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