Airlines set for privatization

9 mayo 2005 <br>COUNTRY BRIEFING MEXICO
FROM THE ECONOMIST INTELLIGENCE UNIT / INFOESTRATEGICA

In a country where a one-hour flight from Mexico City to Acapulco can cost as much as US$400, the democratization of Mexico’s airline industry is a long-standing goal. After several years of failed attempts, the idea of opening the industry to greater foreign participation in order to facilitate competition is finally taking flight.

- Cintra, the government’s holding company that controls Mexico’s two leading airlines, Mexicana de Aviación and Aeroméxico, will put these and other assets on the auction block by the end of 2005 or in early 2006, according to Cintra’s chairman, Andrés Conesa. Details are not yet final, but this much is clear: The carriers will be bundled in two separate packages, with Mexicana to be auctioned off with Click, which will replace a regional carrier, Aerocaribe. Aeroméxico will be packaged with the regional line Aerolitoral. The sell-offs will aim to break the virtual duopoly that Mexicana and Aeroméxico have held in domestic aviation.

- Cintra was created in 1995 to manage the Mexican carriers when they went bankrupt after the 1994-95 peso devaluation and subsequent recession. Since then, Mexican officials have wanted to return the airline industry to the private sector. Yet auctions have met with numerous delays, and the September 11th 2001 terrorist attacks in the US and the damage they dealt the global aviation industry became a major setback.

- Late last year, Cintra proposed merging Mexicana and Aeroméxico to attract more interest among potential buyers. That idea was scrapped after it was criticized for its potential to create a de facto monopoly. Now, at last, the decision to offer up Mexico’s two leading airlines separately but with their secondary assets in play seems to be sticking.

- In preparation for the proposed sell-offs, Cintra is trying to add some polish to its carriers. Mexicana’s Click, for example, will offer customers no-frills, low-cost flights, following the model made popular by JetBlue and EasyJet (both US). Click, set to be launched in July, will offer round-trip routes from Mexico City to such cities as Oaxaca, Mérida, Saltillo, Nuevo Laredo, San Luis Potosí, Zihuatanejo and Tuxtla Gutiérrez.

- Aeroméxico began to modernize its fleet in 2003 by adding more than a dozen aircraft made by Boeing (US). More high-end planes are on order for 2006. The Aeroméxico upgrade was much needed. Mexicana already boasts first-rate aircraft, primarily supplied by Airbus, the European consortium builder.

- Still, the outlook for the Cintra sell-offs is mixed. Carriers around the world are struggling to turn profits, and losses are posted all too regularly. Cintra itself reported losses, in 2001 and 2003, but made US$573m in 2004, thanks mostly to Mexicana’s strength and an up tick in domestic air travel.

- The sale will also be complicated by Mexico’s rule that foreign investors be restricted to a 25% voting stake in carriers (although investors may acquire a larger equity stake), as aviation is considered a strategic sector. A likely scenario will involve a foreign airline teaming up with a solid Mexican investor.

- Already, Delta Airlines and American Airlines (both US), Spain’s Iberia and Chile’s LAN are hinting at an interest in Cintra’s assets. Interest from Mexican investors should also be strong, given their heavy participation in the privatization of the country’s regional airports in recent years.

- Tourism travel bonus
However significant the foreign investment limit and the obstacle it is to Cintra’s sales, it may be overshadowed by the overall potential of Mexico’s travel market. Currently, Mexico-US air traffic moves some 15m passengers a year—a figure that would be much higher if it were not for the high fares that Mexicana and Aeroméxico charge.

- With an estimated 20m Mexicans living in the US and more and more Mexicans expected to emigrate north in coming years, market demand for cheaper US-Mexico routes is set to grow. Mexicana is in the best position to make the most of this increased traffic in that it runs more US-Mexico flights than any other airline in the world. (American and another US carrier, Continental Airlines, hold second and third place respectively.)

- In terms of domestic transport, the country’s size, four times the area of France, makes air travel a practical choice. But for many Mexicans—including business travelers—the sky-high air fares force them to crisscross the country by bus.
Already, low-fare airlines from the US, including America West and Frontier, have started flying to Mexico (mostly to border town hubs). JetBlue and a new, low-cost Texan airline, Mexus, are preparing for their Mexican arrivals later this year. In addition, Mexico’s Communications and Transportation Secretariat has granted operating permits to another low-cost, locally run carrier, A Volar. Regulators are also reviewing additional requests from two other local start-ups, Protego and Aerolíneas Mesoamericanas.

- Transferring Mexico’s airline industry into private hands faces additional turbulence. In late April some 100 union Mexican pilots demonstrated in front of Mexicana’s offices, worried that they would lose their jobs through privatization. Cintra says it will move forward with the sell-offs despite such protests, even though five separate unions fall under the Cintra umbrella. Indeed, the company may face greater challenges on the labour front than in presenting an attractive package to outside investors.

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Mexico’s - airborne tourism
1998 1999 2000 2001e 2002e
Arrivals (願s) 19,392 19,043 20,643 20,874 21,379
Departures (願s) 9,637 10,352 11,081 11,184 11,289
Local expenditure (US$ m) 4,209 4,541 5,499 5,971 6,097
e = Estimate
- - Source: Economist Intelligence Unit

- - SOURCE: EIU / INFO-e -

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