IN FOCUS: Mexican carriers still bullish, a year after Mexicana demise

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More than a year after Mexicana filed for bankruptcy protection, altering the landscape of the Mexican airlines industry, the country's carriers remain optimistic about future growth as they continue to add capacity and aircraft.

In the wake of Mexicana's exit in August 2010, other Mexican carriers quickly picked up the capacity it abandoned, expanding in the domestic and transborder markets. Passenger numbers dipped in the months following Mexicana's cessation of operations but are gradually creeping up, particularly in the domestic market.

Statistics from Mexico's Directorate General of Civil Aviation showed domestic passenger traffic plummeted 25% in September 2010 from the previous month in the wake of Mexicana's withdrawal from the market.

(c) dean morley 445

  © Dean Morley

With Mexicana holding the lion's share of the international market before it filed for creditor protection, international traffic was hit more severely following the carrier's demise. International traffic reported by Mexican carriers fell 50% in September 2010 from the previous month, and declined 42% year-on-year.

However, since then the numbers have gradually bounced back. In September 2011, Mexican carriers carried more than 2 million passengers in the domestic market, up 16% from a year ago. In the international market, Mexican airlines transported almost 400,000 passengers on scheduled services, a growth of 40% year-on-year.

Mexican carriers express optimism about the market and believe it is recovering well following Mexicana's exit and the reinstatement of Mexico's safety rating to category one in late 2010. The reinstatement by the US Federal Aviation Administration allows Mexican airlines to introduce new flights to the USA.

"We are optimistic about the improvement that the industry has registered in recent months," says Mexican low-cost carrier Volaris, one of three low-cost carriers in the country that is aggressively expanding.

Jose Luis Garza, chief executive of fellow low-cost carrier Interjet, says demand in the domestic market is more in line with supply and "most, if not all, the surviving operators are profitable". "These are good symptoms of the industry's health after six years of rough times in Mexico's airline industry," he adds.

Aeromexico, the country's remaining legacy carrier after Mexicana's withdrawal, has benefited the most since its rival's demise. It launched several new routes in the months after Mexicana's exit, boosted capacity on others and embarked on plans to expand its fleet.

At the last ALTA Airline Leadership Forum in Panama City in 2010, Aeromexico announced a plan to add three Boeing 737s and one 767. During its latest earnings call in September, Aeromexico's chief executive Andres Conesa revealed the carrier will acquire two additional Boeing 787s, adding to its existing order of five.

In April, Aeromexico debuted on the Mexican Stock Exchange, after a successful initial public offering that raised $320 million. The carrier plans to grow capacity by up to 13% in 2012, following a capacity growth forecast of 15-16% in the last quarter of 2011. It will add nine aircraft to its fleet in 2012, comprising six Embraer 190s and three 737s, closing the year with at least 115 aircraft.

On its route network, the airline plans to relaunch flights to Atlanta and at least two other cities in 2012, following a boost in capacity on US routes after Mexicana's exit. Conesa said Aeromexico is looking at other US cities on the east coast, which the airline plans to serve in the summer or third quarter of 2012.

Even with plans for new US flights, Conesa expects the carrier's capacity growth in 2012 to be split evenly between the domestic and international markets. He noted that in the past 14-15 months, the carrier was concentrating more on growing its international routes, with a 70-30 split.

Besides Aeromexico, the country's three low-cost carriers are also embarking on growth plans. Along with Aeromexico, Volaris and Interjet have sought extra-bilateral authority from US authorities to launch transborder flights on routes previously flown by Mexicana. In some cases, the authority is granted on special conditions and the rights must be returned if Mexicana resumes operations.

In July, the US Department of Transportation granted Volaris authority to operate three transborder routes: Monterrey-Chicago Midway, Mexico City-Las Vegas and Mexico City-Los Angeles. Volaris was granted the approval with the condition it ceases operations if Mexicana relaunches flights on those routes.

The carrier has no intention of stopping there, saying its business expansion strategy is "directed largely to the USA". The airline now serves seven US destinations: Los Angeles, Oakland/San Francisco, San Jose, San Diego, Fresno, Las Vegas and Chicago.

"We constantly analyse and evaluate different possibilities for new routes, which will be determined by the attractiveness and potential they represent to our clients and our business strategy," the carrier told Airline Business.

Volaris, which began operations in 2006 with two aircraft, now operates a fleet of 33 Airbus A320 family aircraft. Four of those aircraft were recently added. "Our plans are to stay in this line of investment in new equipment," it says.

Along with fellow low-cost carrier VivaAerobus, Volaris only began serving Mexico City in early 2010. Slots at the airport opened up after changes in government policy freed them up to new entrants. The exit of Mexicana also led to the availability of more slots. In late 2010, Volaris began expanding its operations at the airport and the airline says the new routes have been a success. "We are constantly looking to add more destinations to and from Mexico City," it adds. It does not rule out expanding its existing partnership with US carrier Southwest Airlines, which it said has "registered very positive results".

Interjet will make its debut in the transborder market in December, with flights between Mexico City and San Antonio. The carrier had also applied to begin flights to New York and Miami.

The airline, which operates a fleet of 31 aircraft, is due to take delivery of four A320s in 2012 and another four in 2013. It also has an order for 15 Sukhoi Superjet 100 aircraft, with five options Garza says are likely to be converted to firm orders.

Garza sees ample opportunities in domestic markets the airline does not serve, as well as in certain international markets Mexicana used to be strong in. "In 2013, when we receive the Superjet 100 aircraft, we'll be able to enter aggressively into these domestic markets," he says.

The airline, Garza adds, aims to continue gaining in its market share. "Interjet has no plans to reduce its expansion plan."

VivaAerobus, which stepped up its US expansion plan late last year, has launched new flights between its Monterrey hub and San Antonio. This follows announcements of new flights between Monterrey and Chicago Midway, and between Monterrey and Miami and Orlando.

Mexican carriers are not the only ones growing in the market. Brazilian carrier TAM has announced plans to launch flights between Sao Paulo and Mexico City, a route served by Aeromexico and previously served by Mexicana. Panama's Copa Airlines will also begin flights between Panama City and Monterrey in December.

With the rapid addition of new routes and aircraft there are concerns about potential overcapacity in the market, but the country's airlines appear to be confident demand will hold up the supply.

Volaris, for one, believes there is now "a balance between demand and supply".

"There is not an overcapacity and Volaris is in continuous search for new destinations," says the carrier.

Garza cautions that there are "risks of overcapacity in dense markets" on some domestic routes, but believes the domestic market demand-supply situation is balanced.

Aeromexico, while planning to grow capacity next year, said it has a "well-managed risk policy" in place with its aircraft lessors. The carrier plans to renew leases for eight aircraft in 2012, but Conesa says that in the event of a downturn, it can be "flexible" and not proceed with the renewals.