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ANALYSIS: What future awaits a revived Mexicana?

Complex questions still face Mexicana's relaunch and the one receiving the least attention is what kind of airline it will be.

In four months since approval of Med Atlantica's bid to acquire Mexicana, the most visible progress has been its purchase of the airline from a holding company that had held its shares since Mexicana stopped flights and entered court-supervised bankruptcy protection in August 2010.

Med Atlantica is now preoccupied with trying to reach accord with creditors over how to restructure some $800 million in Mexicana debt. Talks with two major banks, Bancomext and Banorte, report little progress. A majority of creditors can bind all, so it is theoretically possible to reach a deal without including the bank. But Mexicana's administrator Gerardo Badin claims settlement with both banks is critical because one holds security interests in nine aircraft that Mexicana needs, and the other will eventually process credit card transactions for the airline.

Christian Cadenas, head of Med Atlantica, foresees three major tasks before Mexicana can exit bankruptcy and start flying: restructuring liabilities with the two banks, signing an accord with a majority of the other creditors, and obtaining an air operator's certificate from the Mexican secretary of communications and transportation (SCT).

Not on his list, but of equal importance, is the return of Mexicana's routes and slots, especially at Mexico City's slot-restricted airport. The bankruptcy judge ruled that after the airline's grounding Mexicana would retain those rights, even if they were provisionally awarded to other airlines. Since then, Interjet, Volaris and Aeromexico have more than filled Mexicana's void, partly with some 40 domestic and international routes that belong to Mexicana. Recently the judge reaffirmed they must be returned.

Major disputes have erupted over what comes first. The SCT says it will not order any return of routes and slots until Mexicana has its AOC, and Mexico City's airport will only reassign slots as Mexicana actually needs them. Airport director Hector Velázquez Corona says it makes no sense to give Mexicana slots for the 109 aircraft it operated before grounding, when it plans to resume flights with less than 10.

However, unions threaten to sue the other airlines for "kidnapping" Mexicana's routes and slots. As a further complication, sources claim the banks will not agree to settle until Mexicana's routes and slots are returned and the AOC is guaranteed, while the SCT insists it cannot issue an AOC until Mexicana signs an accord with its creditors.

Until such questions are resolved, no one is paying attention to the broader issue of what kind of airline Mexicana should become. Christian Cadenas says Mexicana will start with seven aircraft - probably Airbus A320s - flying seven routes, progressively increasing to a fleet of 44 jets in 12 months. With a gradual return to routes it flew before, the apparent plan is to pick up where Mexicana left off in 2010 - as a full-service network carrier with domestic and international routes.

This overlooks how much Mexico's market dynamics have changed in the past two years. On domestic routes, Mexicana will face fierce low-cost competition from Volaris, Interjet and VivaAerobus, which are growing at double-digit rates. Aeromexico's growth has been slower, but has been strengthened by its equity alliance with Delta, boosting its presence in all major markets with routes that are not provisional.

Mexicana's return to its activities of August 2010 would be a return to what led to its bankruptcy in the first place. It needs a new business model, but so far its new owners seem too preoccupied to give this much thought.

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