Commercial Airlines in Mexico

Commercial Airlines in Mexico

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MEXICONOW Staff Report

As Mexico´s aviation industry continues to evolve in the post-deregulation era, the country’s largest carriers are working to entrench themselves in their respective business models. With Aeromexico clearly in first place as the country’s full-service carrier and Viva Aerobus and Volaris adopting more ultra-low-cost strategies, Interjet is assuming the role of Mexico’s hybrid carrier – touting both a more upscale product and lower costs. The other national airlines are Aeromar, Magnicharters and Transportes Aéreos Regionales (TAR) along with Aerocalafia.

The national airline, Mexicana de Aviación, was declared bankrupt on April 4th. This came after a four-year process since the firm ceased operations back in August 2010, nearly 90 years after its founding. The domestic market of the country had been dominated by Mexicana and Aeromexico, which together controlled more than 75 percent market share. Consequently, the departure of Mexicana in 2010 raised concerns about the possibility of Aeromexico becoming a monopoly.

The message of the head of the Secretariat of Communications and Transportation (SCT), Gerardo Ruiz Esparza, was clear about it. He said: "…there is no more Mexicana, considering that the available firm assets are very limited. The government's priority will be to ensure the workers well-being”, he added. The leaders of the unions for flight attendants and ground staff of Mexicana de Aviación announced that they would challenge--in every legal way possible--the decision of Judge Edith Alarcon to declare the company bankrupt.

The aviation industry of Mexico has become more dynamic and has increased both the number of services as well as their overall quality. This has happened despite the collapse of Mexicana. Figures from the Directorate General of Civil Aviation (DGCA) of the Secretariat of Communications and Transport show that the total number of passengers on domestic flights in 2012 reached 28.1 million. This is well above the high record of 27.6 million reached in 2008. This figure was exceeded again in 2013, when seven airlines operating in the domestic market transported 30.5 million passengers. This represented an increase of 8.5 percent from 2012.

Beginning in June 2015, Aeromexico´ s CEO Andres Conesa, will be the next president of the Guild of Global Airlines (IATA). The enterprise has bases in Geneva (Switzerland) and Montreal (Canada).

The National Chamber of Air Transportation recently elected Fernando Flores, CEO of Aeromar, as its new President. He replaces Andres Conesa and his term of office is for the 2014 period.

Exhibit 1 shows that during the first semester of 2014(January–June 30), Interjet and Volaris led the market share of the National Airlines in the Mexican Market in regard to passengers with 3.6 to 3.5 million out of a total of 15.4 million. This represents 23.7% and 23%, respectively. But if we take the overall Aeromexico Group (Aeromexico with Aeromexico Connect), together they enjoyed 37.2% of the market.

Alejandro Bravo is a Partner for Transport and Logistics Industries of KPMG in Mexico. He published: “The airline industry in Mexico has been growing in recent years, and based on analyzed data, it is expected to continue its growth in the years to come. As for the fleet, Mexican companies have done their homework and most of them have done their part to modernize their fleet. This has been done for the most part whether to increase or replace it, due to the many solid advantages that this represents.”

Rodolfo Lopez Negrete is the CEO of the Mexico Tourism Board. He explained that the airline regulation has been revised in order to allow international airlines to enter the country, pick up passengers and continue on their journey to another country. This practice is known as “Quinta Libertad” (the Fifth Freedom).

The review of what others call “Cielos Abiertos” (open skies) has been on the table for a long time and nothing prevents its implementation, except for the infrastructure of domestic airports and increasing operating and energy costs.

In fact, four of the commercial airlines in Mexico: Aeromexico headed by Andrés Conesa; Interjet with Jose Luis Garza; Volaris lead by Enrique Beltranena; and VivaAerobus directed by Juan Carlos Zuazua, in general, consider that the proposal originally made by the governor of Quintana Roo, Roberto Borge, in his capacity as president of the Conago, “Is not bad and can work well, but at the same time things have to be done in an orderly and harmonious manner.”
For Jose Luis Garza (Interjet CEO), it is always necessary to speak of the “Cielos Abiertos” policy with caution because "simplistic openings can cause situations like what happened with the banks. This means that more precision is required on this issue and everyone needs to be more careful. The bottom line is to not let foreign companies inappropriately cover domestic routes.
Garza said there is room for domestic and foreign airlines, but you have to patent the right formula to operate, just like it happens in other countries. Regarding the excellent connectivity that currently operates in Mexico, Jose Luis Garza acknowledged that “The new policy implemented by the Federal Government is working very well and greater openness with foreign airlines can now be seen.”
This is just what Secretary of Tourism, Claudia Ruiz Massieu, and the head of the Secretary of Communications and Transport Gerardo Ruiz Esparza have been analyzing. Mexico, in fact, has now signed over 70 air transport agreements with the same number of countries that regulate traffic rights in a bilateral way. This includes number of carriers designated by routes, frequencies, aircraft types permitted and approval of rates, among other factors.
Starting on January 2015 a program of incentives, including "Quinta Libertad” (the Fifth Freedom) will apply to all airlines seeking to operate or that are already operating in the Toluca airport. This will be done to alleviate the saturation of the Mexico International Airport “Benito Juarez”.

The Central North Airport Group (OMA) sees the modification of agreements between Mexico and other countries as very positive. This is something which would fully support the implementation of the "Quinta Libertad” at the International Airport of Toluca. In fact, this would allow an international airline a stopover in the country to take-on passengers, mail and cargo, and then continue on its journey to a third country.

Jose Luis Guerrero, Director of Administration and Finance of OMA, said that the pilot project expects to be performed by the federal government in Toluca and could be replicated in other locations, which would certainly favor their operations in airports.

As part of the National Meeting of Communications and Transport, the head of the Directorate General of Civil Aviation (DGCA), Alexandro Argudín, said there is interest from several international operators to operate under additional freedoms in Mexico. He pointed to Toluca as the first place to innovate under this scheme.

However, the Airline Pilots Associations rejects the policy of "Cielos Abiertos” (Open Skies) to foreign airlines. This is because they worry it could have an adverse impact on domestic airlines and might even go on to generate a crisis in the domestic aviation sector.

The leader of the Airline Pilots Association (ASPA), Carlos Diaz Chavez Morineau, said they are against the opening: "To continue along the path of the “Cielos Abiertos”, he said, “would lead us to the disappearance of the national aviation industry."

Exhibit 2 illustrates the international service passenger traffic by foreign air carriers. American Airlines and Continental remain at the top of the data recorded during the month of June, 2014, with 376,000 and 296,000, respectively.

Southwest Airlines, the most successful low cost airline in the world, announced it will offer its first flights to Mexico as part of its openness to international routes. This came after serving the domestic market in the U.S. exclusively for 43 years. The airline announced in a press release, that they will offer direct daily flights to Cancun, Quintana Roo from Atlanta and Baltimore.

Southwest will also have direct flights to San Jose del Cabo from the Orange County Airport in Southern California. The airline also plans to operate two daily direct flights between Denver and San Jose del Cabo and Cancun during 2014.

Southwest belongs in the category of iconic airlines along with FedEx, KLM, Pan-Am, Singapore Airlines and Emirates. These are the firms that have revolutionized the global airlines vis-a-vis the concept of low-cost carriers of passengers and cargo. This became a viable model that others have tended to imitate. Southwest has destroyed the myth that it is impossible to consistently make money with an airline.

Competition has brought benefits for the users. This has been done by requiring higher quality and more competitive prices. In the first half of the year (2014), prices of air tickets in Mexico decreased. This was because the airlines started a price war to get more passengers and counteract the economic downturn that inhibits travel.

On average, air fares fell 6.2 percent in the first half of 2014. During the months in which the largest declines were recorded were February and March, when prices fell 14.1 percent and 12 percent respectively, over the same period of 2013. This data comes from the National Institute of Statistics and Geography (INEGI).
In the last 15 years airlines in the world have substantially modified their structure, mode of operation and, above all, their expectations of what is possible and what is not in this global economy. Airlines in Mexico also have to rethink their strategies and take the lead in everything that relates to expansion, investment and technological changes.