Mexican regional market heats up

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Mexico's two flag carriers are rapidly expanding their regional operations, scooping up 50-seat jets as they are shed by operators north of the border.

Grupo Mexicana in March launched a new regional carrier, Mexicana Link, with a fleet of secondhand Bombardier CRJ200s. Mexicana has committed to leasing 13 CRJ200s, with four already in service and the remaining nine to be delivered by October, and is considering exercising options to lease two more by year-end.

Meanwhile, arch rival Grupo Aeromexico has committed to leasing at least seven additional secondhand ERJ-145s in 2009. This will give the group's regional unit, Aeromexico Express, an ERJ-145 fleet of more than 40 aircraft by year-end.

Nearly all of the 50-seat regional jets being added in Mexico this year are coming out of Republic Airways Holding's Continental Express operation. Republic is one of several US regional airline groups shrinking their 50-seat fleets, a trend that began last year when fuel prices skyrocketed and is continuing this year as the economic downturn leads to further capacity cuts. This has created new opportunities for regional operations in emerging markets such as Mexico and Russia.

mexicanalink
 © MexicanaLink

While airlines in these countries are also suffering from the global economic downturn, the significant erosion in lease rates has suddenly made 50-seat jets an economically viable option. Historically 50-seat jets have been considered a bad match for most emerging markets because of their low yields. But with lease rates and fuel prices now at more reasonable levels, the situation has changed.

"With the 50-seater we believe we're taking the right decision at the right time," says Mexicana executive vice-president for corporate planning and fleet transactions Ricardo Baston.

Mexicana chief executive Manuel Borja adds: "We believe there's a lot of destinations where having a smaller aircraft makes sense. What is important is having the correct size planes for the right market."

Borja says Link fills an important void in Mexicana's overall strategy as previously the group did not have any aircraft with fewer than 100 seats. "Flying a 100-seater into a 40-seat market makes no sense," he says.

Mexicana had been evaluating small regional jets for several years but it was not until lease rates dropped and independent regional carrier ALMA ceased flying was it ready to make its move. Until November 2008, Guadalajara-based ALMA operated a fleet of about 15 CRJ100s and CRJ200s - most of which remain grounded in Mexico, a victim of complicated bankruptcy proceedings.

ALMA's routes proved to be too thin and the low-fare model it adopted proved to be unsustainable, given the relatively high operating costs of 50-seat jets. Link, which is also based in Guadalajara, is taking over several ex-ALMA routes. But Borja is confident it can make the routes work because unlike ALMA, which relied entirely on point-to-point traffic, Link is feeding Mexicana's Guadalajara hub. Link is now operating six routes from Guadalajara and later this month will open a second base at Monterrey. "There was a void in the market and we believe we can profit from this space," Borja says.

Link expects to be profitable in its first year of operation and carry 800,000 million passengers annually. This will offset the shutdown of ALMA, which last year carried just under 1 million passengers and accounted for 11% of Mexico's regional market.

Aeromexico chief executive Andres Conesa says Mexicana is simply taking a page out of Aeromexico's book. Aeromexico has had 50-seat jets in its network since 2004, when Aerolitoral took the first of five ERJ-145s ordered directly from Embraer. Several additional leased ERJ-145s were added in 2005 and 2006. After Aerolitoral was acquired by Aeromexico in 2007 and rebranded Aeromexico Connect, Aeromexico pursued further expansion of the ERJ-145 fleet by leasing more aircraft from the secondhand market.

The steady expansion of Aeromexico Connect's ERJ fleet has fuelled rapid growth at the carrier and the Mexican regional market as a whole. Aeromexico Express/Aerolitoral has seen its annual traffic soar from less than 1 million to 3.2 million since it took its first jet while Mexico's total regional market has tripled in size over the last four years from 2.6 million to 7.9 million passengers.

With the ERJ, Conesa says Aeromexico has been able to offer at least two flights a day on several domestic routes previously served once a day with Boeing MD-80s. He says this has given Aeromexico a competitive advantage over other carriers, which continue to serve many domestic routes only once a day, as the multiple frequencies are more attractive to business passengers. This in turn has pushed up Aeromexico's yields, allowing the carrier to offset the increase in unit costs associated with smaller aircraft.

"If you look at our network we have the largest coverage in the country and what we call the AM/PM service that takes you there and back on the same day. For our segment of passengers that's very important," Conesa says. "That's the strategy we're following and it's been very successful."

Embraer vice-president of commercial aviation for Latin America, Luiz Hamilton Lima, points out that more than half of Mexico's domestic routes are still served with one frequency a day or less. This makes it an ideal breeding ground for more regional jets, especially as reduced demand in the USA continues to drive down lease rates. "As the US market shifts towards larger capacity planes some of the 50-seaters are becoming available to move elsewhere. Because of demand in Latin American countries, especially Mexico, the secondhand market is picking up," Lima says.

Bombardier Asset Management vice-president Rob Sheridan adds: "In an economic downturn, the Bombardier CRJ200 offers rightsizing opportunities and the potential to add frequency - it's the right aircraft to achieve both objectives. Adding frequency in Mexico, or any market for that matter, with lower-capacity aircraft flying multiple trips a day versus a single flight on larger aircraft can grow the market share. So first you right-size capacity then, as the market develops, the aircraft can be used to expand the network to new destinations."

Baston says that by the end of the year Link will serve six to eight domestic destinations that were previously not included in the Mexicana network. Conesa says Aeromexico also plans to add nine new domestic destinations this year, using its expanded regional jet fleet. "This year we'll complete our expansion in Mexico," he says. "Basically we'll have all the markets covered."

Conesa points out that this is also made possible by the expansion of Aeromexico Connect's Embraer 190 fleet this year from four to nine aircraft. Two E-190s were placed into service in January and three more will be added by year-end.

Lima says the E-jet is an ideal aircraft for Mexico, pointing out 64% of flights in the domestic market are now operated with aircraft seating between 60 and 100 passengers. "It's still an immature market and therefore very welcoming to 100-seaters," he says.

There are already more than 30 100-seaters in the Mexican market, including the six E-190s at Aeromexico Connect as well as 23 Fokker 100s and two Boeing 717s at Mexicana Click. While Click was conceived in 2005 as a low-cost carrier, Borja today considers the carrier a regional and the aircraft it operates regional jets. Click last year carried 3.3 million passengers, making it Mexico's largest regional carrier.

aeromexico
 © Aeromexico

Click has steadily expanded over the last two years as it has taken over from Mexicana mainline domestic routes to regional business centres. These routes attract high portions of business and connecting passengers and as a result Click has become more a legacy feeder than a point-to-point low-cost carrier. In response to the changing passenger mix, Mexicana has decided to include a business cabin inClick's new fleet of secondhand leased 25 717s. Click's Fokker 100s, which will steadily be replaced by the 717s over the next two years, are in all-economy configuration.

Mexicana also partners the only remaining independent regional carrier in Mexico, Aeromar. Mexico City-based Aeromar currently operates 14 ATR 42s and has two ATR 72s on order. Aeromar executive vice-president and chief financial officer Ami Lindenberg says it wet-leases the equivalent of 1.5 aircraft to Mexicana, while the rest of the fleet is used in its own regional network, with about 80% of the seats sold by Aeromar and 20% by Mexicana.

Aeromar and Mexicana have been codesharing since 2007, or shortly after Aeromexico severed ties with Aeromar. Lindenberg says the Aeromar-Mexicana partnership has generated "very good results" and the two carriers are now working to further improve their networks and connectivity. "The best way to overcome crisis is to forge an alliance," he adds. "No one else in the Mexican market is working together."

With Aeromexico Connect having phased out its Saab 340 fleet late last year, Aeromar is left as Mexico's only turboprop operator. Lindenberg sees this as an opportunity for long-term expansion as the turboprop is a better fit on thin routes with stage lengths of 1-1.5h - a length which is very common in Mexico. "I'll operate routes where the ATR has a clear advantage," he says.

But Conesa says Aeromexico decided to phase out turboprops and terminate its codeshare with Aeromar after surveys showed passengers "preferred significantly a jet over a turboprop". Conesa is confident this preference will help Aeromexico succeed in opening new routes that are now exclusively served by Aeromar. "We think the ERJs are better than the ATRs. It's a 50-seater versus a 50-seater with a significantly better product. Let the consumer choose," he says.

Borja agrees Mexican passengers prefer jets and says Mexicana ruled out turboprops before selecting the CRJ200 for Link. "Jets are more comfortable, are faster and fly higher. And we feel we're getting a good deal with Bombardier," Borja says. "Turboprops when oil is $150 per barrel make sense. At $50 per barrel jets makes more sense."

But both Borja and Lindenberg believe there are still several markets in Mexico that can only be economically viable with turboprops. Lindenberg is particularly critical of Aeromexico's decision to launch ERJ-145 services this year to small cities such as Ciudad Victoria, Colima, Lazaro Cardenas and Tepic. "It makes no sense. You're talking about destinations that have a very low density of passengers. I'm not sure what are the reasons driving their decision on where to go and what aircraft to use, but I'm sure they aren't economical reasons," he says.

Lindenberg is confident of Aeromar's long-term success if it sticks with the turboprop niche and expects the carrier will eventually operate at least five ATR 72s, including potentially the new -600 model. But he says now is not the best time to expand. As a result Aeromar has deferred delivery of its first ATR 72s, which it was originally planning to take in June. "In a crazy environment you can't act like a normal person. If you add capacity you need to make sure you can do it profitably," he says.