The commercial director of SKY, Carmen Gloria Serrat.
Travel

From legacy to low-cost: Sky changes business model to offer lower fares

Chilean airline wiped costs and reduced structure in 2015 to invest in cost-saving aircraft and to open a subsidiary in Peru

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For over 13 years, Sky has been a legacy airline. It sold tickets at physical stores and travel agencies, built luggage check and seat marking into the ticket price, served meals on board, just like any other traditional airline business. In 2015, the company decided to let go of this format and bet on a model inspired by the European low-costs airlines. It changed radically in a short time. It reduced operating costs and offered passengers lower fares, giving them the freedom to choose whatever they wanted beyond the ticket.

This change was led by CEO Holger Paulmann shortly after the death of his father Jürgen Paulmann, Sky founder and at the time CEO. It was not an easy transition. To enter the world of low-cost companies, it had to give up about 40% of its income sources, which came from travel agency sales or passengers from partner airlines. However, while losing revenue, it invested in technology, bet on direct sales channels, such as the website itself, adjusted the route network and began offering extra services to passengers.

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“It was an arduous and difficult process because many felt that the low-cost model would not work in a market like the Chilean. In addition, there was a precedent that many airlines that had tried to compete with Latam were unsuccessful”, explains Sky’s commercial director Carmen Gloria Serrat.

We aim to be as efficient as possible to lower ticket prices, but without sacrificing our commitment to deliver simple and reliable services to customers

Carmen Gloria Serrat, Commercial director at sky.

Another pillar of this change, which is still ongoing, is to rely on a modern fleet. This means replacing the Airbus A319 and A320 aircraft with an average age of 15 years for new, more efficient and economical A320neo aircraft. From an order of 21 aircraft of the model, Sky has already received 11 and expects to have the remainder by 2021, when it will have only new generation planes, which consume on average 20% less fuel. In the order book are still three A321neo, with larger capacity–220 against 186 of the A320neo.

Sky's airplane
Sky is replacing the Airbus A319 and A320 aircraft with an average age of 15 years for new, more efficient and economical A320neo. Photo: Sky/Courtesy.

“The A320neo is the latest generation of short-range aircraft. Recently we have already reached 50% of our fleet with these planes, we were the first low-cost carrier in Latin America to introduce the A320neo into the fleet and we will be the first airline in South America to have a 100% A320neo fleet”, says Serrat.

By standardizing the fleet with new-generation airplanes only, Sky can simplify, streamline and keep operations safe. “The more aircraft models you have, the greater the operational complexity, the greater the operational risk, and the more likely you are to make mistakes, because you need to have mechanics who are prepared to maintain aircraft from different manufacturers,” explains the company’s commercial director.

This business transformation has generated significant results for the company. Since adopting the low-cost model, Sky has grown annually above 10% in the amount of passengers carried. If in 2014, it had 2.45 million travelers on its planes in the Chilean domestic market, in 2018 that number surpassed 3.46 million. This latest mark should be surpassed by the end of this year, as between January and September it transported 2.82 million people. 

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Expansion passes through Peru

Based on a new business model, Sky evaluated the possibility of operating domestically in other markets and saw a good opportunity in Peru. According to the company’s analysis, there is plenty of room for growth, especially among passengers using ground transportation today and cannot afford to pay for air tickets.

By deploying four A320neo planes to Peru, Sky began internal flights in April 2019, all departing or arriving in the capital Lima. In six months of operation, it had already carried more than 500 thousand passengers–the revised goal is to reach close to 1 million travelers by the end of the year.

We have an occupancy rate of 83% and punctuality of 95% in Peru. I dare say it’s the best start of an airline in a new country in the last 30 years

carmen gloria serrat, commercial director at Sky.

To continue growing, the fleet will be reinforced with two more A320neo airplanes, totaling six. They are the ones that will allow the company, for example, to start the first route that does not pass through Lima. In early 2020, Sky Peru will fly directly between Arequipa and Cusco. “We are aiming to achieve between 25 and 30% market share [in Peru]. This, in the original planning, was expected to happen within three years, but we believe we will achieve it sooner. By the end of 2021 we expect to have a 25% market share”, adds Serrat.

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While the current focus is to increase operations in Peru, Sky continues to expand its network to other countries. The company is South America’s low-cost airline with most international routes. From Santiago, it connects passengers to three other countries: Argentina (Buenos Aires and Cordoba), Brazil (Florianopolis, Rio de Janeiro and Sao Paulo) and Peru (Lima). In December, the company will expand its participation in Brazil, with flights between the Chilean capital and Salvador, but only during high season.

Brazil, by the way, is a key destination for Sky. After a year of operation in the country–the first flight was between Santiago and Rio in November 2018–the company has increased its presence in Brazilian skies. “Brazil is one of the most important markets in Latin America and with less than a year of operation we have already announced increased frequencies and new routes. This shows the good reception we had in the Brazilian market”, says the company’s commercial director.

Despite its focus on Peru and international flights, the company envisions operating domestically in another Latin American market. Argentina and Brazil would be the favorites. Sky, however, does not confirm. “We hope that in the future we can enter a third market within Latin America, but for now, in the short term, it is not on the horizon,” concludes Serrat.

Sky in numbers:

Fleet – 20 aircraft

  • 9 Airbus A 319
  • 11 Airbus A320neo

Destinations – Total: 29

  • 14 in Chile
  • 10 in Peru
  • 3 in Brazil (+1 starting)
  • 2 in Argentina