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 Business News | August 2005 
Low-Cost Carriers Set to Enter Mexican Airspace
 Chris Kraul & James F. Peltz - LA Times
Mexico City — No fewer than four budget airlines are being proposed for Mexico, offering the possibility that lower fares and better service could stimulate economic development in a nation hindered by monopolized, high-cost air travel.
The proposed cut-rate carriers would be styled after America's Southwest Airlines and JetBlue Airways and Brazil's Gol Linhas Aereas Inteligentes. The most recent proposal is for an airline called Vuela, to be owned by an investor group including Mexican broadcasting giant Televisa and Carlos Slim, Latin America's richest man.
The emergence of Vuela and other upstarts is part of a trend sweeping the globe. In India, for example, as many as 10 budget airlines may begin flying over the next 18 months.
In Mexico, as in the U.S., Brazil and elsewhere, the spate of new budget airlines is a response to deregulation, high profit potential and the realization by entrepreneurs that low fares are adding significant growth to the air-passenger market.
One of the most successful of the new generation of airlines, Brazil's Gol, says first-time fliers account for 25% of its fast-growing passenger volume.
In the U.S., low-cost carriers led by Southwest are taking a growing share of the market and now handle more than one-quarter of passenger traffic. The same trend has occurred in Europe with discount airlines such as Ryanair and EasyJet.
Mexico and some other countries are encouraging the competition, believing that cheap air travel spurs economic growth, said Bob Booth, chairman of AvMan Inc., a Miami-based aviation consulting firm. Low fares stimulate tourism and increase business travel, he said.
"If it costs you $600 to fly to Poza Rica, are you going to be that enthusiastic about going [there] to do business?" Booth said, referring to the 50-minute flight from Mexico City to that oil refining center. "No, but if it cost $150, you might be."
The upheaval in Mexico comes as air travel — which has been recovering worldwide from a severe drop after the 2001 terrorist attacks in the U.S. — has been rising sharply between Southern California and Mexico.
Last year, Mexicana boarded nearly 1.1 million passengers at Los Angeles International Airport, most of them bound for Mexico. That was up from 614,000 in 2001, according to LAX.
The unveiling of Vuela, which plans to begin flights in mid-2006, coincides with the Mexican government's plans to hold an auction this year of the country's two flagship airlines, Mexicana and Aeromexico. Their long dominance of the domestic air travel market has kept fares too high and dissuaded many Mexicans from flying, said Jaime Aguilera, chief of equity research at HSBC Bank here.
Once packaged to be sold together, the government of President Vicente Fox now plans to sell the airlines separately so they can compete against each other in fares and service, Aguilera said. Possible buyers expressing interest include Iberia of Spain and Mexico's airline pilots association.
But the long-delayed sale of the flagship duopoly has aroused relatively little interest, thanks to the high operating costs of their unionized workforces and taxes imposed at Mexico's biggest airports. The anticipation that budget airlines would eventually enter Mexico's market has also made possible buyers wary, analysts said.
"You hear all the time that it's more expensive to fly from Mexico City to Monterey than from Mexico City to New York, and that's opened an opportunity for the low-cost carriers," said Pete Garcia, Continental Airlines' vice president for Latin America. The Houston-based carrier is one of the busiest U.S. airlines serving Mexico, with 30 daily flights to the country.
Mexicana and Aeromexico have grown complacent because of their dominance, with more than 80% of the local market, said Ana Gabriela Ocejo, an equity analyst at Scotiabank Inverlat, a financial services firm here.
"That's one of the factors that may be discouraging possible buyers, that these are two airlines that have operated in a market that has been closed too long," Ocejo said. "With a captive market, they have not had to compete and so service is poor."
Budget airlines, on the other hand, typically hire nonunion labor and operate at out-of-the-way airports. Vuela is said to be considering establishing its base of operations at the airport in Toluca, a city 50 miles west of the teeming capital. Also a partner in Vuela is Grupo Taca, the highly successful and fast-growing El Salvador-based regional carrier.
Other budget airlines being touted for Mexico include an as-yet unnamed company to be part owned by Brazil's Gol and a Mexican airport management company headed by businessman Fernando Chico Pardo. In addition, the wealthy former governor of Veracruz state, Miguel Aleman, is said to be part of a group starting a budget carrier.
Mexicana itself is rolling out a discount subsidiary, Click Mexicana, and it plans to aggressively compete on price with low-fare rivals, Mexicana Chief Executive Emilio Romano Mussali said in a recent interview. "We take them very seriously," he said of the new entrants.
The heightened competition is likely to spill into the United States, as the established Mexican carriers and their new rivals not only vie for more travelers among Latinos in the Southwest, but for more U.S. tourists heading to Mexico and Latin America.
"There is a very loyal customer base for us in the U.S. Hispanic market," Romano Mussali said.
But the new Mexican airlines aren't likely to push hard into the U.S. market for at least a few years, until they acquire more jetliners, Continental's Garcia said.
"Their goal for the next few years will be more in the domestic market, where there is definitely a need for competitive air fares," he said.
Ocejo and other analysts were confident that the Mexican market could absorb four new low-cost airlines. The upstarts would survive "partly by taking market share away from the duopoly, and also by taking advantage of the growth in the industry that these new lines would generate," Ocejo said.
Kraul reported from Mexico City and Peltz from Los Angeles |
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