Conesa: Cintra's end game

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By David Knibb in Mexico City

Just 10 years after it was formed, Mexico's Cintra plans to sell off its airlines and go out of business, with Andres Conesa at the controls of its final few months of flight

Andres Conesa is trying to work himself out of a job. If he succeeds, by the end of this year Cintra, the Mexican state holding company that has owned Aeromexico, Mexicana and their subsidiaries for the past decade, will cease to exist and his position as president of its governing council will disappear.

Conesa's goal is to split Cintra, Latin America's largest airline group, into three parts – Aeromexico, Mexicana, and a ground handling company named SEAT, so that Mexico's federal government can sell its two-thirds stake in all three. Once this reprivatisation is complete, Cintra will close its offices and Conesa will be looking for work.

"My priority," he says, "is to do my job right. After that I will think about my future. One of the obstacles my predecessors faced is that they fell in love with this job. It is a great place to work." But breaking up Cintra and putting its airlines in the hands of private owners with a long-term commitment to Mexican aviation, he explains, "is more important for the industry and for all the people who work here".

Mexico's two major airlines, Aeromexico and Mexicana, have been commonly owned since 1995 when the country plunged into a deep crisis over the devaluation of its peso. Banks rescued both airlines by capitalising debts and taking control. With approval from Mexico's federal competition commission the CFC, the banks formed Cintra to hold their stakes in the two carriers. The CFC agreed on the condition that both airlines keep their separate brands, operate independently, and avoid any deals over fares, capacity or routes.

Two years later, with several of the banks in trouble, the government's bank guarantee institute and related agencies took over many of their interests in Cintra. Through that bank bailout Mexico's government became Cintra's majority owner.

By then complaints were rising from local communities, the tourism industry and rival airlines that Aeromexico and Mexicana were not honouring the CFC's conditions and were in fact exploiting their near-monopoly. Investigations provoked a tug-of-war between the CFC, which wanted to split the ownership of the two airlines to restore domestic competition, and the secretary of transport and communications (SCT), which wanted to keep them together so they could compete better against foreign carriers. It was a classic standoff between domestic and international competitive concerns.

Ultimately the CFC prevailed, but only after compromise. Its October 2000 order did not compel Cintra's immediate break-up, but ruled instead that whenever Cintra's shares were sold, ownership of the two airlines would have to be split.

Privatisation resurfaces
Cintra has been in a state of limbo ever since as unions and some politicians have argued whether the CFC made the right call. Four years ago, Cintra started gearing up for a sale, but 11 September brought the industry to its knees, and plans were quickly shelved. Between 2001 and 2003, Cintra lost nearly $500 million. Mexico's government was not prepared to give away its shares. In the past few years most stakeholders have come to accept that Aeromexico and Mexicana eventually would go their separate ways. As Pedro Cerisola, current secretary of transport, recently said, their separation is natural: "They are different companies that were united at a certain moment because they had the same owners, not because it was their aim to be united. Each has its own concession, its own life, and will follow its own course."

But last year the rules suddenly seemed to change. Rogelio Gasca Neri, who was then Cintra's president, approached the CFC's new director about the possibility of merging Aeromexico and Mexicana after all. The upshot was preliminary CFC approval for a merger, but only on condition that Aeromexico and Mexicana spun off their subsidiaries into a viable new rival to compete on domestic routes.

That idea lasted four months. Conesa replaced Gasca Neri as Cintra's president last December, began an analysis of what would be needed to satisfy the CFC, and concluded that the merger/spin-off idea was too complex and time-consuming. Cintra's board agreed and reverted to a plan of selling Aeromexico and Mexicana separately.

So Cintra is back where it was five years ago – ­under orders to sell its two airlines to separate owners. The difference this time is that their finances make a sale feasible and the government has some urgency to get on with it. One big reason is next July's presidential election. As Conesa explains, it poses a practical, not a legal, deadline. "Elections create noise. Markets become nervous and volatile. Higher volatility usually means lower price. It is better for us to sell sooner than later."

Other possible events point to the same conclusion. Applications are pending for several domestic startups, and talk is growing about liberalising the Mexico-USA bilateral. "Both will mean more competition for us," Conesa predicts. "The quicker we sell the airlines and bring somebody on board, the better."

Hence one of the largest airline privatisations in Latin America is about to begin. Indeed, preparations for it are well under way.

They started well before Cintra's board decided on 8 February to scuttle a merger in favour of separate sales. Conesa, a former government economist, was already making the rounds to the heads of the agencies that held Cintra shares. Yes, he says, merging the two airlines might fetch a higher price, but it also poses risks and could mean delaying the sale until 2008.

Conesa also held repeated meetings with air transport officials at the SCT, which oversees Mexican aviation. After all, these were the same officials who had lost the argument five years ago to keep Aeromexico and Mexicana together.

"You can have the best plan," Conesa says, "but if you do not have the support of the authorities, it is very difficult to move forward."

Split approved
In the end Conesa's missionary work paid off. Even though Mexico's president Vicente Fox had previously lent his public support to a merger of Aeromexico and Mexicana, ultimately all the affected government ministries agreed with Conesa that an ownership split was the right course. As a result, Conesa now can say: "Our plan is in line with government policy and aviation policy. It is fully approved."

The secretary of tourism alone has expressed some disappointment over the shift in plans, but Conesa believes that splitting Cintra will promote competition and lower fares, which ultimately is what every tourism minister wants.

Since the board's February decision, the pace has picked up. Cintra has selected investment bank Credit Suisse First Boston and a law firm to advise it on key decisions and to handle the sale specifics. Conesa expects the bank to set reference prices or values for each of the three groups that will be separately offered. The market already puts a value on Cintra's shares, which are publicly listed and traded, but there are no separate values for the three groups. Most analysts put Cintra's value at around $250 million.

Cintra will also seek financial and legal advice on the sale process itself. One option is to convert all Cintra shares into separate shares for the three groups before any sale. The other is for Cintra itself to sell the groups and then distribute the proceeds to its shareholders. Either way, at the end Cintra will disincorporate, but the choice has tax implications.

A strategic decision also looms over the method of sale, and Cintra's board expected to make a decision on this shortly. The question is whether to sell the government's stake through a private placement, public float or a combination.

"The choice could affect timing," Conesa warns, because a combination effectively would be two sale processes back to back. Either way, however, his mandate is to wind up everything by year's end.

Conesa discounts the need to bring in foreign airlines as equity partners. "When our airports were privatised, Mexico had no private experience in airport operation, so we needed to bring in a large international player. But Aeromexico and Mexicana are experienced international airlines. They play by the same rules as American or Iberia. It is not necessary to have an international carrier on board."

Foreign ownership
Cintra neither seeks nor expects any change in Mexico's 25% cap on foreign ownership of airline voting shares. The ministry that oversees foreign investment could allow foreign buyers to own more than 25% of Cintra in the form of non-voting shares, and that would require no change in statutes.

But Conesa sees no need for a bigger foreign stake. "There is plenty of domestic liquidity. The recent sale of shares in ASUR [one of Mexico's airport groups] involved a significant amount of local capital, and it was not a concern. Mexico has people committed to the domestic airline industry."

Among potential bidders, according to local reports, are Carlos Slim, one of Mexico's richest businessmen, and Pedro Aspe, a former government minister who has his own application pending to launch a low-cost carrier.

Conesa is confident that whoever ends up owning the airlines will not abuse the privilege. Only 7% of Cintra's shares are publicly traded, but he sees ongoing benefits from the company's public listing.

"We won't see a repeat of 20 years ago, when owners didn't have experience, ran the airlines sort of like a family business, and went broke. Publicly traded means reporting on time, supplying information to the market, and meeting accounting standards. It ensures transparency and accountability."

Aeromexico, which is part of SkyTeam, is Cintra's only airline still in a global alliance, Mexicana having left Star, but Conesa also believes such alliances produce another form of discipline. "Groups such as Skyteam have their own standards. A new owner will have little opportunity to deviate from those standards. If you do, you could be out."

The biggest operational change that Conesa plans before Cintra's sale is the launch of a domestic low-cost carrier. Still unnamed, it is the outgrowth of a fleet modernisation programme that Conesa sees as important to enhance the pre-sale value of Cintra's airlines, as well as to improve its competitiveness. Aeromexico is acquiring 10 Boeing 737s and two 777s. Its subsidiary, Aerolitoral, is adding more Embraer ERJ-145s to its current fleet of five, and Mexicana expects to have 10 new Airbus A318s by year-end.

Mexicana is transferring its 10 Fokker 100s to the new low-cost carrier this spring. That airline will employ the staff of Aerocaribe, Mexicana's subsidiary. Aerocaribe, with its tired fleet of Fairchild 227s and McDonnell Douglas DC-9s, will transfer some routes and Mexico City slots to the new carrier and then disappear. The low-cost carrier will be offered for sale as part of the Mexicana package.

"The low-cost model hasn't been tried before in Mexico," Conesa notes, "but there is plenty of room for growth. Mexico had only 17 million airline passengers last year. By contrast buses carried 2.5 billion." Subtract those travelling under 400km (250 miles) or to towns without airports, and that still leaves 50 million candidates for air travel.

"We can grow three times and that growth is still sustainable," Conesa beams. He expects the low-cost start-up to launch flights in May or June with point-to-point, frequent service and simplified internet-based or call centre fares 30% lower than the majors'.

In contrast to this launch of a low-cost carrier, Conesa foresees "no significant change" at Aerolitoral before the sale. "It is already the most significant regional airline in Mexico," he claims. A fifth of its passengers interline with Aeromexico and he expects that to grow. Aerolitoral will be sold as part of the Aeromexico package, but it will not be merged into its parent, contrary to some reports. "Aerolitoral will continue as a separate brand."

Cargo decision
One final operational change is still under review – whether Aeromexico should add a cargo division. This is tied to the unresolved fate of Aeromexpress, Cintra's cargo division, which has no aircraft but tries to fill the bellies of Aeromexico and Mexicana aircraft. However, Mexicana already has its own cargo division. "We could sell Aeromexpress as a separate package, like SEAT," Conesa explains, or close it and "see that Aeromexico and Mexicana both have their own cargo divisions".

Conesa's bigger concern about cargo is how badly its potential has been ignored. "Cargo generates around 1% of Cintra's total revenue. Compare that with LAN, which earns more than a third of its revenue from cargo. We could bring in significant additional amounts."

But, like other potential improvements, such as better synergies between Aeromexico and Aerolitoral or profit-sharing plans for employees, Cintra can only do so much before the sale. Cintra's financial turnaround will certainly make a sale easier. Its 2004 profit was 573 million peso ($52 million) on revenue of 36.1 billion peso, up 13.3% from a year before. This compares with a net loss of 2.2 billion peso in 2003, representing a remarkable improvement. As a result Cintra's carriers have no material long-term debt. Mexicana is still paying for its first 10 A320s, bought 10-15 years ago, but the only other airline liabilities are off-balance sheet lease payments of $150-160 million a year. Total operating lease obligations run around $350 million.

Nor is there any issue about allocating liabilities between airlines. Each carries its own liabilities in its own names. As Conesa explains: "Each of the three groups will have all the assets, liabilities – above and below the line – and capital that belongs to that group. There are no debts at the Cintra level."

Compared with most Latin American airlines, Cintra's carriers are in good shape. Still, Conesa worries that they are undercapitalised. He stresses the need for new owners "who are able to inject fresh resources and have a long-term commitment to the industry. Mexico's government doesn't have that. In the past 10 years it has put no additional resources into Cintra."

As a result, he laments that Aeromexico and Mexicana have lost market share, Mexico's economy has suffered, and airline jobs are in jeopardy.

But bidders for Cintra's carriers are not required to commit new capital. As nice as it might be, the bigger benefit of Cintra's sale may be that Mexico's two major airlines will be freed from a decade of common control. Critics have claimed for some time that Mexican aviation has stagnated, largely due to a lack of vigorous competition. Now, instead of needing to complement each other or avoid rocking each other's boat, Aeromexico and Mexicana finally will be able to make independent responses to the market.

This is what Conesa has in mind when he says of the sale that will put him out of a job: Cintra's airlines "need a fresh view".

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