Mexican airlines

A clumsy giant stumbles

Mexicana’s bankruptcy will bring welcome turbulence to Mexican skies

Aug 12th 2010 | MEXICO CITY

Storms ahead

AFTER 89 years in the skies, North America’s oldest airline seems ready to ditch. Compañía Mexicana de Aviación filed for bankruptcy protection on August 2nd and has been in a tailspin ever since: ticket sales were stopped on August 4th and a third of its routes were suspended a few days later. The airline says it has lost $350m since 2007 and now owes nearly $800m.

These are difficult times for airlines everywhere. But despite the entry of several low-cost carriers since 2005, fares in Mexico have remained old-fashionedly high: an hour’s flight from the capital’s main airport to Guadalajara, Mexico’s second city, cannot be had next month for much less than $175 return. São Paulo to Rio, a similar hop, can be done for $100. Partly because of this, middle-class Brazilians fly three times more often than their Mexican counterparts.

Some of Mexico’s costs are imposed by fate. The thin air of Mexico City, which lies at 2,250m (7,380 feet), reduces a plane’s range and the weight it can carry. (Flights to Tokyo, for instance, must refuel in Tijuana.) Its international airport, Latin America’s busiest, is in a built-up area with no room for a third runway, though the airport is running at capacity. Last year was especially cruel: while suffering the deepest recession in the Americas, Mexico was hit by the outbreak of H1N1 swine flu, which emptied the country’s popular beach resorts and cut airport traffic by one-sixth.

However, some of Mexicana’s problems are man-made. The firm blames its bankruptcy on onerous labour contracts, under which it says pilots earn 49% more than their counterparts at big American airlines although America is a rich country and Mexico is not. The Mexican pilots’ union says this figure is “inexact” but has not provided one of its own. Working hours are capped so that return flights sometimes require two separate crews, and in some cases the company must train its own pilots rather than hire cheaper outsiders.

These burdens are hangovers from Mexicana’s days as a state airline, which ended in 2005 but whose influence has never quite been shaken off. It is a rarity in Latin America, “the one region in the world where state-backed carriers have faded out of existence to be replaced by or reborn as fully private airlines,” says Alex Dichter, head of the airline practice of McKinsey, a firm of consultants. The continent claims several success stories, including Panama’s Copa Airlines, one of the most profitable carriers in the world.

Mexicana’s failure may have a silver lining. For a start, it will give breathing space to low-cost carriers such as Interjet and Volaris, which have gobbled up 21% of domestic traffic since 2005 but have been kept out of many of the most profitable routes by the older airlines. By bilateral agreement, most routes to the United States may only be operated by two airlines from each country, so popular hops such as Mexico City to New York are the exclusive business of Mexicana and its rival Aeroméxico, another pricey, formerly state-run carrier. These two old fossils also hold most of the take-off and landing slots at Mexico City’s main airport, relegating the upstarts to the out-of-town Toluca airport (from which a flight to Guadalajara costs more like $115).

Vultures are already circling over Mexicana’s valuable slots. But the airline’s chances of surviving in some form have been helped by a ruling by America’s Federal Aviation Administration on July 30th, which downgraded Mexico’s flight-safety rating a notch, owing to a lack of air-traffic controllers. One impact of the ruling is that Mexican airlines cannot open new services to the United States, meaning that rivals cannot take over routes that Mexicana has been forced to shut down. Existing routes, however, are not affected—so any airline that took over Mexicana would inherit the American routes it already flies. “It’s a problem for the Mexican airline industry that could hold an answer for Mexicana,” says Tomás Lajous, head of Mexico strategy at UBS, an investment bank. Mexicana may end up attracting more bids than a bankrupt airline might expect.