Mexico's competition authority is about to order the break-up of Cintra, the county's airline holding company, which would set free Aeromexico and Mexicana as separate companies. After years of inter-departmental feuding over the issue, the transport secretary finally reached an accord with the Federal Competition Commission (CFC), allowing it to make a ruling.
The agencies had been deadlocked over splitting Cintra, with the CFC claiming it stifles domestic competition, and transport officials saying Aeromexico and Mexicana need common ownership to withstand foreign competition. More recently, transport secretary Carlos Ruiz Sacristan simply said the decision "is in the hands of the CFC".
A CFC ruling has been expected since its draft decision leaked in August. During a televised interview in early October, CFC president Fernando Sanchez Ugarte took the unusual step of announcing that his agency would soon reveal its decision to order Cintra's break-up. It is not clear if he hoped to stem speculation about the CFC's intentions, or he wanted to promote public dialogue that might defuse some of the controversy about it.
Cintra officials have been circumspect, largely because the government holds 67% of Cintra's shares and is able to call the shots. The government acquired most of those shares when the then bank protection board (now the IPAB) bailed out failing institutions.
Sanchez claims Cintra's disincorporation will "break an impasse that the airline industry has lived with for the last five years, characterised by uncertainty over Cintra's ownership, a lack of investment, no expansion, and no renovation of the fleet." He denies that the CFC has been under pressure to reach a decision. Yet insiders believe the government is anxious to sell its shares to help meet debt reduction targets; that the share market is likely to be receptive; and that the Zedillo government would prefer to decide the issue before President-elect Vicente Fox takes office on 1 December.
While the CFC will order Cintra's break-up, it will not order its sale, however. Yet, the IPAB has already announced that it will offer the government's 67% stake as soon as it devises a sale process, which it expects to last at least a month, with shares on sale early next year. Effectively this is a re-privatisation of Mexico's airlines. Questions now focus on issues which the CFC's order does not address, such as the fate of Aeromexico and Mexicana's five subsidiary airlines, how to sell such units as catering and maintenance, how to distribute the shares and how to handle foreign bids, which are limited to 25%.
Bidding war
Foreign sales are likely to spark a bidding war among US airlines. Delta Air Lines (a SkyTeam alliance partner with Aeromexico) and United Airlines (in Star with Mexicana) are interested in buying shares in their Mexican partners.
American and Continental Airlines are also seeking Mexican allies. Continental could have a link to startup Azteca, the successor to Taesa, through America West. American, on the other hand, has been without a Mexican partner since its split with AeroCalifornia a year ago. Elsewhere in Latin America, American's strategy has been to align with a local airline wherever possible.
Debate also continues over the value of Cintra shares, and whether they would generate more if sold as a package or separately. Cintra supporters argue that its shares are worth $1billion more if sold intact. The CFC claims that figure fails to account for rigorous new regulations it would impose to restore competition if Cintra remains a monopoly. The CFC believes that Aeromexico and Mexicana together will yield about $1.4billion.
Unions representing 23,000 Cintra employees still hope to derail the break-up. They claim it will open domestic skies to foreign airlines, causing the collapse of Mexican aviation. How seriously they take this threat is unclear, since the government has not proposed to grant cabotage. More likely, they fear the insecurity of a more competitive airline industry. In any event, they threaten to blockade airport terminals around the country in protest.
A union representative who is also a member of Mexico's legislature warns the CFC to avoid any "precipitous decision". Cintra unions are trying, with mixed results, to enlist support from other unions, but they still hope to convince the House of Delegates to intervene or at least defer a decision until the Fox government takes office. A member of the Fox transition team says the competition law should be changed, but he does not criticise the CFC's decision.
Source: Airline Business
