Identifier
Created
Classification
Origin
08MONTERREY522
2008-12-03 16:03:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Monterrey
Cable title:  

ECONOMIC CRISIS HASTENS AIRLINE FAILURES

Tags:  EAIR ECON EINV BTIO MX 
pdf how-to read a cable
VZCZCXRO7616
PP RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0522/01 3381603
ZNR UUUUU ZZH
P 031603Z DEC 08
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC PRIORITY 3284
INFO RUEHME/AMEMBASSY MEXICO PRIORITY 4308
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RULSDMK/DEPT OF TRANSPORTATION WASHINGTON DC
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 8805
UNCLAS SECTION 01 OF 02 MONTERREY 000522 

SENSITIVE
SIPDIS

STATE FOR EB/TRA/AVP

E.O. 12958: N/A
TAGS: EAIR ECON EINV BTIO MX
SUBJECT: ECONOMIC CRISIS HASTENS AIRLINE FAILURES

REF: (A) 06GUADALAJARA218, (B) 07MONTERREY 76

MONTERREY 00000522 001.2 OF 002


UNCLAS SECTION 01 OF 02 MONTERREY 000522

SENSITIVE
SIPDIS

STATE FOR EB/TRA/AVP

E.O. 12958: N/A
TAGS: EAIR ECON EINV BTIO MX
SUBJECT: ECONOMIC CRISIS HASTENS AIRLINE FAILURES

REF: (A) 06GUADALAJARA218, (B) 07MONTERREY 76

MONTERREY 00000522 001.2 OF 002



1. (U) Summary. Since July, six Mexican airlines have
ceased operations or declared bankruptcy and at least three
other airlines remain vulnerable. With the privatization of the
two major Mexican airlines in 2005 and the subsequent entry of
low cost carriers in the national airline market, Mexican air
travelers had hoped the competition would usher in a new age of
low fares. The rapid appearance of the low cost carriers
appears to have saturated the market and the economic crisis is
forcing a fast contraction in this nascent sector. End Summary.




Testing Mexico's New Airlines




2. (U) Mexico's current aeronautic policy is primarily a
result of ex-president Vicente Fox's 2001 - 2006 National
Development Plan, which included liberalizing Mexican civil
aviation. In the years following the announcement of the
development plan, Mexico's two major airlines Aeromexico and
Mexicana were privatized and ten low cost and charter airlines
entered the market (see also reftel A). Several of these
airlines are headquartered in Monterrey as the city seeks to
become a regional transportation hub.




3. (U) In the past four months five Mexican airlines have
ceased operations, representing 16% of Mexican domestic travel
in 2007. AeroCalifornia, Avolar, Alma Airlines, NovaAir, and
Monterrey based Aladia all ceased operations. Another airline,
Magnicharters, has declared bankruptcy but is still operating.
Because of the increased cost and consolidation, Jose Faris, the
President of the National Travel Agency Association, expects
significantly higher airline ticket prices. Faris also expects
to see other airline failures including Monterrey based Aviasca
and possibly Volaris and Interjet. These airlines are
operating at a loss and combined they represent about another
30% of the domestic air market. Aviasca, ranked fifth in
passenger traffic, is currently the most at risk of the
airlines. Aviasca recently raised additional capital in
November from its shareholders to guarantee enough liquidity but
only through the holiday travel season ending in January of 2009.





4. (SBU) The airline industry was relatively stable until

2008. According to Andres Engel, former business director of
now defunct Aladia Airlines, the events of 2008 were a perfect
storm. Jet fuel cost skyrocketed from US$1.70 a gallon in 2007
to nearly US$4.50 a gallon in summer 2008. For Aladia, fuel
cost increased from 30% of total operating expenses up to 55% of
the airlines total cost and the high prices depleted the cash
reserves of the company. Since the peak in July 2008, oil
prices have fallen over 65% but the financial crisis has now
started to take a toll on the companies. Many of an airline's
costs such as lease payments, fuel, and maintenance are
denominated in dollars and the Mexican peso has fallen 32%
relative to the US dollar since September. This has especially
hurt Mexican carriers as their revenue is in pesos.




5. (U) The economic slowdown has also reduced business and
leisure demand in general. For October and November of 2008
demand has fallen up to 30% in some markets according to the
National Travel Agency Association. Until recently when much of
the economic crisis became public, Mexico's civil aviation
authority (DGAC) only reported an 8% decrease in passenger
traffic for the year up to the quarter ending in September.





Opportunities in the Market




6. (SBU) At least one low cost carrier sees a market
opportunity in the current financial crisis. VivaAerobus, a
Monterrey based joint venture between Ireland's Ryanair and
Mexico's IAMSA Group, is seeking to grow its market share. Juan

MONTERREY 00000522 002.2 OF 002


Carlos Zuazua, the Commercial Director of VivaAerobus, states
that the airline is profitable on an operating basis despite the
economic crisis and that its backers are financially stable.
The airline has not altered its expansion plans. The airline is
operating more flights than the previous year and has also
increased its load factor to 75%, the highest load factor of all
national carriers. When the airline launched in November of
2006, it originally started with nine domestic destinations (see
reftel B),but is now flying 19 domestic destinations and one
international destination (Austin, TX). VivaAerobus' fleet has
grown from two to nine planes, all Boeing 737's. The airline
is currently based out of Monterrey but it is looking to lease
additional planes and expand to a second hub, possibly Mexico
City. Zuazua cited business travelers as growing market segment
for VivaAerobus. Cost conscious business travelers now account
for 30% of their passengers for this traditionally leisure
airline.




7. (SBU) Jean Claude Bouche, a leading Mexican aeronautics
consultant, believes the Mexican airline industry is still well
poised to achieve profitability in next few years. Bouche cites
the recent privatization of some airports, the increasing per
capita income and the growing flow of tourism as all reasons to
be optimistic about the market. Bouche contends that the
airlines overbuilt capacity the last few years and that the
economic crisis is only precipitating the expected consolidation
in the industry. The remaining airlines are generally well
run, well financed and are using the latest fuel efficient
short-haul planes in the market.





Reforms in the Market




8. (U) In addition to falling demand, some airline
analysts blame poor government planning for the recent
bankruptcies. Specifically, there is insufficient capacity and
high cost at hubs such as Mexico City and Cancun. New routes
are needed to help create competition and lower cost.
According to Jorge Sunderland, an independent airline
consultant, 90% of passengers travel on just 30 routes mostly
dominated by Aeromexico and Mexicana. Aeromexico and Mexicana
still control over 50% of the total commercial aviation market.
In addition to the structural changes, airlines are currently
negotiating with both airports and the Secretary of
Communication and Transportation (SCT) to reduce high airport
use fees.




9. (SBU) Comment. The falling demand in air travel is
consistent with other signs of the downturn Mexico is facing
such as declining auto production, a contraction in investment
and falling employment, as reported previously by post. The
economic downturn is testing the financial condition of many of
the airlines but the shakeout will likely leave behind stronger
competitors in the growing domestic commercial aviation
industry. The most promising of the airlines is VivaAerobus.
Their ultra-low cost niche has propelled the airline to seventh
place in term of passenger traffic in only two years. Volaris
also remains an interesting competitor since it is backed by
Mexican billionaire Carlos Slim and recently signed a code
sharing agreement with Southwest Airlines. It remains to be
seen if the GOM will take any action to help the industry in
general such as lowering of taxes and use fees or opening up new
routes. End Comment.
WILLIAMSON