06-Feb-2013 6:00 AM

Mexico returns to double-digit domestic growth in 2012, boosting outlook for Aeromexico and LCCs

Analysis

Mexico's domestic market recorded double-digit growth in 2012 for the first time in five years and only the second time this century. The Mexican aviation industry has reached its healthiest point since deregulation led to the launch of five low-cost carriers seven years ago. The market now features a strong legacy airline group and three LCCs which are seeking to cash in on their relatively strong positions by holding initial public offerings.

Mexican carriers flew 28.1 million domestic and 5.9 million international passengers in 2012, according to newly released statistics from Mexico's DGAC. Domestically the market grew by 10% while the much smaller international market grew by 23%. Foreign carriers serving Mexico recorded much more modest growth of 3%, but still dominate Mexico's international market with 21.2 million passengers carried in 2012.

The 10% domestic growth represents the highest figure for Mexico since 2007, when five new low-cost carriers drove a 23% increase in passenger traffic to 27.4 million. The opening up of Mexico's market to new entrants led to a prolonged period of over-capacity, irrational competition and unprofitability for every carrier. Mexico's domestic market ended up declining after reaching a high of 27.7 million passengers in 2008 as several carriers went bust due to a brutal combination of over-capacity and deteriorating economic conditions.

Two of the five Mexican LCCs which launched services in 2H2005 or 1H2006, ALMA and Avolar, ceased operations in 2008. One of the country's smaller legacy carriers, AeroCalifornia, also ceased operations in 2008 while Azteca, a newer carrier which had launched in 2001, ceased operations in 2007. The shake-out continued in 2009 with the shutdown of smaller legacy carrier Aviacsa and concluded in 2010 with the collapse of Mexicana, including its low-cost unit Click and regional subsidiary Link.

Mexico's domestic market finally recovers and reaches new passenger record

Seven years after deregulation, the Mexican market has finally recovered. The 28.1 million domestic passengers carried in 2012 represents the first time the previous record figures from 2007 and 2008, when nine to 10 major players competed in the market, have been exceeded.

Mexico annual domestic traffic (millions of passengers): 2001 to 2012

2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012
17.6	18.4	19.5	21.6	22.2	27.4	27.7	24.4	24.5	25.5	28.1

Aeromexico, including its regional subsidiary Aeromexico Connect, is the lone legacy survivor while Interjet, Volaris and VivaAerobus are the three surviving LCCs. Grupo Aeromexico captured 38% of the domestic market in 2012, a decrease of 2ppt compared to the 40% share the group had in 2011 but still a 6ppt increase compared to its 32% share from 2009, the last full year before Mexicana's collapse. Group Aeromexico has seen its domestic traffic grow by 34% since 2009, filling some of the void left by Grupo Mexicana, which captured a 27% share of the domestic market in 2009.

Mexico's surviving trio of LCCs have grown even more rapidly since the collapse of Mexicana and Click, filling most of the void left by Grupo Mexicana. Interjet, Volaris and VivaAerobus combined have seen their domestic traffic more than double over the last three years, from 7.6 million in 2009 to 16 million in 2012.

LCCs now account for 57% of Mexican domestic market, up from 47% in 2009

Interjet captured 24% of Mexico's domestic market in 2012, compared to 25% in 2011 while similarly sized Volaris captured a 20% share, compared to 18% in 2011. Back in 2009 both Interjet and Volaris had nearly identical 13% shares of the market while Mexicana LCC brand Click had a 15% share.

Interjet grew faster domestically in 2011 as Volaris focused more on expanding its US network. But in 2012 Volaris focused more on domestic expansion while Interjet, which had only been operating domestically until mid-2011, focused more on international expansion.

Smaller LCC VivaAerobus has seen its share of the domestic market increase from only 6% in 2009 to 12% in 2011 and 13% in 2012. The other two carriers operating scheduled services in Mexico, regional carrier Aeromar and leisure carrier Magnicharters, account for the remaining 5% of the market.

Mexico domestic market share (% of scheduled passengers) by carrier: 2012

Mexico annual domestic traffic (millions of scheduled passengers carried) by airline group: 2009 versus 2011 and 2012

Rank	Airline group	2009	2011	2012
1.	Aeromexico	7.9	10.2	10.6
2.	Interjet	3.1	6.4	6.7
3.	Volaris	3.1	4.6	5.8
4.	VivaAerobus	1.4	2.9	3.5
5.	Magnicharters	0.5	0.8	0.9
6.	Aeromar	0.4	0.6	0.6

All of Mexico's major domestic carriers recorded year-over-year passenger traffic growth in 2012, driving the 10% growth for the overall market. Volaris recorded the fastest growth at 25% followed by VivaAerobus, which like Volaris focused on domestic expansion in 2012, at 20%. Grupo Aeromexico and Interjet recorded 4% and 6% growth, respectively, as they focused more on international expansion.

Growth in Mexico has been paltry compared to other Latin American markets

When compared to other emerging markets, including other markets in Latin America, the growth in Mexico over the last decade has been relatively unimpressive. Even with the launch of LCCs taking over half of the market and stimulating demand with lower fares, Mexico's domestic market has only grown by 60% since 2002. It has also taken 20 years for Mexico's domestic market to double in size.

In comparison, Brazil's domestic market has grown by over 50% since 2009 and by almost 150% since 2005. Colombia's domestic also has seen rapid growth, growing by almost 80% since 2008. Brazil is currently the world's fourth largest domestic market based on current seat capacity while Mexico is the tenth largest and Colombia is also in the world's top 20.

Chile, which is the fourth largest domestic market in Latin America behind Brazil, Mexico and Colombia, has grown even faster over the last three years. Chile recorded domestic growth of 18% in 2010 and 2011 and growth of 19% in 2012, making it somewhat surprisingly the fastest growing market in Latin America.

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Even with its first double-digit showing in five years, Mexico was the second slowest growing domestic market in 2012 among Latin America's six largest domestic markets. Only Brazil, which experienced a dramatic cool down after recording 24% domestic growth in 2011, had slightly slower growth than Mexico in 2012.

Passenger growth in Latin America's six largest domestic markets: 2012 vs 2011

Rank	Country	Global ranking	Passenger growth	RPK growth
1.	Brazil	4	N/A	7%
2.	Mexico	10	10%	N/Á
3.	Colombia*	18	15%	17%
4.	Chile	26	19%	18%
5.	Peru	28	17%	N/A
6.	Argentina	29	16%	N/A

Source: CAPA - Centre for Aviation, Brazil's ANAC, Mexico's DGAC, Colombia's CAA, Chile's CAB, Peru's DGAC and Aeropuertos Argentinas 2000
*Note: Colombia data is for the first 11 months of 2012 because full-year supply and demand 2012 data is not yet available. For Brazil, Mexico, Chile, Peru and Argentina data is for the full year. All data comes from civil aviation authorities except for Argentina in which case the data comes from the country's privately-owned airport operator. Supply and demand data used rather than origin and destination data when possible.

But while Mexico has not seen the growth of its Latin American peers over the last decade, the market has now finally stabilised, ushering in a new era of growth and - hopefully - profitable growth. Mexico's economy also has stabilised and while it still is not the fastest growing country in the region the ingredients are there for growth.

Mexico year-over-year GDP growth (% change) 2008 to 2013*

Mexico's domestic beach markets record rapid growth, led by Mexico City-Cancun

LCCs are particularly well positioned to tap into the growth as rising discretionary income and low fares persuade more and more bus travellers to take to the skies. Volaris and VivaAerobus are particularly targeting the first time flier segment and leisure markets. Both carriers have particularly been adding capacity in beach markets, believing its low fares can stimulate more trips to Mexico's many popular beach resort destinations.

For example, Mexico's biggest domestic route and largest beach market, Mexico City-Cancun, recorded 39% growth in 2012 to 3.1 million return passengers. The nearly 900,000 additional passengers that flew between Mexico City and Cancun last year account for one-third of the additional 2.6 million passengers in the entire domestic Mexican market.

Over the last year Volaris has grown capacity on the Mexico City-Cancun route by about 45%, according to Innovata data. Volaris is now the second largest carrier in the market with a 31% share of capacity, compared to a 36% share for Aeromexico, 23% for Interjet and 10% for VivaAerobus.

In comparison, Mexico's other two big domestic trunk routes, Mexico City-Guadalajara and Mexico City-Monterrey grew by a more modest 14% and 13%, respectively. These are more business focused markets as they connect Mexico's three largest cities. There were just over 2 million return passengers in the Mexico City-Guadalajara market and 2.4 million return passengers in the Mexico City-Monterrey market in 2012, according to data from Mexico's DGAC.

Aeromexico and Interjet, which is focused more on the business sector of the market and operates A320s in a spacious single-class 150-seat configuration although technically it is an LCC, are the main carriers in the Mexico City to Guadalajara and Monterrey markets. Aeromexico has a 42% share of capacity on Mexico City-Monterrey and a 41% share on Mexico City-Guadalajara while Interjet has 36% and 30% shares, respectively.

Cancun leads Mexican airports with 25% domestic traffic growth

Cancun was by far the fastest growing major domestic Mexican airport in 2012, providing another indication of the strength of the local beach market. Cancun recorded 25% domestic traffic growth in 2012 to 4.6 million passengers, according to Mexican DGAC data.

Cancun is the fourth largest domestic airport in Mexico after Mexico City, Monterrey and Guadalajara. Mexico City recorded a 13% increase in domestic traffic to 19.7 million passengers while Monterrey grew by 9% to 5.2 million passengers and Guadalajara grew by 7% to 5 million passengers.

Mexico's top 10 airports by domestic traffic (millions of passengers): 2012 versus 2011

Volaris is planning to grow capacity by another 20% in 2013, with again a focus on the domestic market and particularly beach routes. VivaAerobus, Interjet and Aeromexico are also planning to pursue domestic expansion in 2013. As a result Mexico's overall domestic market will likely again see double-digit expansion in 2013.

Interjet and Aeromexico will both be focusing primarily on expansion in thinner regional markets as Interjet takes its first batch of Sukhoi Superjet 100s and as Aeromexico Connect continues to grow its fleet of Embraer E-jets. VivaAerobus and Volaris will likely expand primarily on point-to-point leisure-focused routes where they see opportunities to stimulate demand.

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Mexican carriers continue to lag behind foreign carriers in the international market

Mexican carriers recorded rapid international growth in 2012 but they have traditionally struggled to compete against foreign carriers and are generally more excited about the short-term domestic prospects. While Aeromexico, Interjet and Volaris have pursued significant international expansion since Mexicana's demise, Mexican carriers still have not completely filled the void left by Mexicana in the international market. The international void has proven to be more challenging to fill as Grupo Mexicana accounted for 65% of all international passengers carried by Mexican carriers in 2009 while domestically it only had 27% share of passenger traffic.

Over the last three years Grupo Aeromexico has seen its international passenger traffic grow by 85%, from 2.1 million in 2009 to 3.9 million in 2012. In 2011 the group carried 3.6 million international passengers, according to Mexican DGAC data.

Volaris has seen its international traffic grow from only 200,000 in 2009 to 1.3 million in 2012. But its international traffic grew by only 18% in 2012 as the carrier focused more on domestic expansion. Interjet, which only launched international services in mid-2011, flew 525,000 international passengers in 2012 while VivaAerobus flew only 128,000 international passengers.

Combined Mexico's trio LCCs have seen their international traffic grow by 1.7 million annual passengers since 2009 while Group Aeromexico has grown its international traffic by 1.8 million. But as Grupo Mexicana carried 4.5 million international passengers in 2009 there is still a gap of 1 million passengers or about 20%.

Mexico annual international traffic (millions of scheduled passengers carried) by airline group: 2009 versus 2011 and 2012

Rank	Airline group	2009	2011	2012
1.	Aeromexico	2.12	3.58	3.92
2.	Volaris	0.20	1.05	1.28
3.	Interjet	N/A	0.08	0.53
4.	VivaAerobus	0.03	0.08	0.13

The 5.8 million international passengers carried by Mexican carriers in 2012 matches the 5.8 million passengers from 2002 and is 9% less than the 6.4 million passengers transported by Mexican carriers back in 2000. Mexico's carriers have essentially lost a decade of international growth and it will be nearly impossible to grab the market share lost to foreign carriers, in particular US carriers.

Mexican carriers grow their share of the transborder market but US carriers still dominate

In 2012, the US accounted for 19.2 million of the 27.1 international passengers in the Mexican market or 71%. US carriers transported 14.9 million of these passengers while Mexican carriers transported only 4.3 million, giving it only a 22% share of the market. But Mexican carriers were able to improve their share of the Mexico-US transborder market from 2011, when they flew only 3.4 million passengers to the US for only an 18% share of the total market. Overall the Mexico-US market grew by 5% in 2012.

US carriers have seen their traffic to and from Mexico increase by 22% since 2009 from 12.2 million, but only recorded 1% growth in 2012. Back in 2002 US carriers only flew 7.7 million passengers to and from Mexico.

While the expansion of Aeromexico, Interjet and Volaris in the US market has allowed Mexican carriers to claw back some of the market share lost to US carriers in the aftermath of Mexicana's demise, it will be challenging for the Mexican carriers to capture more than one-quarter of the transborder market. Over the years Mexican carriers have found it challenging to compete against US carriers, particularly in beach markets which cater to inbound traffic.

Mexican carriers have focused traditionally more on migrant worker and visiting friend and relatives (VFR) traffic in the Mexico-US market. But most of Mexicana's former migrant worker-VFR routes have now been taken over by other Mexican carriers and Mexico's LCCs prefer to expand domestically rather than compete with US carriers in beach markets.

The large size of the inbound US market is illustrated in Mexico's international airport traffic figures as Cancun is as large of an international airport as Mexico City. Cancun recorded 6% international growth in 2012 to 9.8 million passengers. Mexico City recorded 10% international growth in 2012, also to 9.8 million passengers.

Several of Mexico's smaller international airports recorded traffic declines in 2012, including the beach markets of Cozumel, Mazatlan, Puerto Vallarta and San Jose del Cabo. This shows the relative weakness in the US inbound leisure market in 2012 as US carriers only grew in the Mexican market by 1%. These airports rely entirely on North American carriers for their international traffic; but generally recorded overall growth as domestic demand for beach destinations increased significantly.

Mexico's top 10 airports by international traffic (thousands of passengers): 2012 versus 2011

Foreign carriers also dominate routes from Mexico to Canada and Europe

The second largest international market from Mexico, Canada, is even more dominated by foreign carriers. Mexico-Canada traffic grew by 5% in 2012 from 2.2 million to 2.3 million passengers. But only 60,000 of these passengers were flown by Mexican carriers.

Mexico's third largest international market, Spain, saw a 6% drop in traffic in 2012 to 766,000 passengers. Aeromexico has only about a 25% share of the Mexico-Spain market.

European carriers overall recorded a 4% increase in traffic to and from Mexico in 2012 to 2 million passengers. Air Europa, Iberia, Lufthansa, Air Berlin, Air France, British Airways, Virgin Atlantic, Transaero and Aeroflot as well as several European leisure carriers serve Mexico while Aeromexico currently only serves Madrid, Paris and (recently added) London Heathrow.

Overall Mexican carriers only account for 22% of total international traffic to and from Mexico.

Mexico international traffic share (% of passengers) by carrier nationality: 2012

Copa emerges as fastest growing foreign airline serving Mexico

Panama has emerged as Mexico's fourth largest and fastest-growing international market, which is an indication that Mexican carriers are also losing out to foreign competitors on flights within Latin America. The Mexico-Panama market grew by 56% in 2012 to 740,000 passengers.

Panama's Copa Airlines, which aggressively markets its services beyond Panama City to South America and the Caribbean, has been growing rapidly in the Mexican market. Copa now operates five daily flights to Mexico City and four daily flights to Cancun. It also operates five weekly flights to Guadalajara and four weekly flights to Monterrey, which it launched at the end of 2011. No Mexican carrier currently serves Panama as Aeromexico quickly pulled out of the market after launching a Mexico City-Panama City service in 2011.

Aeromexico has successfully added some capacity in Latin America since Mexicana's collapse and now serves six destinations in South America and Costa Rica and Guatemala in Central America. Interjet also links Mexico City with Costa Rica and Guatemala but Volaris and VivaAerobus currently only serve the US.

The rapid growth of Copa indicates the Panamanian airline is carrying a large portion of passengers heading from Mexico to South America, particularly destinations which are not linked with non-stop flights. Aeromexico and Mexican carriers risk losing more traffic to Copa and other Latin American carriers if they do not build up their Latin American networks as intra-Latin America traffic is expected to continue growing rapidly. Mexico is also served by Latin American carriers Avianca, TACA, LAN, TAM and Aerolineas Argentinas.

Domestic outlook is brighter as international opportunities are limited

Mexican carriers remain predominately focused and have always been more attracted to the US market than to Latin America or Europe. The reality is Mexican carriers struggle to compete against foreign carriers in the international market and when market conditions are favourable domestically, like they are now, it is logical for Mexican carriers to focus on domestic expansion.

Mexico's aviation industry has gone through a tumultuous period with a huge wave of consolidation finally ending a prolong period of over-capacity and unsustainably low load factors. Aeromexico's position has been strong since Mexicana's collapse even if it remains a relatively small international operator with a widebody fleet of only 11 aircraft. The SkyTeam carrier has been consistently profitable since the demise of Mexicana and completed a successful IPO in mid-2011.

All three of Mexico's LCCs are keen to follow Aeromexico with their own IPOs, which could be used to further accelerate fleet and network expansion. VivaAerobus has indicated it aims to seek an IPO in 2013 while larger Volaris and Interjet also have IPOs in their plans.

With the domestic market they rely on heavily growing again and Mexico's aviation industry having reached a healthy equilibrium, the outlook for all three Mexican LCCs is relatively bright. Mexico may not be the best growth market in the world, or even in Latin America, but it should now be profitable and on a firm footing for the future.

Background information

Mexico domestic scheduled monthly traffic (millions of passengers): Jan-2011 to Dec-2012

Mexico international scheduled monthly traffic (millions of passengers): Jan-2011 to Dec-202