21-Jul-2017 4:00 PM

Aeromexico Part 1: long haul capacity grows by 40% as Asia is doubled and 787 fleet expands

Analysis

Aeromexico has just completed an ambitious expansion of its long haul operation, which has resulted in a 40% increase in seat capacity over the past year. Capacity to Asia has doubled in just four months, although on a small base, while Aeromexico is offering up to 40% more flights to Europe this summer compared to last year.

The early Jul-2017 launch of services to Seoul extends Aeromexico's network to 10 long haul destinations. Over the past year Aeromexico has added frequencies to six of the nine existing long haul destinations; all except one of these is now served daily.

Aeromexico still has a relatively small widebody fleet consisting of 17 aircraft. However, this represents growth of more 40% compared to the 12 widebody aircraft it was operating last summer.

Summary

Aeromexico has expanded its long-haul operation, resulting in a 40% increase in seat capacity over the past year.
The airline has doubled its capacity to Asia in just four months, while offering up to 40% more flights to Europe this summer compared to last year.
Aeromexico now serves 10 long-haul destinations, with six of the nine existing destinations now served daily.
The airline's widebody fleet has grown by over 40% in the past year, from 12 to 17 aircraft.
Aeromexico's expansion in Asia has been made possible by the introduction of the Boeing 787-8, which has the range and efficiency to make long-haul routes viable.
The airline has also increased capacity to Europe by 30% and to lower South America by 16%.

CAPA will hold its inaugural Latin America Aviation Summit in Cartagena, Colombia, on 11/12 September 2017.

For further information please see Latin America Aviation Summit

Aeromexico CEO Andres Conesa discusses the expansion of its long haul network, including the launch of flights to Seoul and additional capacity to London, Madrid, Paris, Shanghai and Tokyo

Aeromexico continues its rapid international capacity expansion

Aeromexico has doubled its international capacity since 2010. It flew 28.413 billion international ASKs in 2016, representing an increase of 8% compared to 2015, and an increase of 120% since 2010. In 1H2016 the group's international ASKs were up another 12%.

Aeromexico Group international ASKs and year-over-year increase: 2009 to 1H2017

Aeromexico Group, which includes its regional subsidiary Aeromexico Connect, serves 44 domestic and 45 international destinations (based on OAG schedules for the week commencing 18-Jul-2017). In 1H2017 the group's international operation accounted for 35% of total passenger numbers (3.449 of 9.935 million) and 71% of ASKs.

International passenger growth was 10% in 1H2017, while RPK growth was 16%, indicating a higher growth rate in the long haul operation. Aeromexico's long haul operation includes 10 destinations, being four destinations in Europe, three in Asia and three in the southern cone of South America. These 10 destinations account for 47% of Aeromexico's current international ASKs, or 34% of the group's system-wide ASKs (based on CAPA and OAG data for the week commencing 18-Jul-2017).

The US is Aeromexico's largest international destination, accounting for 32% of international ASKs and 23% of system-wide ASKs. Other short/medium haul destinations - including Canada, the Caribbean, Central America and the northern part of South America (routes of up to six hours) - account for the remaining 21% of international ASKs.

CAPA will examine Aeromexico's position in the US market, including its new joint venture with Delta Air Lines, in a subsequent report. This report will focus on the airline's fast growing long haul operation.

Aeromexico doubles its Asia operation

Asia has been the region with the fastest growth, but from a small base. Over the past few months Aeromexico has doubled its Asia operation from eight to 16 weekly flights.

Aeromexico upgraded Tokyo Narita from five weekly flights to daily in early Mar-2017. This represented the second upgrade for Narita in less than a year, as it only added the fourth weekly frequency in Jun-2016.

In early May-2017 Aeromexico upgraded Shanghai from three to five weekly flights. The third weekly flight had been added in Mar-2015.

In early Jul-2017 Aeromexico launched its third destination in Asia, Seoul, with four weekly flights. With the addition of Seoul Aeromexico now has 3,888 weekly one-way seats to Asia, compared to 1,944 weekly one-way seats in Feb-2017.

Aeromexico weekly one-way seat capacity to Asia: Sep-2011 to Sep-2017

Aeromexico had only five weekly flights to Asia four years ago

Aeromexico's seat capacity to Asia has nearly quadrupled over the past four years. In Jul-2013 the airline had approximately 1,100 weekly seats to Asia. At the time Aeromexico's Asia operation included three weekly 767 flights to Tokyo Narita and two weekly 777-200ER flights to Shanghai.

Aeromexico upgauged Tokyo Narita from the 767 to the 787 in 2013, while Shanghai was downgauged from the 777 to 787 in early 2016. Aeromexico now operates all its Asia flights with 787-8s in 243-seat two-class configuration, featuring 32 lie flat business class seats. Its 767-200/300s, which were phased out in 2015, had approximately 190 seats (depending on the configuration), while the 777-200ERs, which are still operated to South America, have 277 seats. Neither of these types offered a full lie flat product in the business cabin.

A new higher-thrust option on the 787-8 enabled Aeromexico to begin serving Tokyo Narita nonstop from the high altitude of Mexico City in early 2016. From Sep-2014 to Jan-2016 the outbound flight to Narita operated via Monterrey, and prior to Sep-2014 operated via Tijuana. The return flight has always operated nonstop.

Aeromexico continues to stop in Tijuana on the outbound leg of the Shanghai route as Shanghai is out of range from Mexico City, even with the higher-thrust 787-8. The new Seoul flight stops in Monterrey on the outbound leg and returns nonstop.

787 enables Aeromexico to expand in Asia

The 787 has been a game changer for Aeromexico's Asia operation as it not only has the range to operate from Mexico City to Tokyo nonstop, but is also much more efficient than the 767 or 777-200ER.

Without the 787, Aeromexico would likely not have been able to grow its Asia operation, which historically has been unprofitable.

The 787-8 provides the right amount of capacity and has the operating economics to make Asia viable from Mexico over the long term. Asia was a key factor in Aeromexico's initial selection of the 787 in 2012. For three years the airline was particularly eager to use the 787 to begin nonstop flights to Narita, but had to delay the launch of Mexico City-Narita nonstop flights repeatedly as it waited for upgraded engines.

See related reports:

The 787-8 was also used by Japan's All Nippon Airways to launch services to Mexico City in Feb-2017. ANA is operating the route daily nonstop using 787-8s with only 169 seats, including 46 lie flat business class seats.

Mexico-Japan traffic more than doubles as ANA also enters

Aeromexico's decision to upgrade its Tokyo Narita flight to daily from early Mar-2017, just three weeks after the ANA launch, was partially a response to ANA. However, Aeromexico was also noticing growing demand in the Mexico-Japan market.

The sudden surge in capacity on the Mexico-Tokyo route has, not surprisingly, led to pressure on load factors and yields. However, passenger traffic on the route has more than doubled.

In Mar-2017, the first full month of competition between ANA and Aeromexico, passenger traffic on the Mexico City-Tokyo route was up 154%, to 19,300 passengers, according to Mexico SCT data. Passenger numbers were up 159% in Apr-2017, to 17,100 passengers, and by 132% in May-2017 to 16,500.

Mexico-Japan monthly passenger traffic (in thousands): Jan-2015 to May-2017

Outlook for Mexico-Japan market is positive, despite pressure on load factors

The average load factor on the Mexico City-Tokyo route in May-2017 slipped to 65.5%. However, May is an off-peak month for Mexico-Japan travel and a load factor below 70% is not unusual, given the huge increase in capacity.

Mexico's SCT does not provide a load factor breakdown by airline. However, it provides a market share breakdown which indicates that Aeromexico carried 66% of Mexico City-Tokyo passengers in May-2017, whereas ANA carried 34%.

This equates to approximately 10,900 passengers for Aeromexico and an average load factor of 75%, while ANA carried approximately 5,600 passengers for an average load factor of only 54%. The lower load factor for ANA, although somewhat concerning, is not surprising given that the route is not yet mature.

Demand in the Mexico-Japan market has been growing rapidly in both the leisure and business segments over the past few years. Aeromexico and ANA are therefore confident that their daily flights can be maintained. ANA and (to a lesser extent) Aeromexico also relies on connections beyond Narita, responding to increasing demand in the broader Mexico-Asia market.

Passenger traffic between Mexico and Japan more than doubled from 2012 to 2016.

In 2017 traffic is on pace at least to double again. Through the first five months of 2017 passenger traffic in the Mexico-Japan market was up 104% - even with ANA not launching its service until 16-Feb-2017. The figure of 74,000 passengers carried in the first five months of 2017 nearly equals the number of passengers carried in all of 2014.

Mexico-Japan annual passenger traffic (in thousands): 2010 to 5M2017

Mexico-China traffic is also on the rise

Aeromexico is also confident the additional capacity to Shanghai can be absorbed, given the growing demand in the Mexico-China market.

As is the case with Japan, the Mexico-China market has been impacted by a new competitor since China Southern launched services to Mexico City in Apr-2017. However, with China the situation is different, as China Southern is a SkyTeam partner and is operating a different route than Aeromexico.

China Southern is initially operating three weekly flights to Mexico City from Guangzhou with a stop in Vancouver in both directions, also using 787-8s. China Southern does not have local pick up rights between Mexico and Canada, but trans-Pacific seats not sold from Mexico City can be sold from Vancouver. China Southern also operates a daily Guangzhou-Vancouver turnaround flight.

In May-2017, the first full month that China Southern had served Mexico City, total Mexico-China traffic was up 54% year-over-year, to 7,400 passengers.

Mexico-China monthly passenger traffic (in thousands): Jan-2015 to May-2017

Mexico-China passenger traffic was up 26% in the first five months of the year and has more than doubled since 2010. However, traffic declined slightly in 2016.

Mexico-China annual passenger traffic (in thousands): 2010 to 5M2017

Aeromexico still needs a Chinese partner

The average load factor on Mexico-China flights in May-2017, as reported by Mexico's SCT, was 45%. However, this figure is somewhat misleading, given that China Southern is able to pick up additional passengers for the trans-Pacific leg in Vancouver.

Aeromexico carried slightly less than 6,500 passengers to and from China in May-2017, while China Southern carried slightly less than 1,000 passengers. For the first five months Aeromexico carried almost 28,000 passengers to and from China, and had an average load factor of approximately 80%.

Aeromexico's performance in the China market has improved since it transitioned from the 777 to 787. Aeromexico aims eventually to serve Shanghai daily.

The new China Southern service may not be sustainable. China Southern was averaging fewer than 50 passengers on its initial Mexico City flights, which is a concern. Guangzhou is not as popular a destination as Shanghai for Mexicans. China Southern may be better off pursuing a codeshare partnership with Aeromexico.

In Asia, Aeromexico currently only codeshares with Garuda Indonesia and Korean Air. A partnership with both China Southern and China Eastern would be sensible. China Eastern has also been considering launching services to Mexico City.

Aeromexico launches Seoul

The Korean Air relationship was a factor in Aeromexico's selection of Seoul as its third destination in Asia. Aeromexico also selected Seoul in response to growing economic links between Mexico and South Korea, including Korean investment in the Mexican automotive industry.

Most of Mexico's automotive industry is based in Monterrey, where the outbound flight stops. Korea is Mexico's sixth largest trading partner, and several major Korean companies now have operations in Mexico. "Korea and Mexico have a very strong and dynamic relationship", Aeromexico CEO Andres Conesa told CAPA on the sidelines of the Jun-2017 IATA AGM in Cancún. "There has in the recent past been a surge in investment by Korean companies in Mexico, particularly in the automotive sector close to Monterrey."

He added that Aeromexico's new flight to Seoul reduces travel time between Mexico and Korea by eight to 10 hours, which "will be positive for the flows of investment and tourism between the two countries".

The Mexican tourism industry is keen to attract more Korean visitors, which the new flight is expected to stimulate. However, Aeromexico expects its new Seoul flight to cater mainly to business traffic originating at both ends. There are also opportunities to carry cargo, which could help make the route profitable, considering the high trade volumes between the two countries.

Aeromexico expands widebody fleet by more than 40%

The recent expansion in Asia is made possible by expansion in Aeromexico's widebody fleet. Aeromexico has taken delivery of five 787-9s since Oct-2016. The 787-9s have been used to replace 787-8s on all of Aeromexico's Paris flights, as well as some of its Amsterdam, Madrid and New York flights, freeing up 787-8s for Asia.

All five of the 787-9s were growth aircraft, resulting in significant widebody fleet expansion over the past year - from 12 to 17 aircraft. "It's an important expansion in terms of widebodies", Mr Conesa said.

The airline's nine 787-8s were delivered during an earlier phase, from 2013 to 2015, and mainly used to replace 767s. Its three 777s are expected to be phased out over the next year as four more 787-9s are delivered.

Aeromexico widebody fleet summary: as of 19-Jul-2017

Aircraft	In service	On order
Boeing 777-200ER	3	0
Boeing 787-8	9	0
Boeing 787-9	5	4
Total:	17	4

Aeromexico increases capacity to Europe by 30%

Mr Conesa said the upgauging of Aeromexico's daily Mexico City-Paris service from the 787-8 to 787-9 has resulted in a 10% increase in capacity. He pointed out that over the past year Aeromexico had also increased Amsterdam and London services from four to seven weekly flights each, and Madrid from 10 to up to 14 weekly flights.

Aeromexico has up to 35 weekly flights to Europe this summer compared to 25 a year ago. Its current schedule (for the week commencing 17-Jul-2017) features 33 weekly flights to Europe, including 12 to Madrid and seven to Amsterdam, London and Paris. Its current seat capacity to Europe is up 30% year-over-year.

Aeromexico weekly one-way seat capacity to Europe: Sep-2011 to Sep-2017

Total traffic in the Mexico-Spain and Mexico-France markets has been relatively flat over the past couple of years, but Aeromexico's expansion has enabled it to increase its market share. In May-2017 Aeromexico accounted for 30% of Mexico-Spain traffic and 32% of Mexico-France traffic. Iberia and Air France remain the market leaders, with 44% and 59% shares respectively (based on Mexico SCT data).

The Mexico-UK and Mexico-Netherlands markets have experienced rapid growth, including 81% and 31% respectively in the first five months of 2017. Aeromexico captured a 29% share of Mexico-Netherlands traffic in May-2017, but only a 9% share of Mexico-UK traffic. Most of the growth in the Mexico-UK market has been on leisure routes to Mexican beach destinations; all of Aeromexico's Europe routes operate from Mexico City.

Aeromexico also adds capacity to Chile and Argentina

Aeromexico has also added capacity to its other long haul region - lower South America - although the increase has been less pronounced than to Europe or Asia.

Aeromexico currently has approximately 3,600 weekly seats to the lower South America region, compared to 3,100 seats in Jul-2016. The 16% increase was driven primarily by upgrading Santiago from five to seven weekly flights and - to a lesser extent - upgauging Buenos Aires to 777s. Buenos Aires and São Paulo are currently served daily with the 777-200ER, while Santiago is served daily with the 787-8.

The 16% year-over-year growth in lower South America contrasts to 30% growth to Europe and 100% growth to Asia. Overall, Aeromexico's long haul operation has grown nearly 40% over the past year - from slightly less than 24,000 weekly seats in Jul-2016 to almost 33,000 seats in Jul-2017.

The long haul expansion gives Aeromexico a more balanced network and reduces its exposure to LCC competition, which has intensified in the domestic and short haul international markets. Aeromexico has traditionally underserved the long haul market due to its small widebody fleet.

Aeromexico still has three times more seats in the US market than in its entire long haul network combined, but the gap has narrowed. CAPA will look at Aeromexico's position in the US market, including the new joint venture with Delta, in Part 2 in this series.