Allegiant Air (G4, Las Vegas Harry Reid) and VivaAerobus (VB, Monterrey Mariano Escobedo) have entered into a commercial alliance agreement to offer cheaper nonstop leisure travel between the United States and Mexico from the first quarter of 2023, pending regulatory approval.

Allegiant also plans an equity investment of USD50 million in VivaAerobus, upon which Allegiant Chairman and Chief Executive Officer Maurice J. Gallagher, Jr. will join the board of VivaAerobus.

The two ultra-low-cost carriers (ULCCs) have submitted a joint application to the US Department of Transportation (DOT) requesting approval of and antitrust immunity for the alliance agreement signed on December 1, 2021. The transaction is also subject to clearance by the Mexican competition regulator (Comisión Federal de Competencia Económica - COFECE).

According to the regulatory filing, the carriers have sought approval and antitrust immunity "as soon as reasonably practicable" but at least before July 31, 2022, to start operations in the first quarter of 2023. They have also asked that approval be granted for an indefinite period or at least 15 years.

Pending approval of the application, the commercial agreement will cover codesharing, scheduling, marketing, information systems, loyalty programmes, revenue management, 50/50 profit-sharing, coordinated pricing, capacity coordination, inventory control, distribution, cost reduction, co-located airport facilities, product standards and services on all routes operated by them between the US and Mexico, their application reveals.

The alliance is to capitalise on Allegiant’s and Viva’s complementary route networks and passenger bases. It would enable "a new, competitive transborder service, increasing competition and benefiting consumers by offering lower fares, adding various new transborder nonstop routes and adding capacity on existing city pairs".

More than 250 new potential route opportunities have been identified as part of the DOT application. However, specific routes targeted for service will be announced later, following the application's approval.

The carriers claim their alliance "will not significantly reduce or eliminate competition in any market" but instead "will bring significant new competition and service options to the US-Mexico market." It would also "enable a new and highly competitive transborder service, bringing lower fares on existing routes (many of which are served only by legacy carriers) and introducing new nonstop routes now served only via connecting service".

Las Vegas-based Allegiant Air currently does not serve Mexico or any other international destination. Its primary focus is point-to-point flights to underserved US cities. The alliance agreement will allow it to offer codeshares to favoured Mexican holiday destinations such as Cancún, San José Cabo, and Puerto Vallarta. The alliance would also allow Allegiant an indirect foothold in congested and slot-controlled Mexican airports, such as México City International, which has substantial traffic flows to US leisure destinations that Allegiant serves, the application reads.

At the same time, Monterrey-based VivaAerobus will be able to codeshare to underserved or untapped markets where Allegiant has a significant presence, such as Las Vegas Harry Reid and several cities in Florida popular with Mexican tourists. The Mexican budget carrier will also access Allegiant's distribution network and point-of-sale process, allowing it to grow its US customer base. The airline currently offers a wide range of intra-Mexico services and nonstop services from Mexico to destinations in the US and Latin America. However, it has not successfully gained US-originating leisure customers travelling to Mexico due to a lack of brand recognition in the US.

VivaAerobus already has a strategic relationship with Grupo IAMSA and its partner companies such as Omnibus de Mexico, Grupo Herradura de Occidente, Grupo Flecha Amarilla, among others, which together are a leading bus conglomerate in Mexico. The airline's passengers travelling between Mexico and the US overwhelmingly comprise VFR traffic or Mexican citizens travelling for leisure to the US.

"Without antitrust immunity, Allegiant is many years away from entering the US-Mexico market, and Viva will be unable to break into the US-Mexico leisure market," the carriers argue. "Neither Allegiant nor Viva can enter these routes on its own. Allegiant will not be reasonably capable of entering without a partner for up to a decade, and Viva does not have and cannot reasonably develop the US customer base without a partner. The alliance solves for Allegiant the risk and capital cost of revamping its IT systems for international travel, an investment that will also enable Allegiant to begin service to foreign points outside of Mexico. For Viva, it solves the airline’s inability to market its services in the United States at a reasonable cost."

According to the filing with the DOT, the application is the first of its kind amongst ULCCs, not involving a network carrier. "Neither Allegiant nor Viva, operating independently, could compete at meaningful scale on US-Mexico routes against the immunised Delta Air Lines-Aeroméxico alliance, not to mention American Airlines, United Airlines, and Volaris (which codeshares with Frontier Airlines). Collectively, these carriers transport more than 70% of all US-Mexico scheduled transborder passenger traffic. Southwest Airlines and JetBlue Airways have been entering an increasing number of US-Mexico routes as well. Viva, for its part, carries roughly 5% of transborder passengers (and provides less than 1% of capacity to the main Mexican beach destinations as measured by seats), while Allegiant carries none," the filing reads.

The formal wording of the application discloses that Allegiant and VivaAerobus seek to implement "a fully integrated, metal-neutral alliance covering transborder service between any point or points in the US and any point or points in Mexico, as well as connecting traffic within and beyond the respective carrier’s homeland and public charter flights".

Barclays, Goldman Sachs, and White & Case act as financial and legal advisors for VivaAerobus, while WilmerHale and Garofalo Goerlich Hainbach, PC, advise Allegiant Air.