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  • ANALYSIS: Airlines feel the pain in US-Mexico transborder market

ANALYSIS: Airlines feel the pain in US-Mexico transborder market

Weakness in the US-Mexico transborder market is persisting, as airlines on both sides of the border see soft demand amid currency depreciation and concerns over crime in Mexico.

Mexican flag carrier Aeromexico, the first among its Latin American peers to release third quarter financial results, struck a sombre tone on 17 October as it revealed it is to cut routes and phase out aircraft in a plan to stem losses.

The SkyTeam carrier has racked up a net loss of Ps1.23 billion ($65.3 million) for the first nine months of 2018, and reported a net loss of Ps617 million for the third quarter. Operating profit fell over 80% to Ps235 million in the period.

Aeromexico chief executive Andres Conesa did not sugarcoat the situation, calling the third quarter "one of the most challenging" for the Mexican aviation industry since 2008. High fuel, currency depreciation, overcapacity in the US-Mexico transborder market and inflation in Mexico all contributed to the airline's plight.

The airline is wasting no time to rein in capacity, and will suspend service on nine routes in 2019, five of which are US transborder city pairs. The airline will end flights from Mexico City to Boston, Portland (Oregon) and Washington Dulles. It will also suspend service from Monterrey to Las Vegas, and from Guadalajara to San Jose (California).

Within Mexico, the airline will suspend service from Monterrey to Tijuana, Merida and Veracruz. It will also end flights from Guadalajara to Cancun.

The carrier will retire five aircraft - three Embraer 170s and two Boeing 737-800s - that it predominantly operates on its US routes. With the fleet reduction, the airline will end 2018 with 127 aircraft, instead of 132 as previously planned.

"The operating environment remains complicated," said Conesa on an earnings call, justifying the airline's actions. Aeromexico also plans to embark on a cost savings plan, say executives.

Conesa has long warned of overcapacity in the US-Mexico market, since the floodgates opened in August 2016 after a new bilateral air services agreement was implemented. Aeromexico's planned capacity cuts and similar actions by rivals should help alleviate this, he says.

FlightGlobal schedules data show that capacity between the USA and Mexico rose 11% year-on-year in 2017, the first full year where airlines operated under the new bilateral agreement. Capacity growth between the two countries appears to moderate this year, rising just under 4% compared with 2017.

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In 2018, Aeromexico will be the second largest carrier after United in the US-Mexico transborder market in terms of capacity, followed by American Airlines. Aeromexico, which has a transborder joint venture with partner Delta Air Lines, is marketing about a 15% market share of the capacity between the USA and Mexico. Delta, the fourth biggest airline in the market, has just under a 12% share.

"By making these [network] changes, we hope the performance will improve," says Conesa of the soft yields in the transborder market. Business travel demand has held up better than leisure demand, he adds.

Aeromexico's remarks largely reflect that of rival Volaris, which told FlightGlobal in August that the airline is seeing softness on US-bound leisure routes such as Las Vegas and Orlando as a result of the weaker Mexican peso.

"We are seeing some softness, mostly because the peso depreciated significantly, and it's become much more expensive for Mexicans to go on holiday," says Volaris chief commercial officer Holger Blankenstein.

With the network cuts and aircraft retirements, Aeromexico says systemwide capacity in 2019 will be flat, instead of growing in the high single-digit as it previously planned. International capacity in 2019 will grow "a little bit", largely due to an additional Boeing 787-9 joining Aeromexico's fleet in mid-2019, says Conesa.

Aeromexico's capacity will grow 8% to 8.5% in 2018, with capacity rising about 3.5% in the fourth quarter.

US AIRLINE PULLBACK

Across the border, US carriers are also retreating from Mexico. Some airlines point to US State Department travel warnings which have advised US citizens to exercise increased caution when travelling in Mexico, including destinations like Cancun and Mexico City.

Spirit Airlines, which had 2% of its capacity in Cancun, expects a 100 basis point impact on its third quarter unit revenue and had trimmed capacity to the tourist destination starting in the fall.

"It [Cancun] continues to be an issue for us and it's something that we think will eventually resolve itself, but it is that much of a drag on our third quarter expectations," said Spirit chief commercial officer Matt Klein on a 26 July earnings call.

While Spirit has not cut any Mexican routes, other airlines are taking more significant measures. Both Alaska Airlines and WestJet announced within days of each other in September that they will leave Mexico City. WestJet has dropped its service from both Vancouver and Calgary, while Seattle will withdraw from its route from Los Angeles.

"It's just not performing up to the standards that we would like to see," WestJet chief financial officer Harry Taylor says of Mexico City. "We don't want to be cost-subsidising at this point." The Calgary-based airline had served the Mexican capital for just seven months.

Alaska, which had served Mexico City from 2005, had gradually retreated from the market in recent years. It ended service from San Francisco in 2017, and says that the Los Angeles route had underperformed as well.

Its withdrawal from Los Angeles-Mexico City makes it the second US airline in recent months to suspend service in the market. United exited the route in October, opting to add a third daily flight to service between Newark and Mexico City.

What was once a highly-competitive route with as many as seven airlines offering nonstop service, Los Angeles-Mexico City is now down to just five airlines plying the route: Aeromexico, American Airlines, Delta Air Lines, Interjet and Volaris.

United's exit from the city pair was part of an overall capacity adjustment in Mexico, where it ended service to Huatulco, Mazatlan and Villahermosa after experiencing declining demand. The airline also ended service between Denver and Mexico City, and between Los Angeles and Leon/Guanajuato, choosing to launch flights between Chicago O'Hare and Leon/Guanajuato instead.

The Chicago-based airline said during a 17 October earnings call that it saw demand weakness to Cancun, Brazil and Argentina in its Latin portfolio, calling its performance in the region in the third quarter "disappointing".

But United chief commercial officer Andrew Nocella says the airline sees a "mild recovery" taking hold in some parts, specifically the Mexican business markets and the Caribbean. The airline remains optimistic about improved unit revenue in Latin America in the fourth quarter, he adds.

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