Wednesday, May 16, 2018

Aeromexico Scales Back ‘Unsustainable’ Flights, Following United

Aeromexico, Mexico’s largest airline, is trimming its expansion plans as a seating glut drags down fares.

Capacity will expand 7 percent the rest of this year, said Chief Executive Officer Andres Conesa. That’s down from a previous forecast of about 9 percent, he said, citing the need for increased discipline as rising fuel prices add to earnings pressure.

The carrier is tapping the brakes as a weaker industry outlook has prompted investors to dump Mexican airline shares. Years of go-go growth have left the domestic market awash in capacity, while an open skies deal with the U.S. prompted airlines from both countries to add cross-border flights. United Continental Holdings Inc. said last week it would chop flights to Mexico, saying service to some markets was unsustainable.

“We’re starting to see the impact on profit, but it has more to do with excess capacity than weak demand,” Conesa said in an interview at Bloomberg’s offices in Mexico City.

Aeromexico fell less than 1 percent to 24.10 pesos at 1:58 p.m. in Mexico City. The shares slid 15 percent this year through Tuesday. Its biggest domestic rival, Volaris, tumbled 28 percent this year while the benchmark IPC index fell 6.3 percent.

Delta Partnership

Aeromexico has been able to fend off some of the capacity-related pressure thanks to its joint venture with Delta Air Lines, which owns 49 percent of the Mexico City-based company, Conesa said. Passenger traffic between Mexico and the U.S. rose 6 percent in March from a year earlier, according to the Transportation Ministry.

While Aeromexico eked out a slim profit in the first quarter, Volaris reported a loss of 1.1 billion pesos ($56 million) and posted the largest one-day share decline since 2016. The Mexican airline industry is entering a period of uncertainty amid a potentially unsustainable drop in fares, Barclays Plc said last week.

The highest jet-fuel prices since 2014 -- currently at $2.26 a gallon for purchase in New York harbor -- are adding to the pressure. Aeromexico hedged for about half of its fuel requirements using call spreads with a strike price starting at $1.78 per gallon, the airline said in a call with analysts last month.

Peso Weakness

Aeromexico is naturally hedged against peso weakness, with about 60 percent of its sales in other currencies and about two thirds of costs denominated in dollars, Conesa said. But persistent currency weakness represents a risk to Mexico’s boom in air travel.

“If the peso continues to depreciate, it will have an impact on demand, on real activity and that will have an impact on our business and on the Mexican economy,” he said.

The Mexican currency has tumbled 8.5 percent in the last month alone, dragged down in part by uncertainty about the future of the North American Free Trade Agreement. Investors are also growing increasingly concerned about a deeper rout amid tensions between business leaders and firebrand presidential candidate Andres Manuel Lopez Obrador, the frontrunner in the July 1 election.

Lopez Obrador’s pledge to cancel the construction of a $13 billion airport in Mexico City represents another risk for Aeromexico, which is banking on the hub to boost air traffic. Conesa said he looked forward to working with whoever wins the race.

“We’ll work with the new president and their party to make the case that the airport is needed and is going to be good for the industry, for the country, the economy and job creation,” he said.

Fleet Plans

Aeromexico is still weighing an order of Bombardier C Series planes, Conesa said. The carrier had initially considered the plane when the U.S. slapped tariffs on the Canadian aircraft after a trade complaint brought by Boeing Co.

A trade panel’s ruling in Bombardier’s favor paved the way for Delta to get the planes, giving Aeromexico more time to study its fleet plans. The company flies Boeing 737 and 787 Dreamliner planes, while its regional unit operates Embraer jets. Aeromexico is also considering an order for Embraer’s upgraded E2 planes -- if it takes new planes at all.

“It opened a window of additional time, so we’re analyzing whether to bring the C Series, the new E2 or staying as we are,” he said. “We’re hoping to make a decision in the second half of the year.”

(Andrea Navarro - Bloomberg Business)

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