Ready for takeoff: the low-cost model comes to Mexico as the government prepares to get out of the airline business

Latin Trade, Sept, 2005 by Marisol Rueda

A bus trip from Mexico City to Monterrey in northern Mexico will take you 11 hours and cost US$85. It's quite a haul, but jaunts like that one are very common for traveling Mexicans, 96% of whom when on trips of 300 kilometers or longer are doing so by bus.

Hoping to get those people airborne, Mexican airline Mexicana de Aviacion in July rolled out Click Mexicana, the first low-cost airline in the country.

"We see a great opportunity to get people who travel by bus up on an airplane, where it takes a tenth of the time to travel and the difference in price is minimal," says Isaac Volin, Click Mexicana's general director. According to company estimates, of the 2.8 million people who traveled on the nation's highways last year at least 40% could be coaxed to the skies.

The new carrier will operate 10 Fokker-model aircraft that can carry 100 passengers. Mexicana de Aviacion claims its low-cost subsidiary's tickets are 30% cheaper than its normal flights. Click Mexicana will fly nine domestic routes from Mexico City at first, but it hopes to fly from Cancun to Havana in the near future.

Click's business model aims to fly people across the country without incurring costs that fail to add any value in return, such as serving food. Other savings come from selling tickets over the Internet or through Mexicana de Aviacion's existing offices. Click Mexicana will operate through Mexicana de Aviacion's technical, administrative and maintenance support teams to keep costs down, executives say.

Over the past two years, long-distance travel over land fell 8% in terms of the number of travelers, according to analysts. Arturo Mayorga, an executive at Mexico's national tourism chamber, says that figure has no real backing. Nevertheless, experts say, Click Mexicana flies in the face of the basic principles of the low-cost airline model. Most such companies fly newer planes, avoiding older-generation aircraft, such as Fokker planes. Many low-cost airlines also steer clear of congested airports like the one in Mexico City.

"Operating out of the Mexico City airport is not going to allow a low-cost company to land, refuel and load up the passengers and be on the runway in 25 minutes ready for takeoff," says Jesus Ramirez Stabros, secretary general of the Mexican pilots association, a union of pilots from the Corporacion Internacional de Transporte Aereo (Cintra), a state-owned holding company that controls the country's two main carriers, Mexicana de Aviacion and Aeromexico. "Just parking the airplane here is going to take up the 25 minutes needed to land and take off."

A low-cost airline has to fly more than nine hours a day to get the most use of its aircraft. And it will need enough people on the ground to attend to the fleet's maintenance and quality-control needs. Yet Click will rely on Mexicana de Aviacion's people, which Ramirez sees as risky. "Click Mexicana is not going to have these things. It will rely on a structure that is in reality based on another airline, which makes costs artificially low, thanks to Mexicana de Aviacion," says Ramirez.

Only one in 10 new airlines succeed, according to aviation experts. Arturo Flores, a 31-year-old frequent flier, says he's not convinced Click Mexicana is going to save him any money at all. In fact, Flores says, he figures he'd actually lose money. "On the other national airline, one that is not even low-cost, I'm paying US$220 to go to and from Monterrey and they give me food. If I fly with Click Mexicana, the price comes to $311, so I don't see how it's worth it," he says.

Security measures put in place after Sept. 11 in the United States have made their mark, too, on the Mexican airline business. The price of flying went up, which pushed down demand for tickets. Yet the turbulence subsided and a recovery is under way. In 2004, Cintra reported net income of $53.2 million, after having posted losses since 2001. During the first quarter of 2005, the company reported revenues of $801 million, 16.7% higher than the same period in 2004. Although Mexico's skies are busier, there is room for improvement. "We are way behind in terms of the airline industry. We should be transporting approximately 50 million passengers a year and we are not even up to 20 million," says Oscar Casanova, director of Nova Air, a charter airline.

To bring Cintra to the 21st century, the government decided to sell control of its assets, which account for 82% of the domestic air market. Last May, the company announced a privatization scheduled for year-end. Cintra plans to sell between 51% and 100% of Mexicana de Aviacion--which includes Click Mexicana--as well as Aeromexico. The sale is designed to give the eventual buyers the flexibility to decide how much control of the companies they want to purchase. Cintra will control the remaining 49%. According to Mexico's foreign-investment laws, only Mexican entities can own the country's airlines. Foreigners can invest, however, through consortia controlled by Mexicans.

"There has been a monopoly for a long time, which is why the Mexican aviation sector has not grown," Casanova says. "With Cintra's anticipated opening, the market is going to offer better service and better prices." As Cintra prepares to shed control of its assets, low-cost airlines have jumped on the chance to fly Mexico's skies, including A Volar, ABC, Vuela and Aerolineas Mesoamericanas, all of whom will put downward pressure on tickets should they become actual airlines instead of business proposals. A recent accord between Brazilian low-cost carrier Col and Mexican investors also will create a discount carrier to compete with Click.