Mexico's aviation industry is battling regulations as well as competitors

Roberto Mena/MEXICO CITY

Despite significant advances in the past four years, Mexico's commercial aviation industry is struggling. Not only does it face intense competition from the onslaught of international carriers following deregulation, but government regulators seem determined to crush it.

Three-quarters of the country's airline business is run by Cintra, a holding company that has become a prime example of a successful turnaround of former state-owned companies.

Created in June 1996, Cintra (Corporación Internacional de Transporte) operates the country's two major airlines, Aeromexico and Mexicana Airlines; regional carriers AeroCaribe, AeroCozumel, Air Inter and AeroLitoral; a jet engine overhaul facility; ground services and aircraft maintenance units. Wings of America University, which trains flightcrew and others, is also under Cintra's remit.

Cintra was formed in the middle of a domestic economic crisis that had rendered the airlines virtually bankrupt. The initial strategy by a group of six creditor banks, which assumed control when it became clear that the airlines could not meet their debts, was to "beautify" the companies and prepare them for divestiture.

Under the leadership of chairman and chief executive Ernesto Martens, an interim managing director designated by the banks, Cintra undertook such an effective reorganisation of the two leading subsidiaries, Aeromexico and Mexicana, that it soon became evident that it was too valuable an asset to sell.

High-level financial engineering was used to spread Aeromexico's debt load over a longer term. A 15% reduction of the workforce, to 6,500 - as well as more favourable contractual terms - was negotiated with the unions, and the entire operation, including flight schedules, was overhauled as a new airline emerged. The same strategy was implemented at Mexicana. By 1997, both airlines were in the Western hemisphere's top 10 for on-time performance and traveller satisfaction.

But last year an unforeseen circumstance clouded the picture. As a delayed result of the 1995 devaluation crisis, many banks had to be rescued by the government because of an excess of non-performing credits. Since Cintra's creditor banks were among the troubled institutions bailed out by the federal authorities, the airline holding company found itself with the government as a temporary, indirect, majority stockholder, with a 52% stake.

To make matters worse, last year the anti-monopolies watchdog, the Federal Competition Commission (CFC), ruled that Cintra is a monopoly, with 74% of the relevant domestic market, even though Mexican travellers have options other than Cintra carriers on 80% of domestic routes.

In November, the CFC blocked a $400 million secondary stock issue by Cintra that would effectively have meant its privatisation. Today, the CFC is involved in a jurisdiction battle against the Communications and Transport Secretariat and a ministerial-level commission, which has the final say on Cintra's permanence. Both agencies have determined that, taking into account worldwide criteria on airline monopolies, Cintra is not a monopoly and should be allowed to survive to give Mexico an internationally competitive airline group.

Complementary airlines

With a combined fleet of 122 jetliners, Aeromexico and Mexicana have made significant advances towards using their synergies to make optimum use of their aircraft, and to serve more destinations more efficiently. Before their alliance, the airlines competed on domestic and international routes - now they complement each other.

In fiscal year 1998, Cintra posted operating revenues of $2.2 billion, up by 6.7% from the previous year, with an operating profit - after depreciation allowance and pure lease payments on 82 aircraft and 28 engines - of $131 million.

Aeromexico, run by president and chief operating officer Alfonso Pasquel (a member of the International Air Transport Association's executive board), has been instrumental in turning the airline around, both in operating efficiency and prestige. Five years ago, the carrier gave up its European routes to Madrid, Paris and Rome. The fleet, including noisy and costly McDonnell Douglas DC-10s and ageing DC-9s and MD-80s, was in a sorry state.

Since then, it has recaptured the Paris route, with 14 weekly flights - including its codeshare alliance with Air France, a pact renewed in May for another seven years - and the Madrid route, with daily non-stop flights from Mexico City, plus a codeshare with Iberia that adds another seven flights from Mexico City and four more from Cancun. Both European routes are served with Boeing 767-200s and -300s. The carrier is contemplating adding a Boeing 747-300 in December, on lease from Alitalia, for a year-long charter to cope with the anticipated demand sparked by the Vatican's 2000 Jubilee.

Newly profitable routes to US and South American destinations are certain to enhance profitability this year, through successful codesharing agreements with Delta Air Lines, LanChile and Brazil's Varig, among others.

During a visit to Mexico to renew the commercial agreement with Aeromexico, Air France chairman Jean Cyril Spinetta suggested Aeromexico would join the French flagship, Delta and others in forming an alliance.

Meanwhile, Mexicana, efficiently managed by president and chief operating officer Fernando Flores, this week was announced as a member of the Star Alliance, by virtue of its operating and quality upgrades and its codesharing agreements with Air Canada, Lufthansa and United.

Despite the Cintra companies' remaining financial and ownership shortcomings, Aeromexico and Mexicana's admission to the prestigious circles of airline mega-alliances rebuts the anti-monopolies agency's allegations that Cintra wants to merge the two.

A key to Martens' turnaround of Cintra, besides the financial restructuring, has been to resist the temptation to merge the carriers. With Pasquel and Flores, he has implemented a scheme that has kept the airlines separate, attending to the needs of different market niches, while making the most of their synergies.

"The ongoing differences with the CFC over the monopoly issue, to which we have had to devote considerable time, effort and manpower, have stunted our growth and kept us from advancing at least three levels on the industry's growth scale," Martens claims.

"There is little doubt our case will be resolved in a manner favourable to our shareholders and Mexico's commercial aviation in general. Yet, it must be acknowledged that the longer the final decision takes, the costlier it will be," he says.

The continued turbulence of financial markets has prevented Martens from taking the next logical step - that of privatisation. Despite having been bailed out, the government and the six banks are still involved, since they have a stake in Cintra. They agree that privatisation would serve their best interests.

The chief obstacle to this appears to be not securities market conditions, but the CFC. The crux of the matter could be the intense personal rivalry between CFC president Fernando Sanchez-Ugarte and Martens.

The issue of ownership could be forthcoming before autumn, however. It will depend largely on prevailing economic conditions and on political determination, which is scarce in a political year marked by an important presidential election.

"In the meantime," says Martens, "our only course of action is to devote as much effort as we can to remain efficient and not lose our place in the league of globally competitive airlines."

The company continues to modernise. Recently, it opened a $20 million jet engine maintenance and repair facility it owns jointly with Spain's ITP. The plant will reap considerable savings and bring in additional revenues by servicing engines for other Mexican and Latin American carriers.

Another area of significant improvement is that of operating expenses as a percentage of total revenues. In FY1998, the accumulated factor was down by 5.5 points, to 74.7%.

Modernisation and revamping of the fleet has continued steadily, even in the middle of other problems, such as an uprising by travel agents over cuts in their commission. Aeromexico has three more 767-300s and two 757s on order to add to its jet fleet, which serves 32 domestic destinations, 10 US cities and three in South America, besides Paris and Madrid.

It has phased out most of its older DC-9s and replaced them with Boeing MD-83s and MD-88s, which are ideal for many short-haul routes. The 757s are used for heavy-traffic domestic routes and such US destinations as Atlanta, Dallas, Los Angeles, Miami and New York. Besides the Paris and Madrid routes, 767s are operated to Lima, Santiago and Sao Paulo.

Mexicana has been dissatisfied with the performance of 10 Fokker 100s acquired four years ago and is struggling to overcome the tactical error of having diversified its fleet, which once comprised only Boeing 727s. In addition to Fokker 100s, it has 727-200s, Airbus A320s and the 757s, to serve 29 domestic cities, 14 destinations in the USA and Canada, and eight in Central and South America and the Caribbean. The 757 group will be enhanced with three more deliveries from Seattle during the rest of this year, to reinforce routes to Buenos Aires, Bogotá, Caracas and Lima.

Source: Flight International