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Aeromexico Part 2: US expansion as Delta Air Lines JV is implemented and LCC competition intensifies

Aeromexico is pursuing further expansion in the US market following the implementation of its joint venture with Delta Air Lines. Aeromexico has been forced to divest more than 20 slot pairs at Mexico City to competitors in the Mexico-US transborder market, but is able to continue to add Mexico-City US flights by reshuffling slots.

Aeromexico is launching five US destinations in 2017 – Atlanta, Detroit, Portland, San Jose and Seattle – which will extend its US network to 22 cities. Aeromexico is also expanding in Los Angeles, its largest US destination, with new flights from Monterrey and Guanajuato.

Aeromexico will be operating over 30 routes to the US by the end of 2017 – with more likely to be added in 2018. Delta also operates 38 routes in the Mexico-US market, only two of which are also served by Aeromexico. Frequency increases from both Aeromexico and Delta are being implemented on several of the existing 66 routes that are covered under the new JV.

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 Mexico-US transborder market and the impact of the newly implemented joint venture with Delta Air Lines

This is Part 2  in a series of analysis reports on Aeromexico’s international operation. Part 1 focused on rapid expansion of the airline’s long haul operation, which consists of 10 routes made up of four to Europe, three to Asia and three to lower South America.

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

In this report, CAPA examines Aeromexico’s position in the US market, including its new joint venture with Delta Air Lines.

The US is Aeromexico’s largest international market by a wide margin

The Aeromexico Group, which includes the regional subsidiary Aeromexico Connect, serves 44 domestic and 45 international destinations (based on OAG schedules for the week commencing 18-Jul-2017). The US currently accounts for 19 of the 45 international destinations and approximately half of the group’s international seat capacity.

The short/medium haul international network (flights up to six hours) also includes four destinations in Canada, six destinations in Central America, four in northern South America and two in the Caribbean. Aeromexico’s expansion in these markets will be examined in a subsequent report.

The group is pursuing a new phase of expansion in US market following the implementation of its new joint venture with Delta, which provides an attractive commercial platform to support a larger Mexico-US transborder operation, despite growing competition from LCCs.  

Aeromexico and Delta have been operating under a JV since May

Following a much longer than expected approval process, finally in Mar/Apr-2017 Aeromexico and Delta received anti-trust approval from US and Mexican authorities for their joint cooperation agreement (JCA).  The two airlines proceeded to implement the JCA on 8-May-2017.

Approval was also secured for Delta to increase its stake in Aeromexico from 4% to 36%. Delta completed the acquisition of the additional 32% stake; it holds future options to acquire another 13%, which would result in a 49% stake.

See related reports:

Aeromexico's Andres Conesa told CAPA on the sidelines of the Jun-2017 IATA AGM in Cancún that Aeromexico expects a “very positive” impact from the newly implemented JV with Delta, but it will be a couple of quarters before the benefits are realised. “We are in the process of redesigning the network to see what additional opportunities are there to grow”, Mr Conesa said. “We view this as very positive and we will work very hard to provide additional options to our clients.”

Mr Conesa pointed out that Aeromexico and Delta have already co-located at JFK and Los Angeles, which are Aeromexico’s two largest US destinations based on seat capacity. He added that the airline has also committed to launching new routes to the US, including Mexico City to Portland and Seattle, and adding frequencies to several existing destinations.

JV opens up Mexico City-Portland and Seattle routes

Aeromexico has set a 1-Nov-2017 launch date for services from its Mexico City hub to Seattle, and a 1-Dec-2017 launch date for services from its Mexico City hub to Portland. Both new routes will be initially operated with one daily frequency using 160-seat 737-800s.

Portland and Seattle are Aeromexico’s first destinations in the Pacific Northwest region of the US and would likely not be viable without the joint venture with Delta.

Seattle is a hub for Delta, with over 100 routes. Aeromexico will be able to leverage the Seattle hub by offering connections to Asia and to secondary destinations in the northwestern US and western Canada. Delta also has a relatively large presence in Portland, with 10 routes that include Tokyo.

Neither Portland nor Seattle currently has any nonstop flights to Mexico City. Both cities are only linked with one destination in Mexico, Guadalajara, with service from Mexican LCC Volaris.

Aeromexico expands in its largest market Los Angeles with two new routes

Aeromexico has also unveiled plans to launch four routes to the US in 2H2017, from Mexican cities other than Mexico City.

Service from Guanajuato/León and Monterrey to Los Angeles will be launched on 1-Sep-2017. Aeromexico will launch service from Querétaro to Atlanta on 1-Nov-2017 and from Mérida to Atlanta on 1-Dec-2017. All four of these routes will be served daily with E190 aircraft operated by Aeromexico Connect.

Los Angeles is Aeromexico’s largest current US destination, with eight daily flights – those being six from Mexico City and two from Guadalajara. Aeromexico will compete against Volaris and United in the Los Angeles-Guanajuato market, but will be the only airline operating nonstop flights from Los Angeles to Monterrey. 

Unlike the other six US routes being launched by Aeromexico over the next five months, Guadalajara and Monterrey to Los Angeles are not entirely new to the Aeromexico-Delta JV. Delta dropped Los Angeles-Guanajuato in Apr-2017 and is dropping Los Angeles-Monterrey in Aug-2017 – just before Aeromexico launches the route.

In both cases capacity is being added, as Delta served the two routes daily with smaller Embraer E175s.

Aeromexico to relaunch Atlanta with two routes from secondary Mexican cities

Querétaro-Atlanta and Mérida-Atlanta are new routes that would not likely be viable without the JV – similarly to Mexico City-Seattle and Mexico City-Portland. Delta serves eight Mexican destinations from Atlanta but Aeromexico has not served Atlanta since Apr-2014, when it suspended services on the Mexico City-Atlanta route.

Mérida currently has only two US links, from Houston by United and from Miami by American. Querétaro has four US links, including from Dallas by American, from Houston by United and from Chicago and Los Angeles by Volaris.

Both of the Volaris Querétaro-US routes were launched in 2Q2017 and are among 13 new routes being launched by the Mexican LCC this year as competition in the Mexico-US market intensifies significantly.

Volaris currently has 57 US routes compared to 25 for Aeromexico, but Aeromexico has approximately 20% more capacity to the US than Volaris because 45 of the Volaris routes are served less than daily. 

See related report: Volaris diversifies US operation with new routes from Mexico City and beach destinations

Aeromexico US operation to reach 31 routes and 22 destinations by end of 2017

All except three of Aeromexico’s US routes are currently served daily. The six new routes to be launched over the next five months will also all be served daily, resulting in 28 daily routes and only three routes with less than daily service.

Aeromexico US routes ranked by number of weekly one-way frequencies: week commencing 17-Jul-2017

Rank Origin Destination Frequencies
1 Mexico City Juarez International Airport Los Angeles International Airport 42
2 Mexico City Juarez International Airport New York John F Kennedy International Airport 28
3 Mexico City Juarez International Airport San Francisco International Airport 24
4 Mexico City Juarez International Airport Houston George Bush Intercontinental Airport 21
5 Mexico City Juarez International Airport Chicago O'Hare International Airport 21
6 Mexico City Juarez International Airport Miami International Airport 21
7 Mexico City Juarez International Airport Orlando International Airport 17
8 Mexico City Juarez International Airport Las Vegas McCarran International Airport 14
9 Guadalajara Miguel Hidal Airport Los Angeles International Airport 14
10 Mexico City Juarez International Airport Dallas/Fort Worth International Airport 14
11 Guadalajara Miguel Hidal Airport Chicago O'Hare International Airport 13
12 Monterrey Escobedo International Airport New York John F Kennedy International Airport 7
13 Mexico City Juarez International Airport San Antonio International Airport 7
14 Guadalajara Miguel Hidal Airport San Francisco International Airport 7
15 Mexico City Juarez International Airport Detroit Metropolitan Airport 7
16 Guadalajara Miguel Hidal Airport Sacramento International Airport 7
17 Guadalajara Miguel Hidal Airport Fresno Yosemite International Airport 7
18 Mexico City Juarez International Airport Boston Logan International Airport 7
19 Mexico City Juarez International Airport Austin-Bergstrom International Airport 7
20 Guadalajara Miguel Hidal Airport San José Mineta International Airport 7
21 Mexico City Juarez International Airport Washington Dulles International Airport 7
22 Mérida-Rejón Airport Miami International Airport 7
23 Guadalajara Miguel Hidal Airport Ontario International Airport 5
24 Mexico City Juarez International Airport Denver International Airport 3
25 Monterrey Escobedo International Airport Las Vegas McCarran International Airport 2

Of Aeromexico’s current 25 US routes, two were launched earlier this year – Guadalajara-San Jose on 1-Jul-2017, and Mexico City-Detroit on 1-Feb-2017. Aeromexico is competing against Alaska Airlines and Volaris in the Guadalajara-San Jose market, while Delta is the only other airline operating between Mexico City and Detroit.

San Jose and Detroit are both new destinations for Aeromexico, giving Aeromexico five new US destinations in 2017 for a total of 22 when Atlanta, Portland and Seattle (to be launched over the next few months) are also included. Aeromexico had just 16 US destinations at this time last year; it launched Austin, which is served daily from Mexico City, in Nov-2016.

Delta has 38 Mexico routes, including only two overlapping routes with Aeromexico

Delta currently operates 38 routes to Mexico and since the implementation of the JV has announced one new route to Mexico – a daily service from Los Angeles to Mexico City which will launch on 1-Dec-2017.

However, as Delta is suspending Los Angeles-Monterrey service, the total number of Mexico routes will not grow.

Delta Air Lines US routes ranked by number of weekly one-way frequencies: week commencing 17-Jul-2017

Rank Origin Destination Frequencies
1 Cancún International Airport Atlanta Hartsfield-Jackson International Airport 43
2 Mexico City Juarez International Airport Atlanta Hartsfield-Jackson International Airport 38
3 Monterrey Escobedo International Airport Atlanta Hartsfield-Jackson International Airport 21
4 Cancún International Airport New York John F Kennedy International Airport 14
5 Cancún International Airport Los Angeles International Airport 14
6 Guadalajara Miguel Hidal Airport Atlanta Hartsfield-Jackson International Airport 8
7 Cozumel Airport Atlanta Hartsfield-Jackson International Airport 8
8 San Jose Los Cabos International Airport Los Angeles International Airport 8
9 Cancún International Airport Detroit Metropolitan Airport 8
10 Monterrey Escobedo International Airport Los Angeles International Airport 7
11 Mexico City Juarez International Airport New York John F Kennedy International Airport 7
12 Mexico City Juarez International Airport Detroit Metropolitan Airport 7
13 San Jose Los Cabos International Airport Atlanta Hartsfield-Jackson International Airport 7
14 Guanajuato Del Bajío Airport Atlanta Hartsfield-Jackson International Airport 7
15 Puerto Vallarta Ordaz Airport Atlanta Hartsfield-Jackson International Airport 7
16 Puerto Vallarta Ordaz Airport Los Angeles International Airport 7
17 Cancún International Airport Salt Lake City International Airport 7
18 Monterrey Escobedo International Airport Detroit Metropolitan Airport 7
19 Mexico City Juarez International Airport Salt Lake City International Airport 7
20 Guadalajara Miguel Hidal Airport Salt Lake City International Airport 4
21 Puerto Vallarta Ordaz Airport Salt Lake City International Airport 3
22 Cancún International Airport Minneapolis St Paul International Airport 3
23 Cancún International Airport Orlando International Airport 2
24 San Jose Los Cabos International Airport Salt Lake City International Airport 2
25 Cancún International Airport Cincinnati/Northern Kentucky International Airport 1
26 Ixtapa-Zihuatanejo International Airport Los Angeles International Airport 1
27 Cancún International Airport Hartford Bradley International Airport 1
28 Cancún International Airport Boston Logan International Airport 1
29 Cancún International Airport Washington Dulles International Airport 1
30 Cancún International Airport Raleigh-Durham International Airport 1
31 Cancún International Airport New Orleans Louis Armstrong International Airport 1
32 Cancún International Airport Pittsburgh International Airport 1
33 Cancún International Airport Kansas City International Airport 1
34 Cancún International Airport Baltimore/Washington International Airport 1
35 Cancún International Airport Indianapolis International Airport 1
36 Cancún International Airport Nashville International Airport 1
37 Cancún International Airport Port Columbus International Airport 1
38 Cancún International Airport Tampa International Airport 1

Los Angeles-Mexico City will become only the third route served by both Delta and Aeromexico.

Currently the only routes served by both airlines are Mexico City to Detroit and to New York JFK. Detroit, as highlighted earlier, was only launched by Aeromexico in early 2017.

Most of Delta’s Mexico routes are to beach destinations, catering to southbound US leisure traffic. Aeromexico focuses on serving the US from Mexico’s three largest cities – Mexico City, Guadalajara and Monterrey – and caters mainly to outbound Mexico business and leisure traffic.

Delta’s Mexico network focuses on beach destinations

Delta currently operates 20 routes to Cancún, including 13 that are only served with just one weekly flight (Saturday-only services catering to Americans heading to beach resorts for a week-long holiday). Delta also has three routes to both Los Cabos and Puerto Vallarta, and one route each to Cozumel and Ixtapa. These are all beach destinations that Aeromexico only serves with domestic flights. 

Delta has nine destinations in Mexico. In addition to the five beach destinations it serves the three main cities of Mexico City, Guadalajara and Monterrey, as well as Guanajuato/León. However, Delta has significantly fewer US routes than Aeromexico from most of the main cities. Delta has only four Mexico City-US routes, compared to 15 for Aeromexico, and just two Guadalajara-Mexico City US routes, compared to seven for Aeromexico.

Delta has less capacity in the Mexico-US market (on a year-round basis) than Aeromexico because nearly half of its Mexico routes are served less than daily, whereas almost all of Aeromexico’s routes are served at least daily. Aeromexico has approximately a 15% share of total Mexico-US capacity, while Delta has approximately 10% (based on CAPA and OAG data for the week commencing 17-Jul-2017).

The Aeromexico-Delta joint venture therefore controls approximately 25% of total capacity, making it the market leader, since American and United each account for approximately a 20% share.

Over the past year Aeromexico and Delta combined have carried more than 7 million passengers in the US-Mexico market. This represents a more than 25% share of the total market (in 2016, the Mexico-US market consisted of 27.4 million passengers).

Aeromexico’s US capacity to increase by approximately 10%

Aeromexico generally has more capacity in the US-Mexico market than Delta, but there are certain times of the year when Delta has slightly more capacity than its partner.

For the past three years Delta has had more US-Mexico capacity than Aeromexico in the first quarter, but less capacity over the rest of the year – and significantly less (as little as half) in the September to November period, which is the off-peak season for the beach markets. 

In early Dec-2017, at which point all of Aeromexico's new US flights will have been launched, its US capacity will be up approximately 10% compared to the same period of 2016. Delta’s Mexico-US capacity will also be up approximately 10% year-over-year in early Dec-2017, according to CAPA and OAG data.

While Delta is only launching only one Mexico route this year, it is adding capacity on several existing Mexico routes; these include Atlanta-Guanajuato/León, Atlanta-Guadalajara, New York JFK-Cancún and Los Angeles-Los Cabos. Aeromexico is also adding capacity this year on several of its existing US routes, including Guadalajara to Fresno, Los Angeles, Ontario and San Francisco, and Mexico City-Boston.

Aeromexico faces intensifying competition on Mexico City-US routes

Aeromexico is also not reducing capacity on any of the Mexico City-US routes that competitors are launching or expanding as they use the 24 Mexico City slot pairs it had to hand over in order to secure anti-trust approval. More than half these slots were already transferred, with the remaining slots to be transferred by the summer 2018 season.

The slot divesture will result in additional competition (in some cases new services and in some cases additional flights) for Aeromexico on:

  • Mexico City-Chicago O’Hare route from Volaris;
  • Mexico City-Denver from Volaris;
  • Mexico City-Los Angeles from Alaska and JetBlue;
  • Mexico City-Las Vegas from VivaAerobus;
  • Mexico City-New York JFK from Interjet, VivaAerobus and Volaris;
  • Mexico City-Orlando from JetBlue;
  • Mexico City-San Antonio from Volaris;
  • Mexico City-San Francisco from Alaska;
  • Mexico City-Washington Dulles from Volaris;

The divested slots are also being used on Mexico City routes that are not served by Aeromexico, including Fort Lauderdale (JetBlue), Houston Hobby (Southwest), Oakland (Volaris), Ontario (Volaris), San Diego (Alaska) and San Jose (Volaris). 

However, in most of these markets Aeromexico competes indirectly with services to nearby airports, including Miami, Houston Intercontinental, Los Angeles and San Francisco.

Total Mexico City-Los Angeles capacity doubles, impacting Aeromexico 

Competition in the Mexico City-Los Angeles and New York markets is particularly intensifying, which will likely impact Aeromexico’s performance on its two largest US routes.

In the Mexico City-Los Angeles market, Volaris added a third daily flight in early Jul-2017 and Alaska is launching service in Aug-2017. The Aeromexico/Delta joint venture is responding by launching a seventh daily frequency. (As highlighted earlier in this report, the new flight will be operated by Delta, its first on the Mexico City-Los Angeles route and supplementing the six daily flights already operated by Aeromexico.)

Meanwhile, JetBlue has committed to launching services from Los Angeles to Mexico City in 2018, which will result in a seventh airline operating the route.

Capacity in the Mexico City-Los Angeles market has already almost doubled over the past year – from less than 10,000 weekly one-way seats in mid Aug-2017 to 18,000 weekly one-way seats in mid-Aug-2018 (which is just after Alaska enters). This huge influx of additional capacity includes Interjet entering the market and Volaris expanding from one to two daily flights in late 2016.

Mexico City-Los Angeles total one-way weekly seat capacity: Sep-2011 to Jan-2018

In the same time period capacity in the Mexico City-New York JFK route has expanded by 50% – from approximately 9,000 weekly to 13,500 weekly one-way seats – driven by the launch of services from Volaris and expansion from Interjet.

VivaAerobus has committed to launching Mexico City-New York JFK service in 2018, which will result in another increase in capacity and services from five airlines.

Mexico City-New York JFK total one-way weekly seat capacity: Sep-2011 to Jan-2018

Benefits of the Delta JV should outweigh impact of intensifying competition 

Mr Conesa told CAPA that the new JV with Delta would improve Aeromexico’s position in the “highly competitive” Mexico-US market. He pointed out that Aeromexico had maintained profitability over the past seven years, despite operating in a highly competitive environment owing to rapid expansion from Mexico’s three LCCs, which all launched just over a decade ago.

In the Mexico-US market the LCC penetration rate has increased from virtually zero in 2008 to approximately 15% in 2011, and to more than 30% currently. The LCC penetration rate will continue to inch up over the next year as LCCs (both Mexican and American) are the main beneficiary of the slots being divested by Aeromexico.

However, the overall market is also expected to continue growing. The LCCs competing in the Mexico-US market have generally stimulated overall growth in the market in the past several years, enabling Aeromexico to expand also.

Mexico-US passenger numbers increased by 54% from 2010 to 2016, resulting in average annual growth of nearly 10%. Mexico-US passenger numbers were up another 13% in the first five months of 2017, despite the anti-immigration rhetoric of the new US president Donald Trump.

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

Overcapacity in the Mexico-US market is clearly a short term concern as several airlines expand.

However, the additional capacity should eventually be absorbed, and Aeromexico is banking that its new joint venture with Delta will result in significant financial improvements that outweigh the impact of intensifying LCC competition and the loss of 24 Mexico City slot pairs.

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