Less than three years since its launch, Dominican Republic-based Arajet is rapidly establishing itself as a key connector between the Americas via its Santo Domingo hub. Founder and CEO Víctor Pacheco shares insights on the significance of the recent U.S.-Dominican Republic open skies agreement and what it means for the airline's growth.
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Transcript
David Casey:
Hello, everyone, and welcome to Window Seat, our Aviation Week air transport podcast. My name is David Casey, editor-in-chief of Routes. Welcome aboard. On this week's episode, our guest is someone who's making bold moves within the Americas’ aviation market, and that's Victor Pacheco, the founder and CEO of Dominican Republic-based Arajet. Arajet launched in 2022 with a vision of transforming Santo Domingo's Las Americas International Airport into a new hub for the Americas, challenging long-established transit points in the region. With an ambitious growth plan, the airline has rapidly expanded across Latin America and the Caribbean, and now thanks to an Open Skies agreement is setting its sights on the US market. Today we'll talk to Victor about Arajet strategy, the challenges and opportunities, and what's next for the airline. Victor, thanks so much for joining us on Window Seat.
Victor Pacheco:
David, it's a pleasure to be here with you. Thank you so much for the time and I hope that your audience gets the opportunity to learn a little bit more about Arajet and what we're doing to connect the Americas.
David Casey:
Fantastic. Well, let's start about with that journey so far then. I remember we actually spoke back in, I think it was August 2022, so it was about a month before you launched, and I remember you talked through some of the airline's aspirations. And at the time we were just coming out of the pandemic, really. There were still some travel restrictions. A lot of airlines were really struggling, and I remember at the time thinking that those ambitions seemed really bold and perhaps, dare I say, a little risky. But you've managed to pull it off. And for any listeners that are unfamiliar with Arajet and are unfamiliar with the journey that you've been on since then, perhaps you could just tell us about that expansion that's happened over the last two-and-a-half years.
Victor Pacheco:
Well, David, as you said, it was definitely a huge undertaking. We launched 18 routes in 90 days when we started operations, and as you very well said, a lot of the markets that we launched were depressed because of the pandemic, and our job was to go and stimulate them. And some of those markets had no historical data on being connected before with the Dominican Republic, like the case of El Salvador and Guatemala, but launching 18 all-international routes to get at the airline off the ground was extremely challenging and we had to execute a very well-crafted plan. And we had a good team to do it and we pulled it off. And we expanded all the way from Mexico, Cancun and Mexico City, Guatemala, San Jose, Costa Rica, El Salvador, Bogota, Medellín, Cartagena in Colombia, Guayaquil in Ecuador, Lima and Peru, and then Aruba Curacao, Saint Martin, and Jamaica.
And I remember that when we started those markets, how also beside the operational challenges, there was also commercial challenges and also you had to be able to get the brand to be known because it was a startup, as we very well know. And so we put a strategy in place where not only did we have a solid digital marketing strategy, but also on the ground marketing strategy and a PR strategy. And that meant bringing to the table and doing PR events and inviting local governments and getting them involved and the local private sectors, in all of these different markets. And in the end, it worked out. Today, we've continued our expansion. We then went to Montreal and Toronto in Canada. We also expanded south to Brazil, Chile and Argentina. And we basically did the same playbook that worked in the other markets, and this allowed Arajet to have more than 200 different combination of connections to feed the network.
And you see today an average of between 500 and 600 passengers connecting through our network, which is great, and that has helped us get strong so that now into our expansion into the North American markets, we're looking forward to serving the Dominican diaspora, but we're also going to be focusing on easier traffic and also enabling the connections that we have, feeding them into the North American markets and allowing the passengers to be able to access more affordable fares that they had access to in the past.
David Casey:
In terms of then the strategy, you mentioned some of the routes that you've launched and the ambitions about to go into the US, which we can talk about in more detail later. Just talk us through though the strategy, because you've got a hub based in Santo Domingo, but you also operate from a base in Punta Cana as well. I guess that's mainly attracting point-to-point leisure. Just talk us through how that's evolved and how you see it growing in the future.
Victor Pacheco:
I think that the business has very well been designed for the Dominican Republic. And what I mean by that, if you look at Santo Domingo, it's a diaspora type of airport for VFR and it serves the 2.5 million diaspora that's allocated mainly in the northeast part of the US but also many of the destinations that we travel to in Central America, South America and in the Caribbean, from Santo Domingo. So, you can envision that basically the strategy there is to serve that Dominican diaspora.
In Punta Cana, you have the biggest operating airport in the country that is mainly a leisure airport, but it's an inbound destination, right? So you don't really have a huge amount of people living in Punta Cana. So, the strategy there is to use the geographical position of the Dominican Republic to bring point-to-point leisure travelers to the island, but also to allow connections to flow through the network. And you can see, for example, when we started selling Miami, just to give you an example, out of Punta Cana, 80% of the traffic that's already been booked to go to from the deep South American markets into Miami is connecting through Punta Cana, which is great to see.
David Casey:
As you say, I think you carried over a million passengers in 2024, handling about, was it 81% of passengers in the Dominican Republic? What were the best performing markets and how much of that traffic is now transit and how much is more point-to-point?
Victor Pacheco:
Well, we were pleasantly surprised that the new airport that we chose in Mexico, Santa Lucia, became a huge success. Today it has 14 frequencies flying there a week, which is—it's because its growth is, the market's there. And we started with two frequencies, when you and I met when we launched the airline, and we grew to 14 frequencies because of the demand. And I think that it's a market that is very price-sensitive. The average fare before Arajet was around $700 and Arajet came in with an offering of around $345 bucks and basically that stimulated the market. And if you look at what's happened with our competitors, they haven't lost any seats. They've continued their compounded growth. What's happened is that the market's just grown a lot because of the stimulation of the fares.
Other very successful markets, although they have a lot of competition, is Bogota and Medellín in Colombia. Even though you have some big competitors that are there, I think that the market is very, very sensitive to pricing and we've been able to find a sweet spot to grow the market as well. So I would highlight those markets as very successful markets in the Arajet network.
David Casey:
And how would you manage to maintain that low-cost cost structure though? One of the reoccurring themes at Routes Americas recently in the Bahamas was about taxes in the Caribbean and airport fees. How do you maintain a low cost structure given these conditions, and does your connecting traffic hurt your ability to maintain a true low cost structure?
Victor Pacheco:
Well, interesting that you say that because sometimes you can see, when you dissect the fare, you can see that Arajet might be charging four bucks for a leg and then you're paying $188 on taxes and fees, which shows you right there what an opportunity the governments have to understand that lowering these high fees and taxes will bring more travelers and the economy will get stronger if the governments realize that these high fees and taxes are basically taking away the opportunity for more people to travel and to come to spend money in the different countries. So, the fact that the high tax and fees is so high, there was still an opportunity because even though they're high, that means that the people are more sensitive when you can sell a ticket for any dollar less than what the market was.
I remember when we were building Arajet, there was a lot of industry talk whether a low-cost airline could work in a market that had such high fees and taxes, and even though it hadn't been proven in anywhere before, my gut told me that it would, just because if you remember before, you're looking at $800 average fares, and this went down significantly, right? It went down to around $375, and that showed you that the response that we've received, it shows that even though we have the high fees and taxes, any dollar less that you can bring down a fare in a market, that there will be a market response. And that's what we've seen.
And connections definitely are a challenge for a low-cost carrier, but we think that you stay true to all of the other principles of a low-cost company with your discipline, making sure that the money that's being used or invested is being invested on company needs, that you do an RFP for everything, that you try to get the best price and that you always, always, consider the cost. Because we always say that revenue is aspirational and the cost is definitive. So that's why when you see the Arajet offering, you see that it's a very simple offering and the reason why, it's just because we want to maintain the discipline to continue having a cast that allows us to be able to offer bookings that stimulate the market.
David Casey:
In terms of your product then, it's not all economy though. Am I right in saying you do have a premium option as well?
Victor Pacheco:
Yes. So we have three bundles and we're actually thinking about expanding it a little bit more in the future. And the three bundles are pretty similar to what you see low-cost carriers offering in other markets as well. And as we continue to get deliveries, you're going to see a more premium product offered, meaning that you get three more inches of pitch, like a premium economy type of product.
David Casey:
And is that a strategy to attract more business travelers? I know if you look at Copa's strategy through Panama, a lot of their traffic is business traffic. Is that to pick up not just leisure traffic through Santo Domingo, but more corporate traffic as well?
Victor Pacheco:
Not necessarily. I mean, we do have business travelers that are flying on the network and we do want to get more of those, but we're purely focused on the travelers that are either looking for leisure or looking for traveling because of VFR reasons, and there's a market that wants to be more comfortable and are willing to pay a little bit more to get that comfort.
David Casey:
Let's talk then in a bit more depth about the US expansion because that's something that's on the horizon. I know you're speaking to me today from Miami and you're about to launch some new routes to Miami later this year. How important was the Open Skies agreement between the Dominican Republic and the US?
Victor Pacheco:
Well, David, when we sold this business plan and got it funded, we always expected that the US would come in a lot sooner, maybe two years sooner than what it has. And we never thought that the Open Skies would've taken this long. And without the Open Skies agreement, I would say that you have an airline that's fighting only with one hand and missing another hand, and it would make it impossible for the business to scale without the North American market. We estimate that half of our revenues by 2028 should come from the North American market. Just not having it, it doesn't make the business case viable. So we are extremely happy that it's happened, even though it happened late. And the flip side of that is it's made us stronger. So when we now go to the North American markets, we do carry the strength of our network with us and connections, and that's definitely something good to have when you're going to be flying into Miami, New York, et cetera, et cetera.
David Casey:
Absolutely. So the first route to Miami, and you're doing San Juan in Puerto Rico, talks about doing New York as well. Where else is on the priority list?
Victor Pacheco:
We have 15 more markets that we're looking at right now. We still haven't taken the decision like which one [to] follow, but you can expect us this year to probably launch a total of six or seven markets into North America.
David Casey:
And is that looking at the diaspora?
Victor Pacheco:
I would say that there's the highest percentage is targeting the diaspora that are desperately waiting to bring low fares to them, but there's also a percentage of those flights that will go into Punta Cana. And the strategy there is looking after our VFR base, strengthening it as well.
David Casey:
It's a competitive market though you've got a lot of ULCC competition, not to mention American, United, Delta going into the US-Dominican Republic market as well. How do you anticipate getting a foothold and gaining market share?
Victor Pacheco:
What we've seen so far, David, is that there is a premium being paid in terms of yields in the leisure base, and I would say it's about 16% higher. So even though you do have a lot of competition, you can see that it's a very strong market and that it's growing pretty quickly. Just Punta Cana has become as a brand, probably stronger than the Dominican Republic. I think a lot of people that go there don't know that they're in the Dominican Republic and they know that they're in Punta Cana. And I think that that's one of the reasons why the competitive landscape is different.
When we started Santo Domingo, a competitive landscape for us in Santo Domingo wasn't really, I would say it wasn't really strong. I would say that out of 18 different markets, we had direct competition only on two or three markets, which was Bogota, Medellín and Mexico. And now in Punta Cana you have direct competition in more than 50% of your markets. And I think that it definitely has allowed Arajet to enhance our competitive abilities with other carriers. And I think that it played well. It played nicely now that you're going to be going to North America where the competition is even stronger, we're better prepared for that because of having implemented the Punta Cana base.
David Casey:
This expansion, you're doing it, I think you've got 10 Boeing 737 MAX 8s at the minute. What's the timeline for future deliveries? I think you've got another 10 on order, haven't you? And 15 options. What's the fleet strategy?
Victor Pacheco:
So we're supposed to get three this year. I'm not sure if the three of them will be delivered. I think we're pretty confident on the delivery of the 11th and the 12th plane, but the 13th plane, because it's a December delivery, that could slip. So we see ourselves ending the year probably operating 12 aircraft and then in 2026 taking delivery of about six aircraft.
David Casey:
Okay. How frustrating is that? I know we're seeing delivery delays across the industry, but I think when we spoke, when you launched, I think you were aiming for 10 MAXs by the end of 2023, you ended 2024, I think, with 10.
Victor Pacheco:
We're six MAXs short right now to where we should be. And for a small airline, it hurts us greater than if we were a bigger airline, of course. So it's really frustrating. I think that we should continue working closely with Boeing and hopefully Boeing will be able to continue delivering on time going forward. It's great to see that the aircraft 11 and 12 seem to be, are going to be delivered on time, and that's a good message and we want to continue on that track just because we need to scale, we need to continue our expansion and hopefully we'll get on track.
David Casey:
And in terms of future aircraft needs though, I think you've obviously got the 20, well, you've got another 10 to come in, you've got 15 options. Are you starting to think beyond that now in terms of what you'll need from 2030 onwards say?
Victor Pacheco:
Yeah, definitely. We don't want to make any decisions yet. We want to see how our US expansion plays out, how the network does now that you're going to have these US markets working with it. And so there's not really a decision on fleet happening in the near future. I would say that we would probably be looking at fleet strategy by Q4 of this year.
David Casey:
Okay, interesting. Well, we'll certainly keep an eye on that and maybe check back in with you then when you've got more to say on the fleet strategy. In terms of airline partnerships, I know you've got a ticketing agreement with Euroairlines [Group] in Spain. Are you seeking more partnerships? Do you need airline partnerships to grow or can you do on your own?
Victor Pacheco:
Yes, we definitely do. And we definitely have a huge opportunity given the amount of airlines that are traveling into the Dominican Republic. So we will be adding a partners function, an airline partners function, in a few months, and we will be knocking on doors and finding the right partners for Arajet in order to bring more connectivity into our network.
David Casey:
Okay. Where'd you see? Where are you targeting those air partnerships? Any particular markets where you see the most opportunity?
Victor Pacheco:
I think that the opportunity is so huge that I would say that everyone. Just because if you look at the Dominican Republic, it's very well served by European airlines, by North American airlines, by South American airlines, and so the opportunity is huge. There's also talks with airlines that are in the Middle East that are interested in the Dominican Republic, but need an airline like Arajet in order to be able to add frequencies into the market. So there's so much to do around this part. This is why we are activating and bringing on an executive to lead the partner's function.
David Casey:
Okay, interesting. And would that mainly be interlines? Are you looking at codeshares as well?
Victor Pacheco:
Yeah, we're looking at everything, codeshares, interline. We should be done with our IATA certification in the following, I would say by July of this year. That of course will enable co-chair opportunities. And so this is a big part of our strategy
David Casey:
In terms of then the future for Arajet. We're seeing some consolidation in Latin America. We've got the Azul-GOL potential merger going on in Brazil at the minute, potential privatization of Aerolíneas Argentinas. Do you ever see Arajet being part of a consolidation story in the region, either as an acquirer or maybe joining a larger airline group?
Victor Pacheco:
I would respond, David, that we like having friends. Friends are good. I think that there will come a time. I would target it probably in 2028 would be probably the right time after we've matured more, and definitely explore having an airline partner.
David Casey:
Okay. Interesting. Just to close then, it's been a fascinating conversation, been really interesting to hear about that growth story. As we look ahead, where do you see in Arajet in five years’ time? What will success look like for you?
Victor Pacheco:
In five years’ time, we should be operating to more than 60 destinations with a fleet of more than 35 jets, transporting around 7 million passengers a year, with a headcount of around 7,000 people.
David Casey:
Wow. Well, Victor, we wish you the best of luck with that. It's been really interesting to see the journey so far and looking forward to seeing what happens in the future.
Victor Pacheco:
I look forward to the next conversation.
David Casey:
Fantastic. Well, thank you Victor, and thank you to our producer Cory Hitt, and thanks also to you, our listeners. If you enjoyed this episode, don't forget to like and subscribe wherever you listen. Until next time, this is David Casey disembarking from Window Seat.
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