Making moves in the air: airline battles mean greater options for businesspeople, sun worshippers.

Forget airport layovers in Monterrey and Mexico City. For those who want to travel between the United States and Mexico, there are more possibilities than ever this year. Several major airlines are expanding their services into Mexico, looking beyond the country's largest cities for direct flights to and from the United States.

"If you look, there's a large growth market between Mexico and the United States," American Airlines spokes-woman Martha Pantin told BUSINESS MEXICO in a telephone interview from Miami. "There's increased business and increased tourism in cities throughout Mexico--not just Mexico City."

The growth in air traffic is part of a worldwide surge following the travel slump that started with the Sept. 11 terrorist attacks and continued with the SARS (Severe Acute Respiratory System) scare and then the war in Iraq. The International Air Transport Association predicts a 7% growth in airline passengers worldwide in 2004.

Air traffic in Mexico grew by 10% in the first trimester of this year, according to official figures from the federal Tourism Secretariat (Sectur). The growth stemmed from an 8% increase in national demand and 14% growth in the U.S.-Mexico market.

The industry's growth comes at a time when the country's two largest airlines, Mexicana de Aviacion and Aerovias de Mexico (AeroMexico), are both adapting to new leadership, new global alliances and heavy competition from foreign carriers.

FROM DALLAS TO COZUMEL

Much of the growth in the Mexican airline industry is focused on U.S. destinations. According to Sectur, 85% of flights entering or leaving Mexico are traveling to and from the United States.

"The reason for this is fairly simple," said Fuencisla Gomez, the Mexico director of Amadeus, an international technology company that connects travel agencies with airlines, car rental companies and hotels. "There are 25 million Mexicans living in the United States. They take vacations here. They make a lot of reservations to visit their families here. And this is going to keep growing."

Carriers are adding flights to cities where many Mexican-Americans are from, such as Leon, Guanajuato.

They are also adding routes to Mexico's major business and tourist destinations. American Airlines, for example, added service in January from Dallas/Fort Worth to the Caribbean island of Cozumel, which is popular among scuba divers for its coral reef. The airline has also added a new direct flight from Dallas/Fort Worth to the Pacific coastal resort of Ixtapa.

In late 2003, Continental Airlines added routes between Houston and the Mexican cities of Morelia, Manzanillo and Ciudad del Carmen. And by this summer the carrier will have a total of 27 Mexican destinations, including new regional jet service from Houston to Monclova (since April), Puebla (beginning May 2) and Oaxaca and Toluca (both beginning June 10).

"Our new daily nonstop service to these destinations is an unequivocal symbol of Continental's commitment to offer the public convenient access to the business and recreational markets in Mexico," the airline's international vice president, Jim Summerford, said in a statement announcing the new flights.

NEW ROUTES FOR BUSINESS TRAVELERS

Continental's new service to Monclova, a northern Mexico trade center in the state of Coahuila with a concentration of U.S. businesses, means that American business travelers will no longer have to fly to Monterrey and drive more than two hours to reach their destination. The service to Toluca offers an alternative route to Mexico City or direct access to a rapidly growing city just 41 miles west of the capital. The direct flight to Oaxaca could draw American travelers to the city's famous plazas, culinary festivals and language schools.

United Airlines, which offers daily service to Mexico City from its hubs in Chicago, Los Angeles, San Francisco and Washington, D.C., recently began offering a direct flight from the U.S. capital to Cancun, the beach resort city that has increasingly become a top choice for business meetings and conferences. The airline plans to begin Saturday service from Denver to Cancun this summer.

[ILLUSTRATION OMITTED]

"We are excited about the possibility of offering nonstop service from Denver to this popular vacation destination," said Kevin Knight, vice president of resource planning, in a statement on United's Web site.

The new routes are an opportunity for airlines to offer a sort of air taxi service, said Gomez, an expert on the global travel sector who recently moved to Mexico from Spain.

"What these airlines are doing is competing with the terrestrial niche," she told BUSINESS MEXICO. "In Europe, airlines have been using small planes for years to compete with the trains, and now in Mexico, airlines are looking to compete with the bus system."

Tourists will benefit from the new flights, said Frank Lehmann, CEO of the Queretaro-based AndaleMexico, which offers tours throughout the country.

"The new routes give us the opportunity to offer tour packages leaving from airports that we had never before considered," Lehmann said. "It is our opinion that all travel agencies will profit from the new routes."

GLOBAL ALLIANCES

Mexico's two largest airlines both have new key alliances. AeroMexico has signed a 10-year deal with Continental Airlines that gives its customers expanded access to the United States, most notably to the American South. AeroMexico remains a member of the Sky Team, which includes Delta Airlines, Air France, Alitalia, CSA Czech Airlines and Korean Air.

Mexicana in April dropped Star Alliance partner United Airlines, teaming up instead with American Airlines. Mexicana's new bilateral agreement with the world's largest carrier joins the two airlines with the most share in the U.S.-Mexico market.

[ILLUSTRATION OMITTED]

"At first, I was shocked that Mexicana would leave the Star Alliance, which is very strong," said Amadeus' Gomez. "But what they gain with American is a strengthening of their market share in the northern part of the United States."

The agreement allows passengers to redeem and accrue frequent-flyer miles on more than 500 round-trip flights per week between Mexico and the United States. American Airlines customers now have access to popular Mexican destinations such as Oaxaca and Veracruz.

"This greatly expands both of our networks," said Pantin of American Airlines. "It's a win-win situation for both of our customers. Without this code-sharing, American would risk losing market share to competitors in this important market."

Mexicana also formed a partnership with Spanish carrier Iberia, and retains bilateral agreements with all Star Alliance members except United: Air Canada, Air New Zealand, ANA (All Nippon Airways), Asiana Airlines, Austrian Airlines, Lufthansa, Scandinavian Airlines, Spanair, Singapore Airlines, Thai Airways International, bmi, LOT Polish Airlines and Varig.

"This way, our customers get the best of both worlds," said Adolfo Crespo, vice president of public affairs for Mexicana, in an interview with BUSINESS MEXICO.

As for United, which is still a part of the Star Alliance, the carrier "remains fully committed to the Mexican market and to its customers traveling to and from the region," Graham Atkinson, United's senior vice president for worldwide sales and alliances, said in a statement after the announcement that the partnership with Mexicana would end.

NEW AEROMEXICO, MEXICANA BOSSES

March 22 saw dramatic leadership changes in Mexicana and AeroMexico, as new presidents took charge of the state-owned airlines that together control more than 80% of the domestic market.

Rogelio Gasca, head of Cintra, the holding company for the two airlines, moved Mexicana president Fernando Flores to the helm of AeroMexico. Flores replaces Arturo Barahona, who resigned in February just months after he replaced Alfonso Pasquel. AeroMexico workers have publicly complained of mismanagement of the company's funds during the Barahona and Pasquel administrations.

[ILLUSTRATION OMITTED]

Local media have speculated that Flores' success in the organization of Mexicana's workforce earned him the leadership of AeroMexico. He had been with Mexicana since 1991, and became the airline's president in 1995.

At Mexicana, Gasca replaced Flores with Emilio Romano, a finance expert who formerly worked at the federal Finance Secretariat and was the principal negotiator for more than 50 Nafta fiscal and customs treaties.

The challenge for Flores at AeroMexico and Romano at Mexicana will be readying the two airlines for sale.

In 1995, Mexicana and AeroMexico were heavily in debt. When the banks decided to capitalize on the debt, they created the holding company Cintra, which owns 99% of Mexicana and AeroMexico stock. It also owns most of the stock for the companies in charge of ground-handling and cargo operations for Mexico's airports. In 1999, when the banks were financially unstable, the Mexican government took over the Cintra stock. Cintra has a mandate to sell the airlines.

"What Emilio Romano needs to do is to look for ways of consolidating Mexicana's future financially," said Crespo of Mexicana. "The airlines will be sold as soon as they're healthy, which is speculated to be in 2005."

STOP THE CINTRA BLEEDING

Meanwhile, Cintra is looking to reduce costs through the operational synergy of the two airlines, which have lost 5.2 billion pesos in the past three years. Although AeroMexico and Mexicana must continue to compete--to avoid violating Mexico's anti-monopoly laws--Cintra will be looking for ways to combine, for example, purchasing for onboard services for the two airlines.

"We're looking to obtain the benefits of a fusion without it being necessary to carry it out," Gasca told the newspaper Reforma in March. He estimated that the strategy would allow the airlines to cut 8% of their costs and to increase earnings by 9%.

Fuencisla Gomez, who has followed the sales and mergers of airlines around the world, said that neither the fusion nor the sale of the two airlines seems realistic by 2005. In her opinion, the former would be better.

"A fusion would be very good for them because they could compete with foreign airlines that are penetrating the Mexican market to a very high degree, such as American Airlines, Continental and United," she told BUSINESS MEXICO. "They would complement each other very well--AeroMexico has a strong international presence, and Mexicana is very dedicated to the domestic market."

To get around anti-monopoly restrictions, the companies could unload less popular routes, she said.

[ILLUSTRATION OMITTED]

PIGGYBACK ON RECOVERING ECONOMY

President Fox in April announced that Mexico's economy had grown 3% in the first trimester of 2004, and analysts predict the trend will continue.

"The recuperation of the United States, not only in the growth of the economy but also in the rise of employment, will mean growth for Mexico," said Jorge Perez Colina, professor of economics at the Ipade (Instituto Panamericano de Alta Direccion de Empresa) business school in Mexico City.

The economic outlook, combined with the public's declining fear of flying, should propel the airline sector's growth throughout 2004, industry insiders said.

"There is a positive trend in the market," said Crespo of Mexicana. "Airlines are hypersensitive to changes in the economy, and now that the U.S. economy is beginning to show signs of recovery, so is air traffic. This year is proving to be better than 2003, although there's a long way to go before we reach 2001 levels."

Corrie MacLaggan is a Mexico City-based freelance writer.

Photos by Marco Ugarte