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A year after Mexicana's exit, Aeromexico, Mexican LCCs and US carriers are main beneficiaries

5th September, 2011

One year after the suspension of services at Grupo Mexicana, which became the largest airline casualty since the onset of the global financial crisis, it appears the Mexican market has fully recovered. Mexico’s remaining carriers have been able to quickly absorb Mexicana’s approximately 27% of the domestic market. US carriers have so far been the largest beneficiaries of Mexicana’s demise in the international market but Mexico’s remaining carriers are eager to start narrowing the very wide gap with their foreign competitors.

The Mexico-US transborder market has particularly emerged as a key battleground as Mexico’s low-cost carriers and Aeromexico try to re-gain some of the market share lost by Mexican carriers. The US is by far the largest international market in Mexico, accounting for 75% of all international passengers. Grupo Mexicana was by far the largest Mexican carrier in the US-Mexico market, carrying about 300,000 passengers per month on its US routes and capturing about 18% of the total market.

US carriers have absorbed about half of Mexicana's US traffic

About half of this traffic has been absorbed by US carriers as several airlines were quick to add capacity to Mexico following Mexicana’s suspension on 28-Aug-2010. So far only about one quarter of Mexicana’s US traffic has been absorbed by other Mexican carriers, while the remaining quarter remains up for grabs.

Through the first seven months of this year, total traffic in the US-Mexico market has dropped by only 2% despite the exit of the single largest carrier. According to Mexican DGAC statistics, 11.1 million passengers flew between the US and Mexico in the Jan-2011 to Jul-2011 period, compared to 11.3 million passengers in the Jan-2010 to Jul-2010 period.

Monthly scheduled passenger traffic between US and Mexico (thousands): Jan-2009 to Jul-2011

In Jul-2011, the most recent month in which data has been released, traffic in the US-Mexico market was actually up by 1% to 1.8 million passengers.

Scheduled passenger traffic between US and Mexico (thousands): Jul-2010 vs Jul-2011

US carriers now control 84% of the US-Mexico market

While Mexican carriers have seen the overall portion of traffic on US-Mexico routes decline as a result of Mexicana's demise, through the first seven months of this year US carriers have recorded a 13% increase in passenger traffic on Mexico routes to 9.3 million passengers. US carriers now control an overwhelming 84% of traffic in the US-Mexico market, up from 73% through the first seven months of 2010.

Over the last year, all six of the largest US carriers in the Mexican market have seen their traffic increase. United has seen its traffic to Mexico grow the most in the last year, recording a 55% increase in Jul-2011, while sister carrier Continental recorded a 7% increase.

The largest single US carrier (excluding regional affiliates) in the US-Mexico market, American Airlines, transported 276,000 passengers to and from Mexico in Jul-2011, a 12% increase compared to Jul-2010. Delta, which codeshares and now has a minority stake in Aeromexico, saw its Mexico traffic grow by 11% in Jul-2011, while US Airways recorded a 4% growth.

Scheduled traffic on US-Mexico routes (thousands) for top six US carriers: Jul-2010 vs Jul-2011

Scheduled traffic on US-Mexico routes (millions) for US carriers: Jan-2010 to Jul-2010 vs Jan-2011 to Jul-2011

In the immediate aftermath of Mexicana’s demise, Mexican carriers were unable to add capacity in the US market due to US FAA restrictions caused by the FAA’s decision in Jul-2010 to downgrade Mexico’s safety rating to category 2. But the FAA restored Mexico’s category 1 safety rating at the beginning of Dec-2011, allowing Mexican carriers to again add capacity on US routes. Aeromexico and Volaris responded by quickly pursuing expansion in US markets.

But this expansion has not yet been sufficient to take back Mexicana’s entire share of the US-Mexico market. Instead Mexican carriers have so far only been able to absorb only about one quarter of Mexicana’s US-Mexico traffic.

About two-thirds of this gain has been absorbed by Aeromexico, which has seen its US traffic nearly double so far this year. Grupo Aeromexico transported 1.2 million passengers to and from the US through the first seven months of 2011, giving it an 11% share of the total US-Mexico market. Prior to Mexicana’s collapse, Grupo Aeromexico only had about a 6% share of the US-Mexico market.

Volaris' US traffic doubles; more growth expected

Low-cost carrier Volaris, meanwhile, also nearly doubled its US traffic through the first seven months of 2011 from 287,000 passengers to 547,000 passengers. Volaris captured a 5% share of the US-Mexico market in the Jan-2011 to Jul-2011 period, compared to 3% in the Jan-2010 to Jul-2010 period.

Most of the growth came in 2Q2011 as Volaris added several US flights towards the end of 1Q2011. In Apr-2011, Volaris transported 83,000 passengers on US flights, up from 61,000 passengers in Mar-2011 and only 53,000 passengers in Feb-2011. In Jul-2011, the carrier’s US traffic grew further as more new flights were added, exceeding 100,000 for the first time.

More importantly Volaris has not yet had any problems filling the additional capacity. The carrier’s average load factor on US routes through the first seven months of 2011 was 79%, beating the industry average of 78%.

Volaris has more than doubled the size of its US network since Mexicana’s shutdown, growing to seven US gateways and 15 transborder routes. Service to Chicago Midway was launched shortly after Mexico regained FAA category 1 status in Dec-2010. Fresno in California was launched in Feb-2011, followed by Las Vegas in Mar-2011 and San Diego in Jul-2011. According to Innovata data, 19% of Volaris’ total capacity is now allocated to the US market.

Interjet and VivaAerobus start to look at US expansion

Mexico’s other low-cost carriers, Interjet and VivaAerobus, have not yet not taken advantage of the opportunities in the US-Mexico market that were created by Mexicana’s demise. Interjet does not yet operate any services to the US but has been looking at potentially entering the US market and last month applied for US Department of Transportation (DOT) authority to serve New York, Miami and San Antonio from Mexico City.

VivaAerobus has been serving the US since 2008, over one year before Volaris entered the market, but did not add any capacity to the US in the 12 months following Mexicana’s shutdown. In fact, VivaAerobus’ transborder traffic has decreased over the last year. In Jul-2011, VivaAerobus transported only 6,600 passengers on its two US routes – Monterrey to Houston and Las Vegas – compared to 8,300 passengers in Jul-2010. Only 3% of VivaAerobus’ total capacity is allocated to the US market, according to Innovata data.

In recent months, VivaAerobus has recorded an encouraging improvement in load factor on its US routes, reaching 83% in Jul-2011 after only averaging 67% in 1H2011. The improvement in load factor likely contributed to the carrier’s decision to finally resume expansion of its US network. VivaAerobus recently unveiled plans to add three US gateways from Nov-2011, when service will begin from Monterrey to Chicago, Orlando and San Antonio. Initially the three new routes will be served less than daily, with three weekly fights to San Antonio, two weekly flights to Chicago Midway and only one weekly flight to Orlando.

VivaAerobus also recently applied for US DOT authority to begin services to the US from its secondary base at Guadalajara to Houston and San Antonio. It has not yet confirmed or set a launch date for these potential new routes.

According to Innovata data, the confirmed addition of three US gateways will result in VivaAerobus' US capacity more than doubling from only 2,368 seats per week to 5,328 seats per week by the end of this year. But VivaAerobus' share of the US-Mexico market will still remain below 1%.

Mexico to US capacity (seats per week, one way): 04-Jul-2011 to 05-Feb-2012

It appears Mexican carriers will not be improving over the next five months on their paltry share of the US-Mexico market because the two main Mexican carriers in the market, Aeromexico and Volaris, have not yet filed any capacity adjustments or new routes. But Aeromexico, Volaris as well as Interjet will all likely decide over the next few weeks to launch new transborder routes with several routes likely to commence by the end of this year. As a result, Mexican carriers could end up clawing back some of the market share lost by Mexican carriers following Mexicana’s collapse.

In addition to the new route applications from Interjet and VivaAerobus, Volaris last month applied for US DOT approval for several additional US-Mexico routes from its existing gateways including: Chicago to Aguascalientes, Mexico City, Monterrey and Toluca; Las Vegas to Monterrey; and Oakland to Morelia and Zacatecas. Volaris has indicated it will launch these routes shortly after securing approvals, which should only take a few weeks to process. The planned expansion at Chicago is particularly significant as Volaris currently only links Chicago with Guadalajara, which is now the carrier's only route to the eastern half of the US.

Aeromexico looks to further increase market share on US routes

Aeromexico also applied last month for new US routes, including the same Chicago to Zacatecas route and Las Vegas to Monterrey, which is already served by VivaAerobus. The US route expansions at Aeromexico and Volaris have already been overlapping. Earlier this year, both carriers launched service to Fresno, which was an important and exclusive gateway for Mexicana. In late Jul-2011, Volaris also launched service from Mexico City to Las Vegas and Los Angeles – two of Aeromexico’s biggest US routes.

Aeromexico CEO Andres Conesa told analysts during the carrier’s 2Q2011 earnings conference call that the carrier has not been significantly impacted by Volaris’ US expansion. “We think we have a very good product on both those routes and we’ll be able to defend ourselves pretty good,” Mr Conesa said, referring to Mexico City-Las Vegas and Mexico City-Los Angeles.

Mr Conesa said while Aeromexico has nearly doubled its share of the US-Mexico market over the last year he believes there is still room for further gains. But he said the focus will be on adding capacity to existing gateways rather than adding new markets.

Additional capacity for US routes will be ready for deployment as Aeromexico expands its B737NG fleet. The carrier plans to expand its B737-700/800 fleet from 40 to 44 aircraft during 2H2011 and recently ordered 10 additional B737-700s using proceeds from its IPO earlier this year. Mr Conesa said the 10 additional aircraft are slated for delivery in 2012 and 1H2013 and will be used primarily to increase capacity to the US and Canada.

Domestic Mexican market fully recovered from Mexicana's collapse

While Mexican carriers have not yet succeeded at taking over most of Mexicana’s market share in the US market, domestically the situation has been different. Mexico’s domestic market has already fully recovered with traffic through the first seven months of 2011 matching the traffic from the same period one year ago.

According to Mexican DGAC figures, there were 14.4 million scheduled domestic passengers in Mexico in both the Jan-2010 to Jul-2010 and Jan-2011 to Jul-2011 periods despite the absence of Grupo Mexicana, which had a 27% share of the domestic market. The most recent batch of DGAC statics, for Jul-2011, showed a drop in the domestic market of less than 1% to 2.49 passengers.

Monthly domestic scheduled passenger traffic for Mexico (in millions): Jan-2010 to Jul-2011

Interjet is the biggest domestic beneficiary of Mexicana's collapse

While Aeromexico and Volaris have been the only beneficiaries of Mexicana’s demise in the transborder market, Interjet has recorded by far the biggest traffic and market share gain domestically. For example, Interjet’s domestic traffic surged 87% in Jul-2011 to 653,000 passengers.

As a result, Interjet’s domestic market share has nearly doubled over the last year from 14% to 26%. This has been achieved by Interjet putting all of its additional capacity into the domestic market until Jul-2011.

The carrier was able to add a significant amount of domestic capacity by accelerating fleet expansion after Mexicana’s demise, leasing five additional A320s in 4Q2010 which were not in its original fleet plan. Interjet now has 31 A320s, compared to only 17 A320s one year ago. More capacity expansion is planned as Interjet has 10 additional A320s on order for delivery by the end of 2013 plus an order for 15 Sukhoi Superjet 100s, which are due for delivery starting next year.

Interjet has stated that it plans to continue rapid fleet and network expansion remain intact despite deciding in late Jun-2011 to call off a planned initial public offering. The carrier says it is able to continue funding its expansion using funds from its shareholders and its profitable operation.  

Over the last year most of Interjet’s expansion has been focused on its Mexico City domestic operation. Interjet became the first low-cost carrier to serve Mexico City in 2008. Interjet initially only operated eight routes from Mexico City, but the opening up of additional slots since Mexicana’s collapse has allowed it to expand its Mexico City domestic network to 23 cities. Interjet now accounts for 27% of total domestic capacity at Mexico City International, second after the 48% share held by Grupo Aeromexico.

Mexico City International Airport domestic capacity by carrier (seats per week): 5-Sep-2011 to 11-Sep-2011

Interjet also launched its first international route from Mexico City on 1-Jul-2011, when it began serving Guatemala City. The launch of the Mexico City-Guatemala City flight, which was upgraded from seven to 13 weekly frequencies on 18-Jul-2011, marked the resumption of international services for Interjet after a three-year hiatus.

The carrier briefly served Guatemala City from Mexico City alternative airport Toluca in 2007 and 2008 before suspending it due to a lack of demand. Interjet is confident the route will be more successful from Mexico City International, the main business airport. In the first month, however, the route only achieved an average load factor of 38%, based on Mexican DGAC statistics from Jul-2011.

Interjet also launched on 11-Aug-2011 a daily service from Mexico City to Havana. While Interjet is looking at new markets in Central America, the Caribbean and the US, domestic services will remain its main focus. Currently 97% of Interjet's capacity is deployed in the domestic market.

In addition to Mexico City, the carrier continues to operate seven domestic routes from Toluca, where it has maintained its headquarters and MRO base. Interjet also serves four domestic destinations other than Mexico City or Toluca from both Monterrey and Guadalajara. Its two latest domestic routes, both launched 16-Aug-2011, connect Monterrey with Culican and Guadalajara with Hermosillo.

Volaris and VivaAerobus join Interjet in expanding at Mexico City

Interjet’s two low-cost competitors, Volaris and VivaAerobus, have also significantly expanded their Mexico City operations since Mexicana’s collapse opened up slots at the previously congested airport. Volaris and VivaAerobus were able to launch small operations at Mexico City in 1H2010, but prior to Mexicana’s shutdown were limited to only a few daily flights at the coveted slot-controlled airport.

VivaAerobus now has 15 domestic routes from Mexico City. It has 21 domestic routes at its main hub, Monterrey, and 11 domestic routes at a secondary hub in Guadalajara. VivaAerobus now operates 16 B737-300s, up from a fleet of 11 B737-300s before Mexicana’s shutdown. The airline does not have any aircraft on order but is planning to lease several additional B737-300s by the end of this year.

Volaris now has 10 domestic routes from Mexico City and will add its 11th on 13-Sep-2011, when it launches service from Mexico City to Zacatecas. Volaris currently only has four routes from Tolcua, where it is headquartered and had a large operation until Mexicana's demise prompted it to shift several domestic routes to Mexico City. The carrier also has a big operation in Baja California, including 17 domestic routes from Tijuana.

Volaris now operates 31 A320 family aircraft, up from 21 aircraft prior to a year ago as Volaris – like Interjet, Aeromexico and to a much lesser extent VivaAerobus – decided to accelerate fleet expansion in the aftermath of Mexicana's exit. More rapid expansion is expected as Volaris currently has another 17 A320s on order, according to Ascend data.

Overall, Volaris and VivaAerobus have not expanded nearly as rapidly in the domestic market as Interjet. Volaris, which has directed a big chunk of its additional capacity to the US market, only recorded a modest 24% increase in domestic traffic for Jul-2011 to 423,000 passengers. VivaAerobus, which has not expanded its fleet as dramatically as Interjet, saw its traffic grow by 30% in Jul-2011 to 336,000 passengers. Both carriers have only seen their domestic market shares improve by three percentage points over the last year, from 14% to 17% at Volaris and from 10% to 13% at the smaller VivaAerobus.

Domestic traffic at market leader Aeromexico Group, including its regional unit Aeromexico Connect, was up 27% in Jul-2011 to 927,000 passengers. The group’s domestic market share has increased eight percentage points over the last year from 29% to 37%.

Mexican domestic scheduled passenger traffic by airline group: Jul-2010 vs Jul-2011

LCC penetration rates on the rise in Mexico – but only slightly

From a purely low-cost carrier perspective, the LCC penetration rate in Mexico’s domestic market has only increased slightly, since Mexicana’s collapse, from about 53% to approximately 56%. Grupo Mexicana’s LCC unit Click accounted for about 15% of the total market prior to the group’s demise. Essentially this 15% has been absorbed by Mexico’s three remaining LCCs, while Aeromexico mainline and regional unit Aeromexico Connect has absorbed about three quarters of the market share that was held by Mexicana mainline and regional unit Mexicana Click.

In the transborder market, the LCC penetration rate also has increased slightly due primarily to the expansion of Volaris. Seven US low-cost carriers also serve Mexico, including JetBlue, AirTran, USA3000, Virgin America, Spirit, Frontier and Sun Country. But the market is also served by seven US legacy carriers, all of which have more capacity to Mexico than the US LCCs. Nearly every US carrier – including the legacies and LCCs – increased capacity to Mexico following Mexicana's demise. Mexicana Click did not serve the US market.

From an airport perspective, traffic at the country’s main hub, Mexico City International, has now fully recovered. But traffic is still slightly down at Mexico’s other major airports including Guadalajara, Monterrey, Tijuana and Toluca. Traffic in several secondary cities has fully recovered with traffic at Tuxtla Gutierrez even up an impressive 35% in Jul-2011 compared to a year ago.

Traffic for top 10 Mexican airports (thousands of passengers): Jul-2011 vs Jan-2010

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