Before 'La Crisis', Taesa Airlines terrorised Mexico's two major carriers. With lower-than-bus fare prices, it captured a quarter of Mexico's domestic traffic in its first two years of scheduled service.
Many of those passengers were taken from Mexicana, which saw its market share plunge. By 1994 Taesa was hiring flight crews as fast as Mexicana laid them off, adding aircraft, and boosting capacity in an obvious move to finish off Mexicana. The carrier's chairman and chief executive, Captain Alberto Abed, crowed that Taesa's market share would double in a year. Then the Zedillo government took office and one month later Mexico's peso crashed. That ended the days of the Tiger.
For Taesa, 1995 was perhaps harder than for its bigger rivals. It lacked their foreign traffic to offset a 28 per cent plunge in domestic passengers. And since more of its passengers were discretionary travellers, Taesa's sales dropped 38 per cent and losses leaped from US$12 million in 1994 to a massive $148 million.
Staggered by this beating, Taesa lost all appetite for combat and sought refuge in the equilibrium between the low fares needed to boost its declining traffic base and the higher fares needed to raise yield. The result was something of a truce.
Whether it will last is one of the biggest unknowns in Mexican aviation. For now Taesa is holding its market share at 24 per cent and is busy healing its wounds.
Results through the first half of this year suggest Taesa will end 1996 with a net loss of about $25 million on sales of some $230 million. Year-to-year comparisons in US dollars are distorted by the peso's fluctuation. But the underlying result is one of marginally lower sales against a significant ten-fold improvement in net result, albeit negative.
Achieving stable fares and higher yields are Taesa's two main drivers for more revenue. But last year, the carrier also launched an imaginative venture into the realm of consumer finance. To attract passengers at a time when all Mexicans, except the bankruptcy lawyers, were reeling from the effects of La Crisis, Taesa offered passengers up to 75 per cent credit on their tickets, with monthly repayments spread over a maximum of a year.
The venture has evolved into Creditaesa, a dedicated credit card for ticket purchases held by 5 million Mexicans, according to the carrier. Taesa carries the receivables itself, but bought a bulk guarantee from an insurance company. The insurer reimburses Taesa for any default and then goes after the non-paying customer itself. So far the default rate is only 13 per cent, and both airline and insurer are comfortable with the plan. Taesa also offers a simple frequent flyer plan, under which a member receives one free flight for every five booked.
Aside from these inducements, however, Taesa has relied on cost cutting to promote its recovery, reducing capacity on thinner routes and downgrading its fleet to cut lease expenses. Last year the carrier started exchanging leased B737s for DC-9s. By October it had taken five DC-9s, which are older, smaller, and more costly to fly. But with this year's traffic up only 4 per cent, the capacity loss is incidental, and the slightly higher operating costs are more than offset by savings on the lease payments.
A single class product, average aircraft utilisation of 11 hours plus, limited inflight services, and only one fairly compliant union have helped Taesa keep unit costs low. Through the first three quarters of this year costs per ASM were up from 4.62 to 5.04 US cents over last year, but still well below Aéromexico's 6.3 cents or Mexicana's 7.9 cents.
One place where Taesa still lags behind its rivals is in hedging its foreign exchange risks. Given the peso's recent devaluation and continued softness, this lack of financial sophistication is a concern to the airline. Eduardo Cacho, assistant to Abed, says 43 per cent of Taesa's earnings are in foreign currency, mostly from charters, but foreign-denominated costs and debts are almost 65 per cent of the total. The gap between the two poses a risk that Taesa would like to close and Cacho believes more charter-generated foreign currency is the remedy.
Indeed, Taesa has never committed itself entirely to scheduled service. It started life as an air taxi operator, expanding into corporate jet charters and sales, third party maintenance, helicopter services, cargo, and charters. It has also ventured into wet leasing in a deal with Malaysia's new airline, Pacific Eagle, for a B737. In August it also launched an express cargo service.
Charter operations started in 1991, the same year as scheduled service, and the two have grown at nearly comparable rates. But Abed worries about long term prospects for charters as more tour operators buy their own fleets.
For now, at least, management remains preoccupied with completing the restructuring. This process is now in its last phase. At presstime, the carrier was close to sealing a deal to capitalise Taesa's debts, which range between $130 million and $150 million, depending on interest rates. Taesa and its creditor banks have agreed on the value of Taesa's fixed assets, but were still haggling over the total worth as a going concern.
The Mexican government is party to these talks, partly as a minor creditor but mainly as a trustee for Banco Union, one of Taesa's larger creditors. This situation has arisen because the treasury department took over Banco Union after it became another casualty of La Crisis.
Cacho maintains that both the government and the banks have confidence in Taesa's abilities and want to see it succeed. This coincides with views by others, who suspect the government is now taking a more protective attitude towards Taesa, especially since it represents the best chance to maintain domestic competition should Aéromexico and Mexicana eventually merge.
Close encounters
But Taesa realises banks and governments are not reliable long term investors and the airline is looking for aviation interests willing to take a stake. 'We have had close encounters with a number of investors,' concedes Cacho. But he will not be drawn on rumours of talks with Continental Airlines other than noting: 'That's good speculation.' Cacho insists Taesa has no plans to negotiate with any potential investors until the restructuring is finished. 'We want to give investors the complete picture, not guesses,' he notes.
As the restructuring draws to a close, Taesa is planning a 'conservative' 7 per cent increase in capacity between now and year's end. This expansion fits in with forecasts of 6-9 per cent traffic growth next year. Taesa's focus will remain on retaining its domestic share as that sector grows and it has no plans to expand beyond its two US routes to Oakland and Chicago.
But many Mexican aviation analysts wonder if that is a permanent strategy. The speculation circles back to why Taesa called off its assault on the domestic market in the first place. Was it only La Crisis and Taesa's own financial problems, or was it something more fundamental that stopped the carrier's aggressive advance?
There are a number of opinions on this issue. Officials at Mexicana, which bore the brunt of Taesa's earlier attacks, say the Zedillo government ended the fare wars shortly after it took office in late 1994. According to this view, the new secretary for communications and transport warned all airlines to base their fares on actual costs or face more direct government intervention. The current administration remains in office for another five years.
When asked, Taesa officials are oblique about why they changed tactics. One explanation is that the 1995 civil aviation code outlawed fare 'dumping.' But officials at the Federal Competition Commission (CFC) insist the law contains no such ban and fares below costs are not anticompetitive unless accompanied by other predatory acts.
Another Taesa explanation is that La Crisis forced all the airlines into an informal truce 'to bring order to the domestic market.' As such the airlines did not agree to fix fares, but only to give each other advance notice of fare changes and consider the impact of proposed actions on each other. Yet, officials at Aéromexico and Mexicana point out how the CFC barred them from conferring on fares as a condition of approving their joint ownership by Cintra. Moreover, CFC officials insist any formal or informal arrangement to stabilise fares would be illegal, and say they have seen no evidence to suggest collusion.
Perhaps the most likely explanation is the one Taesa does not want to admit to, which is that it realised market share is less important than profit. Abed observes: 'Even though Taesa is recognised for fares that average 25 per cent lower than our competitors, strong efforts have been made to raise our average yield.'
Yet Cacho does not believe that Taesa will remain content with only 24 per cent of Mexico's market. 'As traffic grows, all the carriers will want an increase. Everyone will be more aggressive.' The big unknown is how much any of them, and especially the airline with the most aggressive history, will sacrifice margins again to expand market share.
Saro led the list of last year's casualties, which includes several smaller airlines. Others, such as Mexico City-based Allegro Air, retreated from scheduled service and now limit operations to charters.
The well established Aerocalifornia, on the other hand, survived the crisis and comfortably occupies the position of Mexico's fourth largest scheduled carrier. Indeed, it rivals Taesa, which earns nearly half its revenue from charters, in the size of the scheduled operation it provides using a fleet of 16 DC-9s. Aerocalifornia has operated for 14 years in a Baja California niche. It flies scheduled routes from Baja to cities throughout Mexico as well as to Los Angeles and Phoenix.
The identity of the next largest scheduled operator is somewhat open to question. What is certain is that the airline that occupies fifth spot is well behind the other four. One likely contender is Aeromar, which operates a fleet of eight ATR 42s. Aeromar codeshares with Aeromexico but is an independent company based in Mexico City. The other pretender is Aeroexo, which owns and operates Aviacsa. Aviacsa started in 1990 and grew quickly for several years. It still claims a fleet of 17 B727s, but sources say at least half of them are now parked.
Excluded from this list for obvious reasons are Aerolitoral and Mexicana Inter, the regional codeshare partners of the big two. Both operators are now directly controlled by Cintra and no longer fall under the direct control of their former owners.
Source: Airline Business
