The airline industry has been facing rapid change, further catalyzed by the COVID pandemic. South American airlines are facing consolidation, while upstarts are “challenging the challengers.” A decade ago, upstart Viva Colombia (now Viva) was battling entrenched Avianca, and now the two are trying to join forces. Latam, a merger of LAN Chile and TAM was American Airline’s ally in South America, but they were snatched away by Delta in an alliance just recently approved. Panamanian Copa Airlines has launched a Colombian low-cost carrier in Wingo. Even Viva’s cofounder William Shaw has now launched Ultra Air, a low-cost carrier taking on his original creation.
The Dominican Republic has a very strong reputation as a tourist destination, but now, a group of entrepreneurs hope the country can become both a hub for travel in the way that Copa has made Panamá a connection point, and home for a competitive low-cost airline with Caribbean flavor. Finance Americas executive editor Loren Moss was able to speak to Victor Pacheco Mendez, the CEO and co-founder of Santo Domingo based Arajet. The low cost airline startup is already running routes between the Dominican Republic and regional destinations throughout Colombia, Perú, Ecuador, México, Central America, even island destinations such as Curaçao, Aruba, Sint Maarten and Jamaica.
Finance Americas: I remember years ago there used to be Dominicana de Aviación but then for a very long time there has been no flag carrier in the Dominican Republic. The founder of VIVA—one of the co-founders, William Shaw was in the region, he was working on something but then he left to go and do other things; why has it been such a challenge to get an airline launched to cover the Caribbean and to be based out of the Dominican Republic?
Victor Pacheco Mendez: Well, I think that if you, if you research the failures within the whole Caribbean, you find that the list is huge, so there is a reason for that and a lot of it has to do with, most of the carriers that have tried to start in the region have been mainly opportunistic carriers that find some ethnic roots or somebody with some money that thinks that they can do some type of operation, but this is the first time that somebody really tries the ULCC (Ultra Low Cost Carrier) business model in the Caribbean.
So, I think that the first thing was figuring out what was the right model and once we did that—and William was one of my seed investors so, William was with us, I hired him in the beginning. At that time, we were called Flycana. A good friend of mine, William. But eventually his dad was falling ill, he was living in Mexico and he got the opportunity to go to Interjet and basically, of course he continues to be a shareholder in Arajet, but he left to do that.
And it took us out a long time, to get Arajet done because it was about putting together the right pieces; it was about convincing the government on changing regulations, to legislate on behalf of the commercial aviation space, it was about being able to compare the DR fiscally to other hubs and be able to convince the government that we have to able to have to have the corporate environment to be equal to other jurisdictions so that a local carrier could compete within the same, let’s say, environment, and that wasn’t the case when we started the journey so, we had to advocate and we continue to do so, we still have some what we called barriers that we are working [on] strongly with the government.
I think, if you see the newspapers of two or three days ago the [Dominican Republic] president said that he is sending from his office legislation that will make the DR (Dominican Republic) more competitive from a fiscal point of view. So, it’s been just a very difficult ride, just with the government piece alone has been very challenging and then besides that of course, we have assembled a team of experts that have built ULCC carriers in other continents, in other regions. In Latin América, for example, our COO is Garret Malone, who was the COO of Viva when Viva started in Colombia, eight years he was the COO of Sky Chile, so having Garret as COO tremendous experience, a veteran, it’s a great thing, he’s a great team member to have and then it was about finding the right capital provider.
We sold the business plan since 2017, 2018. We almost got funded in 2019 and then in 2019, we missed the boat, which is now a very good thing that we did, because then COVID came along. That would have been death! And then, in 2021 once the scare of COVID was leaving we went back to the institutional markets to sell our business plan again and we found a lot of interest. It was incredible, we were almost running an RFP to see who our capital provider was going to be and the main choice was not about valuation, for us the main choice was about who’s the right partner, who do we think as a firm, will support us and will believe in our vision of what we believe we can achieve with Arajet and about chemistry, you know
We ended up selecting Bain Capital and Griffin Asset Management just because we felt that with this guys were a good fit for us and now, I can confirm that having been working with them a little bit more than a year, that these are great partners to have, they, you know really believe in the vision that Arajet has.
Finance Americas: Now, being based out of the Dominican Republic it’s interesting because for a long time the Dominican Republic has been an attractive tourist destination, but you have you already have some competition. For example, Viva flies between Medellín and Punta Cana, Wingo flies to Santo Domingo, if you look in other countries, American Airlines has historically jealously guarded its Caribbean routes and been very aggressive to try to battle competition when it comes between let’s say Miami and the Dominican Republic, or Puerto Rico and Dominican Republic, which has always been a popular route. How would you stay profitable or reach profit and then defend your market and grow your route network against such entrenched competitors?
Victor Pacheco Mendez: Look, Loren, we’re not inventing the wheel. I think that we’re applying the game book or the playbook that other ULCCs have used before. If you look at our 18 routes that are now on sale at https://www.arajet.com/ we only have direct competition in three routes, meaning there are 15 uncontested routes. This [strategy allows us] to mature and give you that oxygen that you need. So, it’s about serving brand new routes and about a mix…about some competition but when we finish creating our network of 54 routes, we will only have direct competition in about 25 of them, at that point.
So, it’s about when do you launch routes where you compete and how you grow brand new, existing routes and you have to try to balance out that. But the good news, and what you can potentially say about us that we will not compete with one carrier for more than six percent of our entire network
Finance Americas: Now, I look at your route network. You are covering in the Caribbean Kingston, (Jamaica) some of the small islands like Aruba, Curacao, Saint Martin. What about destinations like the US market or Puerto Rico which is “kind of-sort of” the US market but certainly with Puerto Rico’s close ties to the Dominican Republic; What are your plans there? Do you have plans to expand outside the Latin American countries?
Because it looks like you’re already very mature and well along the way as you go, and I would think that also Santo Domingo could be a good kind of a transit point, if look at it. I am not telling you what your strategy should be, but I’m kind of asking the question: If you look at what Copa has done by making Panamá a connector between South America and North America, I always wondered, let’s say if I was flying from the US through a Caribbean destination maybe to a destination in South America, is that all viable? Do you have that in your plans?
Victor Pacheco Mendez: Without a doubt. The reason why we will connect 54 routes from Santo Domingo is because Santo Domingo will be a hub where we will be transferring passengers. So, if you look at what we have done, imagine now when we go north, we are going to fly to 17 destinations in North America that includes Puerto Rico. when we go north, we are not only taking the DR up north now, we managed to get a footprint in South America and Central America and the Caribbean. So, when we go north, it gives us some leverage because in the US you do have more of a competitive environment.
So, you can’t get away with operating, you know, 80% of your routes brand new, you are going to have more competition. So, that’s why people ask us: “how come you don’t fly into the US?” Well, we will fly to the US. We will fly to 17 points into the US but we needed to get a base down South into Central America and the Caribbean so that when we do fly into the north, we have the possibility to offer connections.
Finance Americas: That’s smart. I think that if you look at the airline that Mr. Shaw started, they went international, went into Panama a bit early in their life, and had to retrench and pulled back out. But when they got stronger, then they went into US and now they have routes into Miami and Orlando and, I know that they have publicly said that they have some other ones in the works going into South America…Brazil, Argentina now.
So tell me, you mentioned some of the institutional investors, tell me about maybe a little bit about your history and the management what’s your background, I would imagine that you have been in the airline industry?
Victor Pacheco Mendez: Yeah, I started initially—it was the first airline in the Dominican Republic to ever operate new generation equipment. I initially started with an (Airbus) A320 chartering out of the Dominican Republic. The more confidence I got, the more I learned. That’s how I got the idea of changing to a ULCC model, but Arajet exists on top of that. Arajet is a reformatting of that charter that was called Dominican Wings.
Before the airline activities, I was in commercial banking, financial services, business development, real estate development, but I come from a family…my grandfather is an entrepreneur by the name of Victor Mendez Capellán. All of his businesses where focused on the diaspora.
So, in the sixties, he was the first IATA travel agent in the country, and he was responsible for sending a lot of Dominicans to work in the free zones in New York when we were living through a depression in the DR, so thousands and thousands of families, he managed to help them finance their trips to go work there and eventually all of the family would join them. So after that, that brought in American Express, so he represented American Express in the DR, and then that success brought him Western Union and he was the first agent ever, when Western Union went International. DR was the pilot and it had to do with his entrepreneurial track record. So, today he is 94, and his company which is now a commercial bank conglomerate, tends to the diaspora and they still exclusively represent Western Union.
Finance Americas: Remesas Vimenca? I know them well.
Victor Pacheco Mendez: Yeah. That’s my grandfather. That bug inside of me because I worked with him for many years—what else can we do for our people? What else can we do for the diaspora? And an airline was…it wasn’t really about an airline. Initially, it was about how can I lower travel [costs] for our people? And how can we continue growing and supporting them? The only thing was that he thought that my idea was too ambitious, so he didn’t support me with capital.
He supported me with his heart and wished me well, and that is why it took me too long to get this done because you know I’m not a wealthy individual. I had to find partners and I had to raise money. In 2018, I raised my first $2.5 million (USD) in order to get this done and then we capitalized Arajet and with Arajet, we the retail value of the order we did with Boeing with the help of Bain and Griffin was up to the tune of three billion dollars’ worth of aircraft. I never imagined it was going to be such a big transaction.
You know, now, we are the first airline ever in Latin America to be born with brand new aircraft and I was trying to solve for lower fares for the country, but it was a tremendous amount of factors, when we we met the people from Bain and they saw the vision, they said, ‘you know, we really believe in this but a country without having a carrier, a successful carrier of this scale needs an OEM meaning an aircraft manufacturer to be in the country as strategic partner,’ my business plan was leasing aircraft.
And so they said, ‘look, we really need to sit down with you because we don’t believe in this unless there’s an OEM based in the DR and to do that we need to buy planes from them.’
And so now, Boeing is established in the DR and they accompanied Arajet from the maintenance, technical and flight point of view, which is tremendously helpful and is the first phase of a partnership that will be successful.
Finance Americas: Wonderful. I appreciate you spending so much time with us. I cannot think of anything more difficult than to starting an airline, the only thing more difficult is making it successful. So, we are really glad to see you and want to see your continued success.