21-Apr-2020 5:42 PM

COVID 19: Mexico's airlines could face major changes

Analysis

The health emergency that Mexico declared in response to the COVID-19 virus is due to end on 30-Apr-2020, but similarly to its effect in aviation markets worldwide, the pandemic will have far-reaching effects on Mexico once the crisis is over. The next step would be to extend the restrictions associated with the health emergency, and it is unknown whether that will happen at this point, but Mexico's COVID-19 cases have grown substantially during the past weeks.

In the meantime, Mexico's airlines are using strategies adopted by airlines worldwide to cope with the crisis: slashing capacity and parking aircraft. And as is the case in other markets, some airlines in Mexico are better equipped to weather the crisis than others.

One big unknown for the country's aviation market is how the government will now approach Mexico City's airport infrastructure. The current administration of Andrés Manuel López Obrador (AMLO) opted to end construction of a new airport and was working on a plan to create three airports to serve the city, which entailed transforming part of a military base to handle commercial operations.

But with demand not likely to reach pre-crisis levels for a couple of years, those plans could be frozen for the foreseeable future.

Summary

Mexico's airlines slash capacity as the country institutes 'stay at home' orders.
Some of the country's operators are better equipped to handle the downturn than others, which will likely lead to consolidation in the market.
Whether the government's plans for airport infrastructure will ultimately materialise remains unknown, just as a recovery in demand remains so difficult to forecast.

An emergency health order grounds domestic services, almost to a halt

According to the Johns Hopkins University COVID-19 resource centre, confirmed cases of the virus in Mexico jumped from 367 on 24-Mar-2020 to 6,297 on 17-Apr-2020.

The country has declared a health emergency taking effect from 30-Mar-2020 to 30-Apr-2020, which entails the suspension of non-essential activities in the public, private and social sectors, as well as a stay at home order for Mexico's population for the duration of the order.

As a result, the country's airlines have slashed their capacity. Volaris has previously stated that it would cut its system capacity by 80% for Apr-2020, and data from CAPA and OAG show that Aeromexico's domestic ASKs have been reduced by 79% year-on-year for the week of 20-Apr-2020.

For that same period, Viva Aerobus has cut its domestic ASKs by 80%, and Interjet's ASKs have dropped by 91%.

CAPA's fleet database shows that (as of late Apr-2020) Grupo Aeromexico has 95 aircraft in service and 31 in storage, while Viva Aerobus has four jets grounded and 34 in service.

Having parked 21 Sukhoi Superjet 100s, Interjet has only two aircraft currently in service. The majority of its Airbus fleet, which is a combination of current generation and Airbus A320neo family jets, are also in storage.

Interjet fleet summary as of late Apr-2020

The airline has been battling maintenance issues with its Superjet 100s - before the onset of the emergency health declaration in Mexico, Interjet had 17 of the aircraft grounded, which was no doubt creating cost pressure for the airline.

Interjet also suspended all of its international operations due to border closures and sagging demand.

Before the pandemic, Interjet was making a push into the US transborder market. At the beginning of 2020 the airline remarked that its international traffic had grown 26% year-on-year in 2019.

Fewer competitors could emerge in Mexico once the COVID-19 crisis is over

Mexico's economy was already on shaky ground before the COVID-19 crisis, and 'The Hill' has reported that the ratings agency Fitch has downgraded Mexico's sovereign debt to its lowest investment grade above junk bond status.

The publication also reported that Mexico's government had not suspended tax payments or pushed to create a stimulus package similar to the US' USD2 trillion CARES (Coronavirus Aid, Relief, and Economic Security) Act. The report highlighted the IMF's forecast of a 6.6% contraction in Mexico's economy for 2020.

With no economic stimulus planned, it could take some time for Mexico's economy to recover, which will affect how demand will recover in the country's air travel market.

A by-product of a slower return to what is likely the new normal in demand will also ultimately affect the composition of Mexico's aviation market.

CAPA has previously reported that Volaris remains in a solid financial position, with a cash balance representing 23% of its trailing 12M revenues at the end of 2019 and a net debt to EBITDAR of 3.5x.

Viva Aerobus remains privately held, but has stated that its adjusted net debt to EBITDAR at the end of 2019 was 3.8x. Aeromexico had a net debt to EBITDAR of 3.6x, and its cash balances totalled approximately 13% of its total annual revenues.

Interjet is privately held, and its leverage has not been disclosed.

Even before the pandemic, Aeromexico, the country's only full service airline, cited an overabundance of supply in Mexico's domestic market and, coupled with slow economic growth, the only way to fill those seats was by putting pressure on prices.

"So we continue to see that, and we continue to be of the view that we will see consolidation soon in the market because there is no way that we can -- this can continue, going forward", Aeromexico CEO Andrés Conesa has warned.

More recently, Cowen & Co managing director Helene Becker has stated that the company expects Mexico's aviation market to emerge from the COVID-19 pandemic with fewer competitors.

AMLO's vision for Mexico City's airports may, or may not, become reality

During his election campaign AMLO promised to cancel a project for a new airport in Mexico City that was partially constructed, and once he assumed office, the new government held a referendum in which it was decided that construction of the new airport would end.

At that time, one third of the new airport's construction was complete - at a cost of approximately USD5 billion.

The government's alternative plan was to add a new terminal at Mexico City Juarez International airport, and convert the St Lucia military base into a commercial airport. There was also discussion about upgrading Toluca airport.

Before the COVID-19 crisis, Juarez international was operating well above its capacity, and the planned alternatives by the government had a three year timeline for completion.

The plans for construction at St Lucia have reportedly been put on hold - there is no certainty that demand will rematerialise in three years' time to justify resumption of the upgrades to the military base to handle commercial operations. During Mar-2020, passenger levels at Juarez International declined 35% year-on-year.

There is also the question of funds for the planned upgrades, which obviously would be hard to secure during a global recession.

Mexico's airport and airline composition could be forever changed by COVID-19

Mexico's airlines are attempting to navigate the crisis created by the rapid spread of COVID-19 and, like their global counterparts, are no doubt envisaging a smaller industry - it could take years for demand to recover fully.

Mexico also has the added element of how to create a viable airport infrastructure in the new reality created by COVID-19's aftermath.

Perhaps, for now, Mexico City Juarez is the only airport necessary to meet the needs of Mexico's capital, as the reality sets in that COVID-19 will change the travel environment for months, if not years, to come.

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