Location of Aeromexico Connect main hub (Monterrey Escobedo International Airport)
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Aeromexico recorded a sharp drop in profits in 2Q2014 as market conditions in Mexico became unfavourable. An economic slowdown has coincided with rapid capacity expansion by Aeromexico and the overall Mexican market, putting pressure on yields.
Aeromexico’s capacity was up by 17% in 2Q2014, driven by a 27% spike in international ASKs. The group has adjusted domestic capacity, which was up by less than 3% in 2Q2014, but competitors continued to pursue aggressive domestic expansion.
Despite the relatively disappointing results Aeromexico has been consistently profitable over the past four years and boasts the highest margins in the Mexican airline industry. Challenging market conditions are likely to persist over the short term but the group’s medium to long term outlook is relatively bright. Following its recent market share gains Aeromexico should be in prime position to benefit as the Mexico economy improves and competition becomes more rational.
Aeromexico is pursuing rapid growth for its long-haul operation as it renews and expands its widebody fleet. The transition from 767s to larger 787-8s, which began in 3Q2013 and will be completed in mid-2015, is enabling Aeromexico to add long-haul capacity and improve yields.
The carrier will end this decade with 20 787s, compared to only 11 widebodies one year ago, enabling the launch of new destinations and higher frequencies on existing routes. The 787 and the growing long-haul network is a critical differentiator as Aeromexico is Mexico’s only widebody operator while it faces intensifying competition and overcapacity in the domestic and transborder markets.
As Aeromexico expands its long-haul operation it aims to increase transit traffic at its Mexico City hub by leveraging its enhanced network within Latin America. It is also working to boost yields, which have sagged over the past year, through product improvements and an increased focus on sales in higher yielding origin markets such as the UK.
Mexican low-cost carrier VivaAerobus began 2014 on a down note – cancelling a planned public offering valued at roughly USD226 million as it concluded market conditions were too dour and unpredictable to achieve an IPO successfully.
The cancellation occurred as VivaAerobus prepared for the first delivery of an Airbus A320. Its acceptance of the new jet marks a pivotal transition from older Boeing 737-300 narrowbodies to similar aircraft operated by its fellow low-cost rivals Interjet and Volaris.
VivaAerobus’ decision to shutter accessing the public markets does leave some questions as to how it will finance the 52 Airbus jets it has on order as six of the aircraft are scheduled for delivery in 2014. On a broader scale, VivaAerobus remains the smallest carrier among the four largest Mexican airlines, three of which (including VivaAoerbus) define themselves as low-cost carriers. If the projected rebound in Mexico’s economy fails to materialise during 2014, VivaAerobus’ greater exposure to the domestic market could create challenges for the carrier’s yet-to-be defined strategy for the future.
Having recently celebrated the significant milestone of competing an initial public offering, Mexican low-cost carrier Volaris remains bullish over the opportunities inherent in the Mexican aviation market as its domestic share continues to grow and its position in the international transborder space remains steady.
Key to Volaris’ belief in the robust opportunities present in Mexico is the growing appetite for air travel among the country’s increasing middle class. In the short term that thesis may prove tough to execute as the Mexican economy has been slowing and domestic passenger growth has not been as rapid during 2013 as recent years when Mexico’s carriers were scurrying to fill the void left by the collapse of Mexicana in late 2010.
As Volaris works to capture more of Mexico’s middle class, its competitors are devising their own strategies to compete in the dynamic Mexican market place. Aeromexico recently launched a new low-fare product scheme, "Contigo" while Interjet is planning a small market push as the first of its 20 93-seat Sukhoi Superjet 100s comes online. All of those dynamics should make for an interesting market place during the next couple of years as those carriers, along with VivaAerobus work to stake out their respective claims among the growing passenger base. Volaris is basing its future on a fleet comprised only of Airbus A320s while some of its competitors are utilising smaller jets to exploit thinner Mexican and transborder routes.
Domestic passenger traffic in Mexico slowed to the single digits during 1H2013 after recording 10% growth in 2012. The country’s largest carrier Aeromexico is attributing some of the decrease in demand to a softening Mexican economy, which could pressure the country’s low-cost carriers whose business models are built on capturing members of the Mexican middle class that still travel largely by bus.
It is not yet clear how demand patterns within Mexico will shape up for the remainder of 2013, but all of the country’s main carriers continued to record year-on-year growth for Jun-2013 with the exception of Aeromexico. Mexico's only remaining legacy carrier is seeing its domestic market share slide as it focuses more on international expansion.
Aeromexico saw its profits drop for the second consecutive year in 2012 as it was only able to grow passenger traffic by 3% despite double-digit growth for the overall Mexican market. But Mexico’s only surviving legacy airline group remains in the black and its outlook remains relatively bright given its strong position in the Mexican market and the resurgence of the country’s economy.
Grupo Aeromexico is planning to grow capacity (ASKs) by a further 6% in 2013, matching the 6% capacity increase from 2012. But the group is targeting higher RPK growth and load factors, which it hopes will allow it to regain the share of the domestic market it lost in 2012.
Internationally, Aeromexico is planning to grow capacity by up-gauging routes, including replacing 767-200s with new 787-8s to London and Paris. Aeromexico also plans to deploy its first batch of 787s to New York, which it currently only serves with 737s. Aeromexico now expects it will receive three 787-8s in 4Q2013, representing a delay of about three months due to the current grounding of the global 787 fleet.