Mexican Airport Drama

 I clipped this from a 3rd party email from work, yes I have been working a lot of hours, I ain't complaining, OT is a good thing, LOL

    

Open photo in lightboxBenito Juárez International Airport is decreasing aircraft movements as the Mexican government tries to coax airlines to shift operations to the new Felipe Ángeles International Airport.BOARDING1NOW/ISTOCK

Writers of Latin American popular telenovela dramas, similar to soap operas but with more tension and twists, could look to Mexico’s air transport system if they run short of plot ideas. There’s plenty to work with, including a massive new hub airport that was killed well after construction began but before it was completed, and the revival of a defunct airline that will be operated by the military—if it ever gets off the ground.

The story began in 2014 when then-President Enrique Peña Nieto announced plans for a massive new mega-hub to replace Mexico City’s constrained, overcrowded and crumbling Benito Juárez International Airport (MEX). The vision for the new Texcoco Airport was for it to serve as a major international connector for Latin America. But in October 2018, well after construction had begun, then-Presidentelect Andrés Manuel López Obrador, popularly known as AMLO, organized a nonbinding referendum in which almost 70% of the 1 million voters rejected the new airport. Texcoco’s cancellation cost was pegged at over $6 billion.

 

 

“When the new government came in, they took [the new airport] as a symbol of corruption and shady interests. And that project needed to be scrapped to get rid of this corruption problem, which was mostly a fabrication,” IATA regional VP Americas Peter Cerdá told ATW.

López Obrador then converted a former Mexican Air Force Base into a commercial airport, Felipe Ángeles International (NLU), as part of Mexico City’s new three-airport system, including MEX and the much smaller Toluca Airport (TLC). NLU instantly became Mexico’s second-largest airport by territory but is located 30 miles northeast of the center of the city.

“You build this great airport; however, you almost have it on an island because it is so poorly connected to the city center. You don’t have a train or highway arteries that will connect a city of 27 million passengers,” Cerdá said.

“The idea of building a new airport in Mexico City is a good idea. They just put the cart before the horse,” said Fabricio Cojuc, an independent aviation consultant and a chief network officer at Mexicana before it went out of business. While Cojuc sees NLU’s potential as an LCC and spillover airport for the megasprawl of the capital, he has doubts. “It’s a big question mark whether people will be willing to spend time and stress to get there when a better-connected MEX serves 99% of the destinations,” he said.

Government-owned and military-operated NLU opened in March 2022 with a smattering of flights and overall numbers remain small. OAG data report just 2,359 flights per month and seven operators. ULCC Viva Aerobus has the largest market share at 41% and is aggressively expanding its presence at NLU while retaining its base at Monterrey Airport (MTY). Aeromexico’s mostly regional jet operation has the second-largest presence at NLU at 33%, followed by ULCC Volaris at 20%. Venezuelan carrier Conviasa, Dominican Republican new ULCC Arajet and Panamanian flag carrier Copa Airlines are the airport’s only non-Mexican operators.

The Mexican government is taking a carrotbut-mainly-big-stick approach to both coerce and force airlines to make the shift to NLU. It has made landing and facility fees cheaper than those at MEX, where aircraft movements will drop to 43 per hour from January 2024, a more than 30% decrease from the 61 movements an hour allowed as recently as 2022. The government claims the slot cuts are related to airspace restrictions, but IATA notes that a study in 2018 by the same government confirmed the feasibility of safely operating up to 72 movements per hour.

“The airlines have been able to manage deftly by upgauging their metal. But there’s going to come a point when the cutbacks are so deep that there’s only so much compensation you can do,” Cojuc said.

Latin American and Caribbean airline association ALTA says the slot reduction is detrimental because of “a significant increase in delays and cancellations of flights that were already scheduled and on sale. Furthermore, it is very likely that ticket prices will also increase as the supply of flights in the Valley of Mexico City will be reduced.”

Indeed, some airlines are looking elsewhere.

“We are reducing capacity in Mexico City International Airport and using that to fortify our USMexico capacity in the short term, away from Mexico City in other markets from Mexico to the US,” Volaris executives announced during their thirdquarter earnings call.

Passenger airlines aren’t the only carriers affected. Cargo operators were given four-month eviction notices in March to move from MEX to NLU, although this was extended to September after intense lobbying. The transition logistics have been a nightmare by many accounts.

“I can tell you that two months ago, they were trucking freight to Mexico City to clear customs, and then they were bringing it back to [NLU] for distribution,” Cojuc said.

The government’s strong-arm tactics continued, with it briefly considering allowing cabotage so that international airlines could operate domestically. This was written into the law, but López Obrador’s own party blocked it in Congress. Slot reductions initially also targeted international carriers servicing MEX, but the government relented under pressure from foreign governments, IATA and ALTA.

Another outcome of the MEX slot reductions was that the US Department of Transportation, irked by what it saw as a contravention of the US-Mexico air transport agreement, indefinitely postponed giving approval for a planned antitrust-immunized joint venture between Viva and US ULCC Allegiant Air.

FAA RATING UPGRADE

Meanwhile, FAA reinstated Mexico’s Category I safety rating status in September after downgrading it to Category II in May 2021. The rating is always targeted at a country’s aviation regulatory oversight, not the competence of its airlines, but it’s the carriers that bear the consequences because they cannot add new routes or frequencies to the US under Category II rules. The rating downgrade also forbids equipment changes, such as swapping in larger aircraft, and allowing newly delivered aircraft to operate into the US, which is Mexico’s most significant international air market at 85% of traffic.

“It’s a big irony that Category I was being restored in parallel to the additional cutbacks at Mexico City, which effectively neutralizes the Category I benefits in terms of adding frequency and routes,” Cojuc pointed out. Domestic carriers are being forced to send domestic flights to NLU to open slots at MEX for new US routes they can now begin, such as Aeromexico’s nonstops to Boston and Salt Lake City.

For all the upheaval, MEX remains Latin America’s busiest airport and the world’s 16th busiest, with 46.2 million passenger enplanements in 2022, and it is poised to remain the number one airport in the largest air traffic country in Latin America. But the lack of investment and renewal will make it increasingly difficult for MEX to keep pace with those numbers.

“We need urgent focus on improving the infrastructure, the terminals, runways, taxiways—a total overhaul,” Cerdá said.

“What’s frustrating here is Texcoco Airport was an airport that Mexico needed and was fully supported by the airline industry. We’re being asked as passengers and airlines to pay off the bonds through the user fees for the decommissioning of the airport, which we never wanted to occur.”

Meanwhile, plans announced in mid-December to hike MEX fees by an average of 77% in 2024 were condemned by ALTA and IATA, which warned this would lead to higher fares and put the country’s competitiveness at risk.

THE MEXICANA SURPRISE

Another twist in the Mexican aviation telenovela that nobody in the industry saw coming was a government plan to launch an airline under the name of Mexicana, which was spun off as a publicly owned carrier before shutting down in August 2010. In May, the government announced it had purchased the defunct Mexicana for $48 million. The deal includes the brand, three buildings and a flight simulator. And in a populist move, the financial proceeds from the sale would pay the more than 7,000 former employees who lost salaries and benefits when Mexicana was liquidated. In addition, the government said it would invest 233 million pesos ($13.6 million) in the new military-run venture.

Mexicana was envisioned to start as an LCC jointly controlled by Mexico’s army and air force and operating 10 737-800s leased directly from Boeing. There were promises of introductory fares to leading domestic destinations that would be around 20% cheaper than those of competitors, include free seat selection and beverages, and no charge for checked bags up to a certain weight.

Open photo in lightboxViva Aerobus made the first passenger flight into Felipe Ángeles International Airport on March 21, 2022. HECTOR VIVAS/GETTY IMAGES

With a planned Dec. 1 launch date, the government also said Mexicana would carry 8 million passengers and take a 6% market share during its first full year of operations, while breaking even financially by the end of 2025.

But more confusion than progress has resulted. Ticket sales have started, stopped and then started again, with refunds inexplicably given for delayed services.

At a press conference in late November, López Obrador said launch would be pushed back, possibly to Dec. 26, saying, “It’s going to fly soon, very soon.” The airline posted a bizarre message on its website saying that anyone who had booked flights to certain cities would receive an email with instructions about how to confirm their reservation. It then listed another set of cities, tickets for which it would send compensation while not being clear if those tickets had been sold.

Aviation Week Intelligence’s fleet data tracking can find no reference to the 737s being delivered and the launch fleet plan appears to have changed at least twice. A deal to wet-lease 50-seat Embraer ERJ-145s wet-leased from TAR Aerolineas seems to have fallen through, with local media reporting the airline would start service with two 737-800s and one -300. There was no confirmation of that or of a firm launch date as of mid-December.

Not surprisingly, people are skeptical. “They don’t have anything: no crews, no planes, no infrastructure, no agreements with the airports they want to fly to,” local aviation specialist María Larriva Sahd said. “They haven’t made any advancements. They’re just announcing things, but they haven’t established the procedures to create an airline.”

The airline’s leadership team is also raising eyebrows in the industry because it reportedly comprises retired Mexican air force personnel with little-to-no commercial aviation experience. Critical elements and services, including aircraft and flight crew procurement and maintenance services, were outsourced by the Secretariat of National Defense to SAT Aviation Holdings Inc., a little-known USbased company that was previously referred to as Petrus Aviation, according to Mexican business publication El Financiero.

“We are not sure we understand Mexicana’s rationale. Mexico already has two low-cost airlines that do very well, but it sends a message that prices shouldn’t go up. It’s also a jobs program for the government,” TD Cowen senior airline analyst Helane Becker wrote.

As Becker notes, Mexicana would directly compete with established Mexican LCC players Viva and Volaris, so the conditions being set for fair competition are being scrutinized even though Mexicana has yet to fly.

“Volaris has demanded equal treatment by the authorities and is closely monitoring the implementation process for a new entrant,” Volaris president and CEO Enrique Javier Beltranena said during the third-quarter earnings call.

Cojuc made clear the industry’s suspicions. “This is where we have the start of the makings of a very unlevel playing field situation. [Mexicana] is in a position to enjoy multiple biased cost advantages, such as cheaper fuel, landing fees, taxes, and the like, and having preferential treatment in gate allocation and air traffic control,” he said.

IATA’s Cerdá also noted there could be a backlash if preferential treatment becomes apparent.

“We are not against new airlines entering the market, but we will certainly be very vocal on unjust treatment towards [existing] Mexican carriers. You’re negatively impacting Mexican companies operating within your country,” he said.

Cerdá added that he and others believe the oversaturated Mexican domestic market is well served, and resources could be better directed. “Instead of focusing on a new airline, let’s focus on fixing the infrastructure,” he said.

BOOMING MEXICAN RIVIERA

With so many questions about how and even why Mexicana is being relaunched, some also point to the carrier’s planned inaugural route from its NLU base to Tulum Felipe Carrillo Puerto International Airport (TCQ), 85 miles south of Cancun and a pet project of the president. TCQ is located in the booming Mexican Rivera tourist zone near Playa del Carmen and is targeted to be Mexicana’s second base. Airlines are flocking to TCQ, which soft-opened on Sept. 21, 2022, and was formally opened on Dec. 1. When the airport opens to international traffic in March 2024, it will see American Airlines, Delta Air Lines, United Airlines and Spirit Airlines start service from their US bases.

Meanwhile, for all the drama, Mexico’s domestic and cross-border US markets are mostly faring well, especially among the ULCCs that account for 71.4% of Mexican domestic capacity, according to OAG data. Market leaders are Volaris (39%) and Viva Aerobus (32.4%), whose business models are predicated on switching people from the bus in a country with no passenger rail links but a strong VFR market. Volaris and Viva also have some of the lowest costs and fares in the world, and, until recently, enjoyed very high operating margins. Both ULCCs are ratcheting down domestic capacity. The reduction could help raise yields while “purging their route network networks a little bit, mowing down the bad grass in certain markets where there’s overcapacity,” Cojuc said.

Open photo in lightboxMexican President Andrés Manuel López Obrador oversaw the Dec. 1 opening of Tulum Felipe Carrillo Puerto International Airport, which has attracted many carriers, including American Airlines, Delta Air Lines, United Airlines and Spirit Airlines. MEDIOS Y MEDIA/GETTY IMAGES

Legacy network airline Aeromexico, which delisted itself from Mexico’s main stock exchange and went private following its emergence from Chapter 11 bankruptcy in March 2022, is poised to return to public markets. With FAA Category I status restored, the nation’s largest international player, along with its Delta joint-venture partner, is rapidly growing in the US transborder market, with a joint 19% share closing in on market leader American’s 21% share.

Though Delta’s post-Chapter 11 ownership in Aeromexico, a fellow SkyTeam alliance member, has decreased from 49% to 20%, Delta president Glen Hauenstein says the Mexican market represents “a great source of strength.” Transborder capacity in December 2023 will be 14.8% higher than in December 2022 and 35% higher than in December 2019, according to OAG.

“The Category I recovery is already allowing Mexican carriers to add capacity in the transborder market, as evidenced by a 15% YoY published seat increase in Q1 2024,” Cojuc said.

VFR dominates Mexican carrier’s US-bound traffic, while leisure sun-and-sand travel powers Mexico-bound traffic. Mexican carriers are shifting capacity from the saturated domestic markets internationally to meet pent-up demand for international expansion. OAG filings show 22 new US-Mexico routes are confirmed for 2024. This could flip the domestic versus international yield dynamics.

“We expect yield improvement in the domestic market as capacity moves north into the US market, where we expect yields to decline. We think there will be overcapacity in the Mexico-US market,” TD Cowen’s Becker noted.

Just how all this transpires through 2024, however, will at least partially hinge on Mexican politics. So many of the swings and changes in the country’s air transport industry over recent years have been connected to politics and 2024 will see a presidential election in June. López Obrador is term-limited, but in another crowd-pleasing move meant to rally his base, his government is looking to reduce privately operated airport usage fees by 8%-12%. In addition to the lower usage fees, Mexico’s transportation ministry has said it will almost double what it charges operators for concessions to run the airports. Airlines say the move could stimulate demand via lower rates but will be a neutral pass-through on profitability. Opponents say it only hurts the potential for investing in badly needed infrastructure upgrades and expansions, and they point out that government-controlled airports aren’t subject initially to the same fee decreases.

Another chapter in the Mexican aviation telenovela seems poised to play out.