Investors in Mexico are lining up to back a wave of low-cost start-up carriers seeking to capitalise on the potential of the country’s rapidly evolving airline industry. However, Mexico’s established flag carriers have been finding it more difficult to attract investment.
This was highlighted by Mexican government-controlled holding company Cintra’s recent unsuccessful attempt to privatise both of its airline groups, Aeromexico and Mexicana. On 16 December, Cintra’s shareholders approved the sale of Mexicana and its low-cost subsidiary, Click Mexicana, to the Grupo Posadas hotel chain for $165.5 million.
But Cintra was unable to sell off Aeromexico and its regional subsidiary Aerolitoral. The holding company has indicated that it may again attempt to sell Aeromexico early this year.
At the end of the privatisation process, Grupo Posadas and Grupo Xtra were the only two investors to submit final bids for the two airlines. Grupo Xtra’s bid for Aeromexico was rejected by Cintra for failing to reach the carrier’s minimum value.
Earlier in the year, Cintra had approved 18 applications from 10 different bidders, including Spain’s Air Europa and Iberia. However, Mexican airline industry sources say Cintra’s decision to award a 5% stake in each airline to the country’s pilots union, ASPA, in return for increased productivity was a factor behind some of the bidders withdrawing their applications.
New entrants
Instead, investors have been ploughing money into five new low-cost start-ups, two of which began operations in 2005. Avolar, headed by Jorge Nehme, began domestic operations from its Tijuana base on 16 September. To begin with, the carrier leased two Boeing 737-300s and a 737-500. It plans to operate 30 aircraft within two years. Not far behind Avolar is Interjet, which on 1 November finalised a memorandum of understanding with Airbus for up to 20 A320s. Interjet is owned by Mexican conglomerate the Aleman Group and began operations using three former Volare aircraft on 1 December. The carrier’s chief executive Jose Luis Garza Alvarez says “nine or 10” new routes will be added in March, adding that “we should be an airline with a fleet of 30 aircraft by 2011”.
A third start-up, Volaris, recently signed a firm order with Airbus for 16 A319s, with options on a further 40. The carrier plans to begin operations on 13 March from its Toluca base to Cancun, Guadalajara, Monterrey and Tijuana. Volaris is backed by Mexican billionaire Carlos Slim, along with broadcaster Televisa, the Canadian Discovery Americas I investment fund and Taca chairman Roberto Kriete. Each investor holds a 25% stake in the carrier, which was financed by an initial investment of $100 million.
Mexico’s civil aviation authority is also reviewing applications from Aerolineas Mesoamericanas and an as-yet-unnamed airline to be run by Brazil’s GOL in co-operation with Mexican airport investment company Inversiones y Tecnicas Aeroportuarios. The latter aims to begin operations in the third quarter of this year. Interjet’s Garza Alvarez says a key reason why so many new carriers are entering the Mexican market at the same time is that “the macroeconomic indicators are now right”. He adds: “Everyone is seeking the big market potential here,” and says: “Mexico’s air transport market should have been far more developed before now, but Mexico’s financial crisis and instability created problems for the airline industry, leaving investors struggling to survive the currency devaluations.”
Alvarez adds that the privatisation of Aeromexico and Mexicana “opens new opportunities for new entrants”, and that the Mexican government has now adopted “a new policy of openness” toward new entrants. “Government concessions for airlines used to be a privilege, but now the process is much more open,” he says.
ASPA secretary general Jesus Ramirez Stabros says Mexico’s aviation market has “the greatest potential in the world for growth”, but warns that the market could “turn to chaos” if laws governing the country’s aviation system are not changed ahead of the influx of new carriers. “There needs to be a change in the law to make the market fair to all concerned, and the rules of competition must be equal for all airlines,” he says. “Mexico must also make many modifications in its infrastructure, with the construction of better airports.” Changes to the law should also include limits on airline share ownership to avoid past problems of fraudulent activity, says the union chief. “In the past, businesses have used investment in Mexican carriers as a money laundering technique, which led to a distortion of the market.”
Government oversight should also be increased to enforce the rules of fair competition and to penalise carriers that “do not pay fees to airports, do not pay immigration taxes, have high debt and continue to operate very old, poorly maintained aircraft,” he says.
Ramirez Stabros has asked Mexico’s President Vicente Fox to allow the formation of a national aviation commission, which, while lacking any real legal power, would make proposals for necessary changes to the industry. This commission would be “very important for aviation analysis” in Mexico and is something ASPA is going to insist on, says Ramirez Stabros. President Fox has already agreed to the proposal in principle, says the union chief, but has not indicated how or when such a commission would be formed.
Despite these concerns, Ramirez Stabros says Mexico’s population of 105 million, of which only 3-9% use air travel, is a strong indication of the country’s future market potential. “At the moment, the majority of the population use buses to travel, but this is likely to change when these low-cost carriers enter the market.”
Keenly aware of the increased competition it faces, newly privatised Mexicana has been working to increase its efficiency over the last few months and in July 2004 it launched Click Mexicana, a low-cost subsidiary that will be used to compete against the new domestic start-ups. The carrier began with service to nine domestic destinations from its Mexico City base and later added flights from nearby Toluca. Click chief executive Isaac Volin says the carrier will continue its expansion, with service to “somewhere in the south-eastern USA” set to begin this year. Further expansion is also planned to other countries in Central and South America.
Grupo Posadas’ acquisition of Mexicana has allowed the carrier to begin considering an expansion strategy into international, long-haul markets, traditionally the domain of Aeromexico, says Mexicana senior vice-president of public relations and customer service Adolfo Crespo.
Potential threat
The carrier has been designated by Mexico’s communications and transport ministry to operate services to China in 2007, and is looking to lease two widebody aircraft – either Airbus A340s or Boeing 777s. “Grupo Posadas’s strategy for Mexicana is for growth and profitability,” says Crespo. No specific routes have been decided, but Mexicana will probably operate its China services from Tijuana.
Despite Mexico’s enormous potential for growth in the airline sector, some industry executives are reluctant to endorse further expanding the country’s bilateral aviation accord with the USA because of a perceived unfair advantage to US carriers. The two countries in September expanded their 1999 agreement to allow three airlines from each country to fly between any US city and 14 Mexican destinations.
But Mexicana executive vice-president of alliances and industry affairs Fabricio Cojuc says the bilateral agreement is “detrimental” to domestic carriers because of the larger size of the USA’s airline industry. “We are not against liberalisation, but only if there is a level playing field,” says Cojuc, adding that US carriers have the advantage of filing for Chapter 11 bankruptcy protection, a process that does not exist in Mexico.
In order to make the bilateral agreement more just for Mexican carriers, he adds, US carriers operating under Chapter 11 should not be allowed to expand into new markets until they complete their restructuring.
This sentiment is echoed by Cintra chairman Andres Conesa, who says Aeromexico is “in good shape” to compete with US carriers, but only if the process is fair. “We are not scared as long as there is fair competition,” he notes. “For example, if US carriers receive government support, this is not fair competition.”
ASPA’s Ramirez Stabros believes the Mexican government should make aviation “more of a priority” and overhaul the regulations that govern the market. “If this does not happen, the next thing in the market will be chaos, high pressure and instability,” he says. ■
KERRY EZARD / LONDON
Source: Flight International
