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The Mexican aviation market has been in almost constant flux and overwhelmingly unprofitable in the past decade. The turbulence generated seven airline casualties between 2007 and 2010, including the market’s biggest casualty during the recession, former oneworld carrier Mexicana. The market looks to have stabilised following the exit of Mexicana, which was the country’s largest international carrier, with a healthy group of four dominant carriers – comprising one legacy and three low-cost carriers. Mexico’s growth fundamentals remain sound, with a large population, strong economic growth and a population spread over large area.
Airports in Mexico
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Mexico’s publicly traded carriers Aeromexico and Volaris battled tough economic conditions in the country during 3Q2013 as FY2013 GDP growth estimates for Mexico continue to fall. To compensate both carriers are adopting strategies to preserve passenger volumes at the expense of yield, with Aeromexico in particular emphasising it aims to defend its position in the domestic market.
Even as yield pressure lingers into 4Q2013, both airlines are seeing positive booking trends for the last quarter of the year and into 2014. And each carrier appears to be focusing on international expansion in the short term to combat some of the weakness created by Mexico’s sluggish economy.
VivaAerobus joins Volaris and Interjet in placing large A320neo order. Can Mexico sustain all three?
Competition in Mexico’s dynamic market is set to intensify as the country’s smallest low-cost carrier is poised to at least triple in size over the next eight years following a landmark aircraft order with Airbus.
VivaAerobus has ordered 52 A320s, allowing for a rapid replacement of its current fleet of 19 737-300s and significant growth. VivaAerobus is currently a relatively small player in the Mexican market with only a 13% share in the domestic market and is a non-factor internationally as it has just one trans-border route.
VivaAerobus is now seeking to follow its closest competitor, Volaris, with an initial public offering which should provide the funds to support accelerated fleet and network growth. Market conditions in Mexico have improved significantly in recent years but there is a risk of a return to over-capacity and irrational competition given the fleet expansion plans at the country’s four main carriers.
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.
A new air services agreement recently forged between Mexico and Indonesia opens up an opportunity for a codeshare between Aeromexico and Garuda, which in early 2014 will be joining the Mexican flag carrier in the SkyTeam alliance. The expected partnership should result in the first of many codeshares between carriers from Southeast Asia and Latin America.
Southeast Asian and Latin American carriers are starting to seek out opportunities to partner with each other as ties and trade between their regions increase. The current lack of partnerships between Southeast Asian and Latin American carriers give Gulf and European carriers an advantage in carrying passengers between two of the world’s fastest growing aviation markets.
Aeromexico is the only Latin American carrier serving Asia, where it sees opportunities for expansion using its new Boeing 787 fleet. But Aeromexico only serves North Asia and will need to rely on partnerships to serve Southeast Asia.
Latin America provides huge growth opportunities for low-cost carriers given the region’s expanding middle class and miniscule LCC penetration rate outside the two largest domestic markets. The existing small field of six LCCs are best positioned to benefit from the anticipated growth and leverage their first mover advantage. Four of the carriers are eyeing initial public offerings (IPOs), which could give them the cash to accelerate expansion in their home markets and regionally.
Latin America’s LCC sector is now concentrated in only three countries – Brazil, Mexico and Colombia. The other 18 countries that comprise Latin America (excluding the Caribbean) account for about 35% of seat capacity but, remarkably, do not have a single local LCC. These markets are only served by foreign LCCs, resulting in limited and in some cases no LCC services at all. The overall LCC penetration rate in these 18 countries is approximately 2%.
Turkish Airlines (THY) is pursuing aggressive expansion in Latin America, where it plans to triple the size of its network in 2014 to six destinations. THY will still be a relatively small player in the Latin America-Europe market but its launch of services to Bogota, Caracas, Havana and Mexico City is primarily targeted at the faster-growing and under-served Latin America-Asia market.
THY will offer the Colombian, Cuban, Mexican and Venezuelan markets the fastest connections to the Middle East, most of Asia and parts of Africa. With the expansion the Star Alliance carrier emerges as an attractive partner to Latin American carriers, which have a very limited presence in any of these regions.
THY is also accelerating expansion in the US market, where it plans to grow its network from five to eight destinations next summer. The carrier will open up new connections to parts of Asia, the Middle East and Africa from Atlanta, Boston and San Francisco. But the THY product from these new destinations will not be as exclusive as is the case with its new Latin American cities.