AIR TRANSPORT: FLU SPARES PASSENGERS, HITS FINANCES

UNCLAS SECTION 01 OF 02 MEXICO 001322 SIPDIS SENSITIVE STATE FOR WHA/MEX AND EEB/TRA STATE PASS TO FAA (FRANCESCHI, GLENDINNING) STATE PASS TO DOT (HEDBERG) E.O. 12958: N/A TAGS: EAIR ECON KFLU MX SUBJECT: AIR TRANSPORT: FLU SPARES PASSENGERS, HITS FINANCES REF: A. MEXICO INFLUENZA SITREPS (MEXICO 1277 ET AL) ¶B. MEXICO 1260 ¶C. MEXICO 1298 ¶1. (U) This is the third in a series of cables reporting on the economic impact of the influenza outbreak in Mexico. ¶2. (SBU) SUMMARY: The transportation system in Mexico has withstood the H1N1 assault at its current intensity rather well. While fear of the influenza has subsided, the economic costs for airlines are real and painful. Flu-driven drop in passenger demand has driven airlines to substantial capacity cuts and is making for choppy financial waters for Mexican air carriers. The Secretariat of Communications and Transportation (SCT),airports, and air traffic controllers have earned solid marks for ensuring the continuity of their systems during the influenza pandemic. The GOM has heeded calls for relief to the sector, but what is most needed is a return of tourist travel. END SUMMARY. CARRIERS CUT CAPACITY -- FOR HOW LONG? -------------- ¶3. (SBU) Reacting to a sustained drop in demand, U.S. carriers have cut Mexico capacity by an average of 40% through at least June. For some carriers, the cuts will remain into the fall. In the meantime, airlines are re-assigning aircraft to more profitable U.S. domestic routes. Mexico routes historically have been profitable for U.S. carriers. They are committed to operating here (American Airlines has been in Mexico since 1941) and are prepared to restore capacity as demand rebounds. For now, the Centers for Disease Control (CDC) recommends deferral of non-essential travel to Mexico, planes are half-empty, and bargain airfares abound. With the summer all but written off and autumn traditionally a low period, the holiday travel season that begins in November may be the next time U.S. carriers see healthy passenger volumes. ¶4. (SBU) European carriers base their Mexico business on two-way tourism -- Europeans to Mexico and Mexicans to Europe. They were initially the most affected of the airlines, in particular by blanket cancellations implemented by tour group operators like Thomas Cook and TUI AG. Thomas Cook intends to unfreeze Mexico tour packages on 19 May, though just how many European tourists are ready to hit the beaches is uncertain. Air France plans to fly groups of travel agents, promoters, and opinion leaders to Mexico to spread the message that the country is again open for vacation. European lines have been reluctant to pare the frequency of their wide body flights. ¶5. (SBU) Mexican carriers, for whom every route is a Mexico route, have seen their schedules disrupted across the board. The impact of a continued slowdown on companies' cash flows could be substantial in a sector that before the flu was already amidst a low cost carrier shakeout. Domestic routes looked almost unaffected early in the crisis, then took a pounding during the long 1-5 May weekend. Mexicana's CEO, Manuel Borja, told us he believes domestic traffic will spring back quickly. Both flag carriers report big drops in their three primary passenger segments -- business travelers, paisanos (Mexican nationals living abroad),and tourists. Mexicana, built around a north-south route system that reaches into North, Central and South America, is the Mexican carrier most exposed to the falloff in international bookings. This no doubt informs the company's militancy against the CDC's Mexico travel warning. GOM AID -- BETTER THAN NOTHING BUT... -------------- ¶6. (SBU) Airlines view GOM financial assistance, announced by the Finance Ministry (Hacienda) on 5 May (ref B),as timely but too little. They call the 200 million peso (USD 15.3 million) allocation for tourism promotion a wise step, but wonder how quickly it can repair the country's damaged reputation as tourist destination. Whereas business travel is likely to recover to levels approaching normal (that is, back to the already-low downturn-induced baseline) as the immediate crisis subsides, few believe the confidence of international tourists will return so quickly. Additional measures suggested range from a reduction in landing fees to more competitive jet fuel prices. One airline executive noted prices for aviation services were not unduly high in Mexico, but rather that effective action required quality and efficiency improvements to such services. Secretary of Hacienda Carstens announced a second relief package on 11 May (ref C) that includes 3 billion pesos (USD 228 million) in credit facilities for MEXICO 00001322 002 OF 002 airlines -- a measure for which domestic carriers had previously agitated. QUARANTINES, SUSPENSIONS, BAD NEIGHBORS -------------- ¶7. (SBU) The Foreign Secretary pronounced "brother" countries Argentina, Cuba, Ecuador, and Peru in violation of international agreements on civil aviation for their suspension of flights to and from Mexico. The Foreign Ministry (SRE) followed those comments with a formal complaint at the International Civil Aviation Organization. While Argentina appeared to bow to diplomatic pressure and was to renew flights on 4 May, as of this writing the country had seized on a variety of technicalities to prevent service from actually resuming. Ecuador announced it would re-open to Mexico traffic on 7 or 8 May -- a largely symbolic gesture, as there is no regularly-scheduled commercial air service between Ecuador and Mexico. SRE, SCT and airport contacts still note with mixed pride and relief that a motion considered by the European Union to suspend flights to Mexico was soundly defeated in late April. China and Singapore have both quarantined Mexican nationals. The GOM's flag-draped rescue-by-777 of passengers stranded in China met with widespread approval in Mexico. Passengers and the plane's pilots have made multiple media appearances. (Note: Goodwill generated by China's donation of two 747-loads of humanitarian supplies -- including many of the hi-tech thermal imaging devices just installed in Mexican airports -- appears short-lived as consequence. End note.) ¶8. (SBU) COMMENT: Domestic, paisano, and business travel will return to normal more rapidly than tourist travel, but don't expect the already-recession-emptied business cabin to pad many bottom lines. In turn, domestic tourism will be back before its international cousin. The influenza slowdown on top of the economic downturn (and before that a year of sky-high fuel prices) could be sufficient to knock out another Mexican low cost carrier, several of which failed in 2008-2009. END COMMENT. BASSETT