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Judge declares full bankruptcy for Mexicana, orders airline to sell assets.

The airline has not flown an airplane in almost four years, and yet Mexicana remains the subject of front-page headlines. In what could finally spell the end for the beleaguered air carrier, a federal judge declared Mexicana in a "state of bankruptcy," which means that the company's assets must be sold to meet obligations to creditors. The decision announced by Federal Judge Edith Alarcon in early April also includes the company's two discount commuter airlines Aerovias Caribe (Click) and Mexicana Inter (Link).

The judge's decision marks the beginning of the end for an airline that has been a fixture in the Mexican transportation scene since 1921. For more than two decades, Mexicana--one of the country's two flagship carriers--has operated under financial strains because of increased domestic and international competition, rising fuel and labor costs, and global financial downturns (SourceMex, Sept. 30, 1992, Sept. 21, 1994, Oct. 17, 2001, and Dec. 7, 2005). Mexicana and Mexico's other flagship carrier, Aeromexico, at one time operated under the single holding company Corporacion Internacional de Transporte Aereo (CINTRA). The government, which took control of CINTRA during the economic crisis of 1994, proceeded to sell off the two airlines as separate entities.

The sale of Aeromexico to a consortium of private companies was by all accounts successful (SourceMex, Sept. 26, 2007), but the sale of Mexicana became more problematic. In 2005, the airline was sold to hotel chain Grupo Posadas, which went on to face its own financial difficulties (SourceMex, July 20, 2011).

The most recent chapter of Mexicana's financial difficulties started in August 2010, when the airline suspended all flights and announced it was seeking protection from creditors. At that time, Mexicana proposed a combination of salary reductions and layoffs to help the airline deal with its financial crisis. The unions representing pilots (Asociacion de Pilotos Aviadores de Mexico, ASPA) and flight attendants (Asociacion Sindical de Sobrecargos de Aviacion, ASSA) countered that the airline's problems were not as bad as advertised and that Mexicana was simply looking for an excuse to cut costs (SourceMex, Aug 4, 2010).

In January 2011, Mexicana announced that the company had obtained enough support from private investors to resume partial operations later that month (SourceMex, Jan. 5, 2011). Many investors backed off, however, given the lack of agreement between the air carrier and labor unions.

The next hopeful sign came in February 2012, when a bankruptcy judge approved a plan by a Spanish-Mexican conglomerate to acquire the airline. The buyer, Med Atlantica, had talked about resuming operations in April of that year (SourceMex, Feb. 29, 2012). The purchase again fell through, leaving Mexicana without a plan to emerge from its financial difficulties, in part because of the airlines burdensome debt of about US$800 million.

The end of an era

On April 4, 2014, after about three and half years of attempting to find a financial solution to the problems of Mexicana, Judge Alarcon finally declared the airline in full bankruptcy. "In the end, Judge Edith Alarcon acknowledged the inevitable and declared that Mexicana was broke," said nationally syndicated columnist Sergio Sarmiento.

Statistics from the federal civil aviation agency (Direccion General de AeronAutica Civil, DGAC) showed that Mexicana and subsidiaries Click and Link transported 11.1 million passengers in its last full year of operation, accounting for almost 23% of the Mexican air-passenger market in 2009. In contrast, Aeromexico and its subsidiary Aerolitoral (also known as Aeromexico Connect) carried 10.1 million passengers that year, or about 21% of the market. "Mexicana de Aviacion was not only the oldest airline in our country but also the most important carrier," said Sarmiento,

In 2010, the year the airline suspended all flights, the carrier had concessions to fly 98 international routes but was only making use of 58 of those concessions, said the Secretaria de Comunicaciones y Transportes (SCT).

Judge Alarcon's ruling allows one unit of the bankrupt airline, Mexicana MRO, to continue operations indefinitely, thanks to a funding plan put together by Mexico's foreign trade bank (Banco Nacional de Comercio Exterior, BANCOMEXT), the private financial institution Banorte, and the Mexico City international airport (Aeropuerto Internacional de la Ciudad de Mexico, AICM).

The SCT said the financial resources obtained via the MRO would be used to provide economic support to 8,000 employees and 600 retirees of Mexicana and its subsidiaries.

The DGAC had temporarily handed over the slots used by Mexicana at Mexican airports to other air carriers, including Interjet, Volaris, and Aeromexico. Those slots will now be transferred permanently.

The court's decision also directs the SCT to name an administrator to sell off the company's assets to repay creditors. Financial experts who specialize in bankruptcies said the process could extend for a long period, since the administrator would have to find buyers to acquire not only Mexicana's assets but also the assets of the subsidiaries.

"Debts cannot be liquidated until a buyer is found for the assets of the subsidiaries, which could take an undetermined amount of time," Gricelda Nieblas Aldana, director of the Instituto Federal de Especialistas en Concursos Mercantiles (Ifecom), told CNNExpansion.

Airline unions unhappy

Employees of Mexicana and its subsidiaries, who have not worked for almost four years, are planning to challenge Judge Alarcon's decision. Union leaders said the judge should not have proceeded with the bankruptcy without first resolving several pending issues between Mexicana and the unions.

"Judge Edith Alarcon was not allowed to proceed with a definitive declaration of bankruptcy before prior appeals were resolved," said Joaquin Ortega, a lawyer for the ground-support workers union (Sindicato Nacional de Trabajadores de Transportes de la Transformacion, Aviacion, Servicios y Similares, SNTTTAS).

Pilots, flight attendants, and other airline employees organized a series of protests at the AICM in mid-April, taking issue with Judge Alarcon's move to separate the MRO from the rest of Mexicana's assets. ASPA leader Carlos Manuel Diaz Chavez Morineau said all the company's assets should have been considered together to determine the full value of Mexicana.

Furthermore, said Diaz Chavez Morineau, there were no guarantees that the financing for the MRO will be used to the full benefit of the workers.

Ortega also took issue with the government's "illegal" decision to transfer Mexicana's slots at the AICM to competing airlines. Those airlines, he said, owe compensation to Mexicana.

Another issue that remains unresolved is whether the stockholders had any responsibility in Mexicana's bankruptcy, said Ortega. "We are going to continue our demonstrations because our fellow union workers are very angry," he said. "We want to demonstrate that the work force will continue the fight, even if it lasts for 30 years."

Mexicana's bankruptcy will also have a deep impact on Banorte, the financial institution that provided the most financial backing to the airline. The Monterrey-based bank was one of Mexicana's 24,000 creditors. "This is the end of a chapter that we regrettably knew was coming," Banorte director general Alejandro Valenzuela told reporters at a recent banking convention. "For Banorte, this bankruptcy implies a loss of 1.2 billion pesos (US $92 million). For our country, this means the end of one of the signature companies in Mexican aviation and the loss of many sources of jobs." [Peso-dollar conversions in this article are based on the Interbank rate in effect on April 16, 2014, reported at 13.05 pesos per US$1.00.]

by Carlos Navarro
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Author:Navarro, Carlos
Publication:SourceMex Economic News & Analysis on Mexico
Date:Apr 16, 2014
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