Aeromexico Part 3: Canada, Latin America expansion round out increased focus on international market

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

Part 1 in this series focused on the rapid expansion of Aeromexico's long haul operation of 10 routes, which consist 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 the second report CAPA examined Aeromexico's position in the US market, including its new joint venture with Delta Air Lines. In 2017 the group is growing its US operation from 17 to 22 destinations, and from 25 to 31 routes, as it starts to leverage the synergies from the JV with Delta.

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

In this report CAPA will analyse Aeromexico's position in the Canadian and intra-Latin American market. Aeromexico has four destinations in Canada and 15 international destinations to Latin America, 12 of which are under the short/medium haul operation (routes of six hours or less).

Canada becomes Aeromexico's second largest international market

Canada has emerged as Aeromexico's second largest international market after the US following a two-plus year period of rapid expansion. Canada currently accounts for approximately an 8% share of Aeromexico's total international seat capacity.

At the beginning of 2015 Aeromexico served only one destination in Canada - Montreal. Vancouver and Toronto were both added in 2015, resulting in a more than tripling of the airline's seat capacity in Canada, although from a small base.

On 1-Jun-2017 Aeromexico launched a daily service from Mexico City to Calgary, its fourth destination in Canada. It also added capacity from 1-May-2017 on all three of its existing Canada routes, expanding Mexico City-Vancouver from 11 to 14 weekly flights, Mexico City-Montreal from 11 to 13 weekly flights, and Mexico City-Toronto from 10 to 12 weekly flights.

Aeromexico has stated that the increases on the three Canada routes and the new daily service to Calgary will be maintained year-round, resulting in 46 year-round weekly frequencies to Canada. The 46 weekly flights represent capacity growth of 44% compared to the 32 flights Aeromexico has previously operated to Canada.

Its current Canada schedule features 49 frequencies due to extra seasonal flights to Montreal and Toronto, both of which cities are being temporarily served with 14 weekly frequencies for the peak summer months of July and August. Aeromexico operates all of its Canada routes with 160-seat two-class 737-800s.

Aeromexico achieves rapid market share growth

Aeromexico currently accounts for approximately a 30% share of scheduled nonstop seat capacity between Mexico and Canada. A year ago, in Jul-2016, its share was less than 20%.

Aeromexico's capacity share in the Mexico-Canada market fluctuates markedly, depending on the time of year. Canadian airlines add significant capacity to Mexico in the winter months as almost all their flights to Mexico are to beach destinations. Aeromexico only serves Canada from Mexico City, and caters mainly to ethnic and business traffic.

The only Canadian airline serving Mexico City is Air Canada, which serves Mexico City from Montreal, Toronto and Vancouver. (Air Canada low cost brand rouge is used on the Montreal-Mexico City route while the main brand is used in the Toronto-Mexico City and Vancouver-Mexico City markets.)

The other 13 Canada-Mexico routes currently served by Canadian airlines (based on schedules for Jul-2017) are to beach destinations, including Cancún, Cozumel, Puerto Vallarta and Los Cabos. In the peak winter months there are approximately another 40 Canada-Mexico seasonal routes connecting several Canadian cities with several Mexican beach destinations.

Aeromexico was also the only Mexican airline serving Canada until 13-Jul-2017, when Interjet launched three weekly flights on both the Cancún-Montreal and Mexico City-Montreal routes. Aeromexico's other main local competitor, Volaris, does not currently serve Canada.

Mexico-Canada market grows rapidly

Aeromexico is keen to increase its share of the Mexico-Canada market, as well as to benefit from rising demand.

Annual passenger traffic in the Mexico-Canada market has increased nearly 70% over the past six years - from 1.9 million in 2010 to 3.2 million in 2016. In the first five months of 2017 Mexico-Canada passenger traffic was up another to 21% to 2.1 million passengers.

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

Source: Mexico SCT.

In May-2017, the latest month with available data, total Mexico-Canada traffic was up 17%, to 187,000 passengers. Aeromexico accounted for a 22% share of total Mexico-Canada passenger traffic in May-2017, making it the third largest player after Air Canada, with 27%, and Sunwing, with 25%. (The Air Canada share includes rouge, which is used in all the beach markets and in the Montreal-Mexico City market.)

May is an off-peak month generally for Mexico-Canada traffic, along with June through October. However, the summer season is a peak period for the northbound leisure segment of the market, which Aeromexico caters to with its Mexico City-Canada services. For the much larger southbound leisure segment the peak months are December through April, driving much larger overall traffic figures for these months.

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

Source: Mexico SCT.

International expansion enables Aeromexico to grow transit traffic

Aeromexico's international operation is dominated by services to North America, which account for nearly 60% of total international seats (including approximately 50% for the US and 8% for Canada). However, it has been working to grow the rest of its international business, including its long haul operation to Asia and Europe, as well as its intra-Latin America operation.

The expansion in regions other than North America enables Aeromexico to achieve diversification and increase sixth freedom transit traffic. The company typically has carried a very small amount of international transit volume, due partially to an imbalanced network and partially to a lack of commercial focus on sixth freedom traffic.

However, the airline has been pursuing more transit traffic over the past few years with a focus on using the Mexico City hub to offer connections throughout Latin America for passengers originating in or heading to in North America, Asia or Europe.

See related report: Aeromexico focuses on long-haul and transfer traffic growth as 787 fleet expands

Aeromexico shifts focus of Latin America expansion to additional frequencies

In 2015 and early 2016 Aeromexico expanded its network in Latin America by resuming services to Panama and launching services to Medellín and Santo Domingo. However, the Latin America international network grew by net one destination, from 14 to 15, as Caracas was suspended in mid 2016 and Rio de Janeiro was suspended in 2015.

Caracas was suspended due to the Venezuelan financial crisis and will likely be resumed if and when the situation in Venezuela improves. The Rio de Janeiro route was only operated for a year and was suspended due to poor performance.

Aeromexico has not launched any new destinations in Latin America over the past year, but has added capacity to several of the 15 existing destinations. The capacity increases within Latin America over the past year include one of its three routes to southern South America, which were covered in the first instalment in this series of reports as they are long haul routes (more than eight hours) operated with the widebody fleet.

In late 2016 Aeromexico added two weekly 787 flights to Santiago, for a total of seven frequencies. Buenos Aires and São Paulo are already served daily with 777-200ERs. The airline is planning to phase out its three remaining 777s over the next several months, but is planning to add frequencies to Buenos Aires and São Paulo as the routes transition to 787s, leading to an increase in overall capacity.

Aeromexico's other 12 destinations in Latin America are served with the narrowbody fleet and are short/medium haul routes of two to six hours. The airline has added capacity to half of these destinations over the past several months.

Aeromexico adds frequencies to Bogotá and Lima

Mexico City-Lima, the longest of its narrowbody routes, at six hours, was upgraded from two to three daily 737 flights on 15-Jun-2017. Mexico City-Bogotá was also upgraded from two to three daily 737 flights on 1-Jul-2017.

Capacity on Aeromexico's other two routes to upper South America, Mexico City-Quito and Mexico City-Medellín, has been maintained. Quito and Medellín are both currently served with one daily 737 flight.

Aeromexico's total seat capacity to the upper South America region has increased by approximately 33%, driven by the recent increases to Bogotá and Lima.

Aeromexico adds frequencies to four Central American destinations

In Central America, Aeromexico capacity has increased by nearly 40% over the past year as frequencies were added in the El Salvador, Guatemala, Nicaragua and Honduras markets. All Aeromexico flights in these four markets are served using Embraer E170 and E190 regional jets operated by Aeromexico Connect.

In Apr-2017 Mexico City-San Salvador was expanded from one to two daily flights. In Feb 2017 Mexico City-Managua was also expanded, from one to two daily flights.

In Jan-2017 Mexico City-San Pedro Sula (Honduras) was expanded from one to two daily flights. In Oct-2016 Mexico City-Guatemala City was expanded from three to four daily flights.

Aeromexico has maintained flat capacity in its other two Central American routes - Mexico City to Panama City and San Jose (Costa Rica). Panama City is served with one daily 737 flight, and San Jose with two daily 737 flights.

Aeromexico to upgrade Santo Domingo to daily

In the Caribbean, Aeromexico is expanding by upgrading in Sep-2017 its Mexico City-Santo Domingo service from five to seven weekly E190 flights. This is significant, as it will mean all of Aeromexico's intra-Latin America routes will be served daily.

Capacity to its only other Caribbean destination, Havana, has been flat over the past year. However, Aeromexico pursued significant expansion to Cuba in 2015, as it doubled capacity to Havana.

Aeromexico currently serves Havana with three daily 737 flights, including two from Mexico City and one from Cancún. The Cancún-Havana route is the airline's only international route to Latin America that does not originate at its Mexico City hub.

The group's Latin America expansion has focused on Mexico City as Aeromexico has been keen to pursue more transit traffic to and from its Central American and South American destinations. This has traditionally been a segment of the market dominated by other Latin American airline groups, including Avianca, Copa and LATAM.

Aeromexico reduces its reliance on Mexico's intensely competitive domestic market

Overall, the rapid international expansion has improved Aeromexico's position because the group has reduced its reliance on the Mexican domestic market, which has become extremely competitive due to several years of rapid LCC expansion.

Aeromexico has continued to grow domestically, but its rate of domestic growth has slowed as it has shifted focus to international expansion. The group's domestic passenger numbers grew a relatively modest 14% from 2012 to 2016, and were up 4.6% in the first half of 2017.

Aeromexico Group domestic passenger numbers and year-over-year growth: 2010 to 1H2017

Source: CAPA - Centre for Aviation and company reports.

The Mexican domestic market grew by 49% overall from 2012 to 2016 - and by another 12% in the first five months of 2017 (total market figures for 1H2017 are not yet available). As a result, Aeromexico's market share slipped from 38% in 2012 to 31% in 2016.

Meanwhile, the group's international passenger traffic increased by nearly 150% from 2012 to 2016 - and by another 9.8% in 1H2017. Aeromexico's share of Mexico's international market has increased from 10% in 2012 to 16% in 1H2016.

Mexico's international market has typically been dominated by foreign airlines, which still account for 73% of the market, despite the inroads made in recent years by Aeromexico.

Aeromexico Group international passenger numbers and year-over-year growth: 2010 to 1H2017

Source: CAPA - Centre for Aviation and company reports.

Aeromexico maintains profitability, despite strategic international expansion

The international market accounted for 35% of Aeromexico's total passengers in 1H2017, compared to only 23% in 2012. The international market now accounts for over half of the group's passenger revenues, including a 56% share in 2Q2017.

Aeromexico has been able to pursue strategic international expansion without negatively impacting its profitability. The group has posted operating profits for 29 consecutive quarters.

In 2Q2017 Aeromexico turned an operating profit of MXP461 million (USD25 million), representing a 20% improvement compared to 2Q2016, despite higher fuel prices and the depreciation of the Mexican peso. The group's operating margin improved slightly from 3.1% in 2Q2016 to 3.2%.in 2Q2017.

Aeromexico CEO Andres Conesa told CAPA that, despite intensifying LCC competition, Aeromexico has been able to achieve consistent profitability in the past eight years by reducing costs and making strategic adjustments. "LCCs make you do things better", he said. "They put more pressure to reinvent yourself every day. If you look at where Aeromexico is today versus where it was 10 years ago we are much more competitive. We have dramatically changed the airline."

Aeromexico's biggest opportunities are in the international market

Aeromexico has proven that it can compete effectively against Mexican LCCs, which have not enjoyed the same level of profitability as Aeromexico over the past several years. However, the group clearly recognises that the biggest opportunities for the future are in the less penetrated international market.

The new joint venture with Delta unlocks synergies in US market, which will continue to account for an overwhelming majority of Aeromexico's seat capacity.

However, the long haul and regional international markets within Latin America potentially offer more promising opportunities. Aeromexico is disproportionately small in the long haul and intra-Latin America markets compared to the region's other main airline groups - Avianca and LATAM.

By the time Mexico City opens a new airport in 2020, eliminating the current constraints on capacity, Aeromexico should be well positioned to compete more effectively against its regional rivals for international transit traffic.

Aeromexico also stands to benefit from a rise in outbound international traffic from Mexico as the country's middle class and discretionary income levels continue to expand, enabling Mexicans who have already traded domestic and transborder bus journeys for flights to travel further.