Flying low: The government prepares to put Cintra on the auction block. (Spotlight).

Reports on Mexico's aviation industry are confusing. The process to sell Aerovias de Mexico (Aeromexico) and Mexicana de Aviacion (Mexicana)-- both controlled by holding company Cintra--has been rescheduled several times, although it is now expected to begin in July.

After Cintra was founded as a holding company to administer the nation's financially distressed airlines, the Federal Competition Commission (CFC) in October 1995 ordered its breakup on the grounds that it was a monopoly, with 80% of the domestic airline market falling under its control.

The federal government controls more than 65% of the holding company, mostly through the Bank Deposit Protection Institute (IPAB), which assumed its 50.5% stake from debt held by banks bailed out by the government after the December 1994 peso crisis.

Grupo Financiero BBVA-Bancomer has a 12% stake in Cintra, while Citigroup's Grupo Financiero Banamex owns 8%.

INDUSTRY MALAISE

The break up and privatization of the two airlines has been on the table for some time now, delayed partly because of the economic downturn and the events of Sept. 11, which threw the industry worldwide into a tailspin from which it has still not recovered.

Cintra registered losses of US$8 million in September alone, leading the federal government to provide rescue credits of up to US$100 million for airlines and fuel discounts as long as they were up to date with their tax and regulatory obligations.

Moreover, in the months prior to the attacks, four airlines--United, Delta, American and Continental--were considered major potential bidders for the two Mexican airlines. It now appears that none have the appetite or the cash to acquire either Aeromdxico or Mexicana.

And that's hardly surprising: Six months after the terrorist attacks, the U.S. aviation industry was still gasping, struggling to survive a period of catastrophic loss. According to the U.S. Air Transport Association (ATA) Office of Economics, prices plummeted 19.2% in October, 19.8% in November, and in December the average domestic fare was the lowest of any month since August 1992.

According to the Air Transportation Safety and System Stabilization Act, the decline will continue through 2002. It concludes that at best, the U.S. airline industry hopes to see profits again in late 2003, leaving Mexico's controversial privatization of its top two airline carriers on hold.

CLOSE TO HOME

And in Mexico, the aviation industry is not doing much better. Mexicana Commercial Director for Mexico and Latin America Sergio Allard recently told press that in the first five months of 2002, domestic traffic registered a fall of between 12% and 13% compared to the same period last year. He said that on routes between Mexico and the United States, reservations were down by almost 20%, while most Latin American routes (except for Brazil) had fallen over 30%.

According to Allard, the sector's recovery could be as far away as early 2004. However, United Airlines Mexico Director Jouse Meza is more optimistic, claiming the airline has a similar number of flights to last year, with revenues barely 2% below preSept. 11 levels.

Meanwhile, Aeromexico has been struggling with labor disputes and the menace of strikes. Moreover, between October 2000 and up until the end of January this year, Aeromiexico s prices fell by 11%, as a result of drop in demand.

According to government estimates, Cintra's revenue dropped 20% in September compared to the same month in 2000. And it was hardly thriving beforehand: In the first nine months of 2001, it reported operating losses of $530 million pesos and net losses of $742 million pesos. By January this year, Cintra series A shares had dropped 60%, to a low not seen since 1997.

Before Sept. 11, Cintra paid US$1.1 million dollars annually in insurance against acts of war and terrorism, but these costs shot up to over US$30 million after the attacks.

Consequently the government approved credit of up to US$100 million dollars for airlines and fuel discounts--but only for airlines up-to-date with their tax and regulatory obligations. This eliminated Aerocalifornia, Aviacsa, Allegro y Aerolineas Internacionales, who at the time owed a total debt of $100 million pesos for navigation services (Servicios a la Navegacion del Espacio Aereo Mexicano, SENEAM).

The new law established a trust that by April 30 received requests for support from Aeromexico-Aerolitoral, Mexicana and Aviacsa (now complying with the requisites), according to the Communication and Transport Secretariat (SCT). Interest rates on the credits correspond to 28-day Cetes, plus two points, with payment periods of up to four years.

However, the Center for Private Sector Economic Studies (CEESP) criticized the absence of efficient public policies that would generate a better atmosphere for the development of the sector. It listed the ambiguity of Mexico's regulatory policy as one of the industry's main problems, and said the government is not doing enough to create a competitive atmosphere in the industry. Both Aeromexico's and Mexicana's prices for domestic routes are often more expensive than longer, international flights.

MEXICANA

One of the reasons Mexicana felt such a blow from the terrorist attacks is the location of its major market: It has the highest passenger traffic between the United States and Mexico, competing with more than 10 other airlines.

"We were severely hit, especially being leaders in the U.S.-Canada Mexico market. We have 26% of our market share between the three countries, and it was precisely this market that collapsed," said Adolfo Crespo, Mexicana's vice president of public relations in Mexico City.

While last year represented a loss for the airline, it hopes to break even this year.

"We are noticing that things are beginning to improve, even though they are not back to pre-9/11," Crespo said.

Mexicana has not let the sector's woes prevent it from a busy plan to renew its fleet and expand routes. Since the end of last year, the airline has been working to reverse the impact of Sept. 11 by expanding into new markets in the United States, Latin America and most recently in Asia, with positive results, Crespo said.

Mexicana recently celebrated its fifth anniversary with Star Alliance, which has brought the airline annual growth of 12%. Allowing frequent flyer passengers to accrue mileage with 15 different airlines, this is the largest airline alliance. Mexicana has built code-share agreements with most of the carriers, including United Airlines, Lufthansa, Air Canada, Varig, Air New Zealand and ANA, facilitating passenger connections and access to through check in.

Moreover, last month in Shanghai, Star Alliance announced three new members: Lot Airlines (Poland's state owned flag carrier), Asiana (South Korea's second-largest airline) and Spanair (based in Majorca, with a majority holding by Scandinavian carrier SAS). Mexicana transported 8.3 million passengers last year and expects a similar amount in 2002. "We expect to see an increase in the first quarter of 2003," Crespo said.

The carrier's strategy with regard to its fleet is to phase out the Boeing 727s, and replace them with Airbuses.

"This is a substitution strategy that was accelerated as a result of 9/11, because we wanted the most cost-efficient aircraft that would impact on bottom line results," Crespo said.

He added that the 727s have an average age of close to 20 years, while Mexicana's overall fleet has an average age of only 10 years.

"By the end of 2003, the fleet will average seven to eight years, making Mexicana's the youngest fleet in the region and one of the youngest in the world. This really portrays our strategy: We are the airline with more tradition, but will have the youngest fleet."

AEROMEXICO

Founded in 1988, Aeromexico is the country's largest airline. It serves 33 national destinations, 13 in the United States, two in Europe and three in South America.

The average age of its fleet is 16.4 years, and it transported 9.4 million passengers in 2001. The airline also boasts the distinction of being the most punctual airline in the world.

Aeromexico's international alliance is with SkyTeam, which includes as members Air France, GSA Czech Airlines, Delta Air Lines, Korean Air and, recently, Alitalia. It also has strategic alliances with Mexicana, Lan Chile, Aerolitoral (its regional associated airline) and Aeromar.

And now the company has labor problems. Aeromexico presented a proposal to the Flight Attendants Association Union (ASSA) for a 5.12% raise (4% direct to salary and 1.2% in benefits), which was rejected by the 1,600 unionized workers who had reduced their original demand for 20% to 9%. There were 15 other labor issues that the ASSA said did not affect the company's finances, including health insurance, retirement funds, and limiting stopovers to one on night flights, instead of five.

ASSA head Arturo Aragon had said that unless an agreement was reached by the end of May, that beginning June I around 250 air operations throughout the country could be affected, and that the company could see losses of US$1 million dollars per day.

When flight attendants temporarily stopped working on May 31, the issue was finally resolved, with management agreeing to a 5.5% salary increase and an improved benefits package.

The threat of action from this high-profile union came at a poignant time; just as the six investment banks invited to act as financial agents in the sale of Cintra were presenting their proposals for the sale of shares to IPAB.

Merrill Lynch, which was originally chosen to handle the sale, but whose contract expired, was rehired.

The ASSA has been an outspoken opponent of the break up of Cintra, arguing that it will allow foreign investors to take over a greater share of the domestic market and endanger job security.

The union says it isn't against selling the airlines per se, even though privatization of the airlines in the early 1990s led in a costly fiasco when the government had to take them back only a few years later after they came close to bankruptcy, following an alleged US$61 million embezzlement scandal.

The ASSA has said it wants to be sure buyers will invest money in the airlines after the purchase, rather than just sell off the assets.

Neither the airlines nor potential buyers are ready to comment on the upcoming dissolution of Cintra and the airlines' ensuing sale. Continental CEO Gordon Bethune, when asked about his airline's interest in Aeromexico or Mexicana said that Continental was not in discussions to invest in either.

He added, "They've been kind of for sale or not for sale for a long time, and I'm not sure they won't be for sale for another eight years. If they're going to be sold, we want to know the terms."

A flurry of activity finally started last spring, when groundwork for the sale process was laid through a corporate restructuring that left two groups dependent on Cintra, made up of Aeromexico-Aerolitoral and Grupo Mexicana de Aviacion, composed of Mexicana and Aerocaribe / Aerocozumel. IPAB had originally sought to sell Cintra as a single company to maximize returns, but antitrust regulators and the Organization for Economic Cooperation and Development (OECD) recommended the break up of the local monopoly.

"About a month and a half ago, the government changed the paperwork, making Mexicana and Aeromexico two separate entities, so that they can be sold separately," said Mexicana's Crespo in May. "The airlines are again on the slate to be sold."

"If sold now, there are effects from Sept. 11, and the government would have to sell the airlines at a low price," Crespo said. "There are people who say this is not the time to sell, because the market is depressed and we won't be able to get the best price. But at the same time, the government needs the money."

He couldn't speculate about when the sale might take place.

"We are here to administer the airline and sell at the best price possible," he clarified.

RELATED ARTICLE: Continental Climbs

Continental Airlines expands Mexican services

Barbara Kastelein

Beginning this month, Continental Airlines will serve Mexico with 305 weekly flights, an increased frequency from its pre-Sept. 11 operations and more flights between Mexico and the United States than at any other time in Continental's 68-year history.

"We were able to restore service to Mexico more quickly than other regions because of our close ties with the country and strong passenger traffic," said Continental Airlines CEO Gordon Bethune.

"The AMERICAN CHAMBER/MEXICO and Continental Airlines support each other's missions," Bethune said, explaining that the Chamber's and Continental's businesses are intertwined because the former stimulates trade and investment between Mexico and the United States, while the airline--the No. 1 U.s. carrier to Mexico--reinforces that mission with daily, nonstop service to 19 cities in the republic.

At the same time, he said, the work of the AMERICAN CHAMBER/MEXICO fosters business between the countries, which increases the demand for Continental's service and helps to expand its operations.

Author of "From Worst to First," Bethune referred to Continental's "sordid" past before 1994 (the airline had undergone two bankruptcies), and compared the days when it had "every kind of cat and dog airplane you could fly," to now, when it boasts the youngest jet fleet in the United States.

The United States' fifth-largest airline, Continental has won more awards for customer satisfaction than any other airline since Bethune has been at the helm.

Mexico is Continental's major international destination. The airline employs 475 staff here, of 48,000 worldwide. In May, Bethune announced, Continental added a sixth daily flight to Mexico City and Monterrey, and increased service to Leon/Guanajuato to twice daily.

Bethune brought humor to the industry's post-Sept. 11 crisis: "Today in our business, which is a really crummy business to be in, it used to be that the guy ahead was the one that made the most money, now it's the one who loses the least."

U.S. airlines lost more than US$7 billion in 2001. And while the industry is frankly "crippled," Bethune said there were still winners and losers. He referred to the Airline Stabilization Act, which saved some carriers for a short time, and said Continental will be first of the U.S. majors to return to sustained profitability.

Last summer, Continental had 295 weekly flights to the Mexico region, which dropped to 230 weekly flights after Sept. 11. But recovery was faster and stronger here.

With service to 46 cities and more than 600 weekly departures to Latin America and the Caribbean, Continental is the No. 2 U.S. carrier to the region. "And we intend to hold on to this position," Bethune said.

He attributed much of his airline's success in Latin America to its "Latinization" program, which began in 1997, and offers specialized service to Spanish and Portuguese speaking customers. On board, Continental has Spanish and Portuguese speaking flight attendants, regional Latin cuisine and Spanish-language newspapers, magazines, TV programs and music. And in airports, it has bilingual customer service representatives, signs and flight information.

Continental also has a Spanish-language reservation service and voice-activated flight information system, as well as a Spanish-language screen option on all of its eService Centers.

Bethune told guests it was "nice to come to a region where the industry is actually making money," and said Continental has also invested in new Boeing aircraft in Latin America.

With 26 new Boeing 737 aircraft, flying higher, faster and farther than comparable aircraft, and worth nearly US$1.5 billion on Latin American routes, he said Continental was able to serve more destinations with the right-capacity aircraft.

Continental's investment in aircraft, routes and customer service is a strong sign of its commitment to Mexico and the rest of Latin America, Bethune said.

Barbara Kastelein writes about Mexico travel and tourism for Fodor's Travel Publications, Conde Nast Traveller (UK) and the Sunday Express newspaper in London.

Barbara Kastelein writes about travel and tourism in Mexico far Fodor's Travel Publications, Conde Nast Traveller (UK) and the Sunday Express newspaper in London.