down to Cancun, come back, and then fly back to base. You’re looking at 3.5 to 4 hours one way from South Bend to Cancún, so it’s not easy to squeeze that into a full day for a single crew. Even if you can, you’re looking at some pretty ugly flight times for those flights between the base and South Bend.

Of course, Allegiant could open a base of its own in Cancún, right? Well, sort of. Apparently there just isn’t any real estate available to park airplanes for long periods down there, and with Allegiant’s low utilization, it would need to keep them on the ground for a long time on off-peak days. Even if there was real estate, it’s not easy to open up a base in a foreign country. And ultimately, much of this joint venture seems to be about doing things in an easier way.

In this deal, Allegiant knows it has people in South Bend who will buy tickets to go to Cancún, but it can’t make it work as well operationally. Viva Aerobus, however, can easily make it work operationally, but it knows people in South Bend won’t buy tickets on the airline. It doesn’t have the brand recognition, and there’s that whole issue of Americans being wary about foreign airlines anyway. So now, Viva can fly an airplane from Cancún to South Bend and back, and Allegiant can do the heavy lifting on selling tickets. At the same time, Allegiant can take advantage of Viva’s relationships with hotels in Cancún to sell vacation packages and make even more money.

The airlines say this will also work in the other direction with Mexicans in smaller cities flying to US leisure destinations. Here’s a potential map:

For markets like Monterrey, presumably that could be easily operated by Viva. But for many others, Allegiant would be the obvious operator from its big US bases. And in this case, it’s Allegiant’s hotel relationships in Las Vegas and Orlando that will bring value. It’s again that combination of market presence and operational ease, but in reverse.

You’re probably already starting to get a sense for why this could work so well, but there’s another piece of the puzzle and that involves peaks and valleys. Check out seasonality by airline.

Allegiant is very clearly in high season during spring break, summer, and the holidays. That is not a surprise But the fall is not great, especially September which is virtually dead. (Thanks, Florida.) But take a look at Viva which, of course, has high season in the summer as well, but its summer high season stretches further toward the fall. Further, and not shown in this chart, there is day-of-week variance. Viva has peak days on Saturdays, but outside of Florida, Saturday is off-peak for Allegiant’s network. That creates utilization opportunities.

During spring break, Allegiant is full trying to fly airplanes to its existing bases. During those times, Viva can do more US flying. During the fall, when Allegiant has more slack, then Allegiant can do more Mexico flying. And on Saturdays, Allegiant can do more while Viva flies its peak day down in Mexico. There is a great deal of flexibility here.

The rationale the airlines present makes a lot of sense, and I can see how there will be solid consumer benefit, but what I still can’t grasp is what Allegiant could build on its own if it so chose. Cancún could have a base, and Allegiant could do the IT work needed. It’s just harder to do that, and presumably Allegiant thinks it would be much more disruptive and costly than the $50 million it will sink into Viva.

For Viva, the opportunity is more clear, because a) it gets $50 million and b) it will likely never have the ability to draw many US-based travelers for leisure flying. In the end each airline can stick to their operational strengths while using their commercial strengths to support the other’s flights. This makes serving the US-Mexico market easier, so I can see why it would be such an attractive plan.