Aeromexico and Delta Air Lines sealed their new immunised partnership last week with the launch of a transborder joint venture between Mexico and the USA.
The deal, the latest in a number of joint ventures for Delta and the first such tie up for Aeromexico, allows the SkyTeam Alliance carriers to co-ordinate fares and schedules, share revenues, and jointly market and sell their flights in the Mexico-USA market.
"The ability to co-operate fully with Aeromexico brings additional competition to one of the most dynamic transborder markets in the world," says Ed Bastian, chief executive of Delta. "We are now well positioned to provide significant benefits to our customers, our businesses and our employees.”
In addition to the joint venture, Delta closed a $620 million investment in Aeromexico in March, raising its stake in the carrier to 36.2%. It plans to raise its stake in the Mexican carrier to 49% with an additional investment this quarter.
Dynamic is a good description of the US-Mexico market. FlightGlobal schedules show 15 carriers serving the market, with certain routes boasting as many as eight carriers.
Countering that competition is the aim of the joint venture.
COMPETITION RISING
In their application for immunity to the US Department of Transportation in March 2015, the carriers said: "The [joint venture] will be a more effective competitor on US-Mexico transborder routes by linking the combined networks of Delta and Aeromexico to create a third viable network competitor."
They pointed to their third and fourth places behind American Airlines, with a 25% seat share, and United Airlines with a 22% share of the market in 2014 as a reason for the regulator to approve the partnership. Together, Aeromexico and Delta would have a comparable 25% share, they said.
Competition has changed in the intervening two years. Interjet, JetBlue Airways, Southwest Airlines and Volaris all grew by double digits between Mexico and the USA, eating away at the shares of top four, FlightGlobal schedules data shows.
In 2016, American had a 21.6% share of seats, United 19.5%, Aeromexico 13.7% and Delta 11%, the data shows. The first three all lost share while Delta alone remained flat.
Interjet, JetBlue, Southwest and Volaris all gained transborder market share, with the latter posting the largest gain of 2.5 percentage points to 10% of seats in 2016, the schedules show.
FlightGlobal schedules
US-Mexico competition is only getting hotter. The liberalised bilateral agreement that allowed Aeromexico and Delta to seek immunity and form a joint venture also lifted caps on the number of airlines that can serve any one market, which was previously capped at three from each country.
This has allowed airlines to pile into high-demand markets such as Los Angeles to Mexico City. Aeromexico, American, Interjet, United and Volaris serve the route today, and Alaska Airlines, JetBlue and Southwest are set to enter the market over the next two years as a result of conditions placed on Aeromexico and Delta.
The DOT and Mexico's regulator COFECE conditioned approval of the partners' antitrust application on their divesting 24 slot pairs at Mexico City and four pairs at New York John F Kennedy airports.
Alaska, JetBlue and Southwest each received pairs in Mexico City for Los Angeles flights, as well as pairs for other markets. InterJet, VivaAerobus and Volaris also received slots in Mexico City and New York.
In addition, the DOT limited immunity to five years, at which point Aeromexico and Delta will need to reapply.
"The terms are pretty onerous," says Hunter Keay, an analyst at Wolfe Research, who has written extensively on Delta's investment in Aeromexico and their planned joint venture. "I really can't see this thing being as effective as it was when they conceived it."
He points to the five-year term implemented by the DOT as a potential significant limit on the carriers' achieving as many synergies as they outlined in their 2015 antitrust application.
Aeromexico and Delta outlined plans in their 2015 antitrust application to optimise their combined network, jointly manage revenue and pricing, co-ordinate sales and marketing, and facilitate seamless passenger connectivity.
However, they are thinking bigger to potential cost savings and further synergies. Aeromexico chief financial officer Ricardo Sanchez Baker told FlightGlobal in January that joint fuel purchasing, supply chain management, fleet procurement and IT co-ordination were possible opportunities.
“We are confident that there are robust opportunities to explore,” he said.
Sanchez Baker, and other senior Aeromexico executives since, did not comment on how the five-year term could limit these possible initiatives.
INTEGRATION UNDER WAY
Aeromexico and Delta are moving ahead with their tie-up, despite the potential challenges. Aeromexico moved to terminal four at New York JFK on 1 May, and Delta will move to terminals two and three at Los Angeles International airport by 17 May – moves that place the carriers next to each other at the airports.
Both Los Angeles and JFK are named as key joint venture hubs in the airlines' antitrust application.
Network and schedule changes are among the most touted passenger benefits from the partnership. The airlines have said they could add up to 14 new routes and 39 additional flights between Mexico and the USA under the joint venture.
Anko van der Werff, chief revenue officer of Aeromexico, told FlightGlobal on 3 May that growth would be split into three components: hub-to-hub markets, Mexican cities to US points, and US cities to Mexican beach destinations.
Steve Sear, president of international at Delta, said in a 3 May interview: "Once the teams can get together to plan the new network, ultimately, it's to have more network connections, better timed connections and sometimes more frequencies."
These will complement their existing network nicely. Aeromexico and Delta serve 59 routes connecting 10 Mexican airports with 32 in the USA, Innovata FlightMaps Analytics shows.
Combined Aeromexico-Delta transborder network, May 2017
Innovata FlightMaps Analytics
This does not include Aeromexico's new service to San Jose, California, from Guadalajara that begins on 1 July.
There was excitement in the air at a joint event to announce Aeromexico and Delta's sponsorship of the Mexican national football team on 3 May. Staff from both airlines cheered comments by van der Werff and Sear on the possibilities of the joint venture before the executives shifted to the topic at hand.
"This is special, this is the first short-haul, high-frequency joint venture in the world today," said van der Werff.
Source: Cirium Dashboard
