Swine flu further weakens Mexico's carriers

The sudden outbreak of swine flu in Mexico could not have come at a worse time for the country's carriers, which were already suffering from the economic downturn and overcapacity in the domestic market.

Mexican carriers say sales immediately fell of a cliff after the outbreak was reported in late April and were close to zero during the peak of the outbreak in early May. Mexico's five largest carriers (see table) all say traffic was down at least 30% for May. But these carriers collectively only cut capacity by about 15%, mainly by cancelling flights on a day-by-day basis, leading load factors to dip to 50% or worse. "May was disastrous," says Interjet chief executive Luis Garza.

Garza says sales were down 50% in May and were off 70% in the first week of May. Interjet ended May with an average load factor of 52%, 22 percentage points below budget, and that was only achieved after it reduced capacity by 30%.

Mexicana says its traffic was down about 30% in May as it cut capacity by 15%, leading to a load factor in the mid 40s. "It's now picking up but May is like a black hole," the airline says.

Aeromexico says its traffic was also down about 30% in May. It would not provide a load factor figure for the month but it clearly plummeted as capacity was only down 12%, including a 22% drop early in the month.

Volaris says it only trimmed capacity by 4%. The low-cost carrier followed a slightly different strategy, targeting passengers with tickets on flights cancelled by other carriers with a special 500 pesos ($38) "protection" fare. But Volaris says sales were still down by 40% in May.

Aviacsa, which is now fighting an attempt by Mexico's Secretary of Communications and Transportation to ground it over alleged safety violations, says it cut capacity by about a quarter while traffic fell even faster.

Mexico had already seen domestic traffic drop by 11.4% in the first quarter of this year to 6.2 million passengers. Nearly all of Mexico's carriers have acknowledged they were unprofitable last year and conditions in the first quarter only worsened. Garza says April, aided by a late Easter, was better but hopes in the industry for a turnaround in 2009 were quickly dashed by the "totally unexpected" swine flu outbreak.

"It was the straw which broke the camel's back," Garza says. "The event came at the worse time for the industry. It created a lot of problems."

All the carriers say domestic demand is quickly recovering with June traffic only slightly down and normal peak season figures expected for July and August. But international traffic is still down as foreign tourists avoid Mexico.

Mexicana says its international traffic is still down about 20% with its US and Canadian routes hit the hardest. It says US traffic has been particularly slow to recover despite promotional efforts to fight the "irrational perception" that Mexico is not safe.

Aeromexico says its international traffic is still downabout 10% and low demand forced it to permanently suspend service to Rome and Shanghai. A sudden 80% drop in forwarding bookings also prompted VivaAerobus to drop the US city of Austin, which only a year ago opened a low-cost terminal for the airline. Otherwise Mexican airlines continued to serve all markets as the crisis bit, mostly cutting frequencies.

US carriers have been more aggressive, suspending several Mexican routes and cutting their Mexico capacity by 30% to 50% in May. American Airlines chief executive Gerard Arpey says the carrier's Mexican traffic was "devastated by the virus" but the impact is now diminishing as the "media hysteria" subsidies. Continental, the largest carrier in the US-Mexico market, says the swine flu caused a $30 million reduction in its May revenues.

Domestically, while Mexico's carriers are confident they will see average load factors back in the 70s this summer, Garza says September is a concern and warns more consolidation is still required for the industry to return to profitability. "Something will have to change. There's no relief. There's no aid," he says.

The Mexican government in mid-May announced it was working with the country's main ­airlines to develop a stimulus package to help them cope. But Garza says the government so far has only reduced air traffic control fees by 50% for three months, a concession worth only $100,000 to Interjet.

The government also plans to offer airlines loans through state investment bank Bancomext. But airlines will have to qualify for the loans and there will be no discount on the interest rate. "It's a commercial loan. Eligibility will be very difficult. You're going to need a very strong balance sheet," Garza says. With the financially weaker carriers unable to raise cash, Garza predicts "insolvency will arrive. It's inevitable."

Three small Mexican carriers already went bust last year and Aviacsa is widely expected to be the next casualty. But after three days with no flights Aviacsa was able to resume operations on 5 June, when it secured a highly controversial ruling by a lower court judge which reversed at least temporarily a government grounding order. The ruling prompted an outcry from Mexico's Secretary of Communications and Transportation, which claims its legal right to ground carriers for public safety concerns has been usurped. It will likely take months before there is a permanent outcome for this case as well as a separate case which began last August after the SCT tried to shut down Aviacsa because it is behind in paying air traffic control and airport fees.

Source: Airline Business