Interview: Aviation Magnate Germán Efromovich Explains The Collapse Of Low-Cost Carriers in Colombia

With a career spanning several countries and industries, Germán Efromovich is one of Latin America’s most prominent industrialists. Born in Bolivia to Polish parents who escaped the atrocities of World War II, Efromovich started from humble beginnings, working as a teacher in Brazil (where he once taught President Luiz Inácio Lula da Silva), dubbing movies into Portuguese, and eventually hitting it big working in shipbuilding, petroleum, and aviation.

Photo: Germán Efromovich in 2012. (Credit: Cruks)

Known as the founder of Synergy Group, the former chairman of Avianca, and the chairman of Colombia’s Movich chain of upscale business hotels, Efromovich continues to grow and manage businesses — most recently Aeroitalia, a new European airline based in Rome — and he has taken to social media, especially LinkedIn and YouTube, where he generously shares his history and insight directly with the public.

Like every magnate who dares to venture — especially in the colorful world of South American dealmaking — Efromovich has seen his share of ups and downs. But, unlike most, he isn’t afraid to discuss them.

In an interview many years in the making, Finance Colombia Executive Editor Loren Moss was able to have an in-depth conversation where they talk “sin papas en la lengua” (his version of the Spanish idiom “sin pelos en la lengua”)* about the recent turbulence in Colombia’s aviation market and what the future may hold.

Finance Colombia: It’s a pleasure finally speaking with you. First, I would like to congratulate you on your new project, Aeroitalia. How is that going?

Germán Efromovich: It isn’t my own new project, actually. I’m not an investor. I was recruited to be in charge of the intellectual part and build the company along with a group of people from Italy. They invited me because of my experience, and since I like aviation, I gladly accepted. We started 15 months ago with the certification request, and in four months we were already flying.

Today, the company is a bit more than a year old, and it already makes profit — there isn’t any loss. I know that, historically, when speaking of the commercial aviation business, that isn’t common.

“If you start selling tickets cheaper than your cost, how can you compete? … It’s impossible. So, I don’t call it low-cost — but ‘kamikaze-cost.’ It makes no sense.”

– Germán Efromovich

Finance Colombia: You have a very successful track record, but there’s something else that stands out: You tell your experiences to the public. Once a lot of successful people arrive at this point, it’s difficult to know anything about them. They live in secret. But you now have a YouTube channel where you openly share your lessons with your followers. I think it’s very noble. Why do you do it?

Efromovich: Thank you very much. I don’t know why it shouldn’t work this way. I think that if humans share more about their experiences — good and bad — we would all help the world be a better place. However, people forget. We don’t learn so much from others’ experiences, right? Otherwise, we wouldn’t be going through so many issues right now globally. If we look back to all we’ve gone through as humans — all those wars — if we paid real attention to the experiences, I think we would have a more civilized and peaceful world.

Viva Air made a big splash in Colombia by giving millions a new low-cost option, but it began to struggle in recent years before ultimately exiting the market after an unsuccessful acquisition by Avianca. (Photo credit: Viva Air)

Finance Colombia: I recall you saying, maybe 10 years ago, that the low-cost airline model was unsustainable and that it was a never-ending road. I remember your skepticism. At the time, everybody was saying, “well, he’s more traditional,” but here we are in 2023 and there has basically been an earthquake of the Colombian aviation market — with two local low-cost carriers disappearing in a month. Why have the low-cost airlines failed in Colombia? What happened and why?

Germán Efromovich: If you start selling the product way for cheaper than it cost you, you won’t be able to maintain it for long — unless you have a lot of money to waste. In Latin America, I always said that the term “low-cost” is wrong. Somebody invented it and it really doesn’t exist — not even in Europe.

In Europe, what is wrongly called “low-cost” works because the price of the plane, the crew, and the gasoline doesn’t change. It only varies a little. The question is how much you sell the ticket for. And you will sell a cheaper ticket if you have a subsidy. And in Europe, there are alternative airports where, in England, for example, they pay the airline to land. This is in contrast to Heathrow, which charges airlines many, many pounds to land.

So you, as an operator, get paid and you can incentivize clients that are willing to arrive at an airport one hour — or more — away from to the city. But in Latin America there is no airport that pays you for landing. If you start selling tickets cheaper than your cost, how can you compete? How can you, with an asset of about $50 million USD per plane, compete with a bus that costs $100,000 USD?

It’s impossible. So, I don’t call it low-cost — but “kamikaze-cost.” It makes no sense.

So, you ask, what happened? At first, the low-cost carriers in Colombia survived. But then, everything we have now seen happen started to happen.

Actually, Viva Air didn’t end up bankrupt. It was bought by Avianca. Then, Avianca decided to stop it or close it, but it wasn’t declared bankrupt. But what happened before the buying? Why did Viva give up and sell the company? Because when Ultra arrived, they start competing and selling their tickets at a lower price than their cost, and miracles don’t exist. That, yes, I saw it many years ago.

READ MORE: Viva Air: The Chronicle of a Death Foretold

There are some countries with subsidies For example, in the United States — you will say they don’t pay to land there — and they have airlines like Southwest and Frontier. What did they do to sell cheaper tickets than American Airlines, Delta, and United? They re-designed the planes, people flew in fetal position. They transferred them into Hayden [Colorado]. They removed service and charged a bit less — but not a lot less.

So, Southwest, Spirit, and others, they all did very well because Southwest had a vision and good luck many years ago. They started to use fuel hedging. At the time, I believe it was like $25 USD or $30 USD when fuel was $100 USD. They grew a lot that way because they transferred the benefit to the passenger.

Finance Colombia: And the larger carriers responded by cutting costs as well.

Germán Efromovich: Exactly. At that time, they were very inefficient and they provided bad customer service. So, what happened? In order to compete with the low-cost airlines, these companies started to become more efficient. A company like Delta — which many years ago was absolutely inefficient and almost went bankrupt — had to ally with Northwest Airlines.

“There will always be a market for those willing to quit taking a suitcase and who don’t want to pay for comfort. But I think the majority of travelers would choose a better, more respectful service with more attention to detail. That’s going to come back. It’s cyclical.”

– Germán Efromovich

Nowadays, it’s a very efficient company. Moreover, the difference between Delta and “low cost “almost doesn’t exist, because if you want to fly with any company and take a carry-on with you or pick a seat, you will have to pay the difference either way. You may have to pay a bit more, you have a loyalty program, a better seat, and the service is better — but prices are very similar now. I had an experience in Europe 3 weeks ago… If you want to buy a last-hour ticket, can you? Ryanair it’s twice the price of British Airways.

Finance Colombia: You have to pay for the luggage, the water — even the toilet!

Germán Efromovich: Exactly. I saw it when it first started. To me, it was obvious that we would see what is happening today.

As I already said, the difference between the tiers is very small because the low-costs started with brand-new planes that were used for three years without maintenance or any trouble. They didn’t have a history.

An experienced company has a history, it has processes, it has had some fines. And the bigger ones went through Chapter 11. Look what happened in the United States. Every company went through it at least once — most of them two or three times. Many big companies disappeared.

Let’s go down through history. Where is Pan Am, Eastern Airlines, or Braniff Airways?

Finance Colombia: USAir.

Germán Efromovich: Exactly, USAir. Today it’s American. They bought American and kept the name because it was stronger, but its first name was Allegheny.

Finance Colombia: I remember it! I’m so old I remember it, and my two aunts were supervisors of passenger service for Eastern Airlines in Miami.

Germán Efromovich: Allegheny was the original name. It turned into USAir after two Chapter 11s. In the end, they end up being stronger after Chapter 11 because they didn’t pay to the dollar and they bought American Airlines. Then Northwest and CEO Richard Anderson bought Delta and transformed it. He kept the Delta name because it was stronger in the market.

READ MORE: Ultra Air 2nd Colombian Airline To Cease Operations In 1 Month

Finance Colombia: I remember doing the math when I was advising tourists in Colombia that were thinking about flying with Spirit. I said, look carefully, because if you have two suitcases, the ticket will cost the same as with Avianca. You believe it’s cheaper because you are the bait.

I find it interesting that the legacy carriers are losing some advantages because they are trying to compete with the low-cost airlines. I mean, if LATAM or Avianca — or United and others in the United States — try to sell low-cost, and try to sell everything piece by piece, they’re also losing.

Germán Efromovich: I think Avianca will have to come back with some new service. Lowering it, as it happened, in my opinion, was a wrong move. Even though, in terms of the number of passengers, it’s going well, what about their loyalty? What about the business traveler? It was forgotten in this case.

I think they should be getting profit out of it — otherwise it would be nonsense. You don’t see a Delta or LATAM lowering their service level or increasing density in an aggressive way. All in all, as I said, the difference between the two types of business practically doesn’t exist — or it’s very small.

There will always be a market for those willing to quit taking a suitcase and who don’t want to pay for comfort. But I think the majority of travelers would choose a better, more respectful service with more attention to detail. That’s going to come back. It’s cyclical.

Finance Colombia: I think it’s pretty noble that, some time ago, thanks to low-cost airlines, some people could fly for the first time because of cheap tickets. But there are also business travelers on a tight schedule who would like to be treated accordingly. Many don’t care about paying an extra $25 USD. I think the most important thing is that there are airlines who care about those clients. It’s important to have different sectors of the market that suit everybody’s needs.

“There are no miracles. The passenger has to be careful. When someone sells a plane ticket cheaper than a bus ticker, the client must know this company may not last.”

– Germán Efromovich

Germán Efromovich: No doubt. But regarding these low-cost companies, if you arrive a day before or at last minute, without luggage, are you going to pay the same? Or will you pay more than the other way? You’re going to pay even more.

There are no miracles. The passenger has to be careful. When someone sells a plane ticket cheaper than a bus ticket, the customer must know this company may not last. It will go bankrupt and leave the customer without service, like what happened with Ultra.

Finance Colombia: I’ve seen they sell them sell plane tickets cheaper than bus tickets. How is that workable?

Germán Efromovich: It isn’t.

* “Sin papas en la lengua” (without potatoes on the tongue) is Efromovich’s rather famous personal take on the Spanish phrase “sin pelos en la lengua” (without hair on the tongue), meaning to speak directly, without fear of offending the listener.

This interview has been been edited for length and clarity