Publish in Perspectives - Wednesday, June 3, 2015
The Aeromexico-Delta joint venture presents a conundrum for Mexican policymakers, the author points out. (Photo: Delta)
Larry B. Pascal, Partner and the Chair of the Americas Practice Group with Haynes and Boone.
Oil price decline benefits Latin American aviation sector.
BY LARRY B. PASCAL
There have been recent interesting developments in Latin American aviation. Set forth below is a discussion of some of them.
Latin America is not a single monolithic region and different parts of the region grow at different rates. Perhaps no two countries better reflect this reality than Mexico and Brazil, the region’s two largest markets. The Mexican economy has enjoyed stable (albeit not extraordinary) growth, particularly in the automotive sector, and is generating new investment in the energy and telecommunications sector. In contrast, Brazil is facing higher inflation, negative economic growth for 2015, a debt crisis for its national oil company Petrobras saddled with charges of corruption, and a politically weakened President in Dilma Rousseff, who faces criticism for actions of her governing party, the Worker’s Party. Interestingly, the two countries recently announced that they intend to negotiate a new trade accord with the goal of increasing bilateral trade, which of course would facilitate commerce and hence help air service between the countries.
One thing the entire Latin American aviation sector has going for it is the reduced price of oil. Fuel is one of the most important expenses of an airline (along with aircraft lease expenses and labor) and the substantial drop in the price of oil both directly benefits airlines in the form of lower fuel expenses and indirectly by putting more discretionary dollars in the pockets of Latin America’s emerging middle class.
The US economy has also, relatively speaking, fared well from an economic perspective, and this has assisted the Latin American aviation sector which depends on robust economic growth. China, the region’s other major trade partner, has seen its economic growth cool somewhat (albeit from a higher threshold), which has to some degree negatively impacted the region and South America in particular). That said, China appears to be taking a long term approach to the region, and recently announced a large investment and loan package for South America, including for Brazil.
Certainly, another interesting development in the Caribbean is the opening of diplomatic relations between the US and Cuba. Travel for general tourism purposes has not been authorized under the recent regulations. Interestingly, the US Department of Transportation (“DOT”) has recently authorized ferry service between Florida and Cuba. However, the DOT has not announced a new Bilateral Air Services Agreement with Cuba that would presumably modernize air travel between the countries. Although Miami is an obvious point of reference for expanded service to Cuba, other large US cities, including Houston have expressed a desire to see expanded international air service to Cuba. In the case of Houston, the city would like to see service from both its larger international airport George Bush Intercontinental Airport (a hub for United), as well as its smaller regional airport William P. Hobby, where Southwest Airlines is building a $156 million five gate international terminal scheduled to be fully operational later this year. In general, the relatively recent arrival of Southwest Airlines as an international carrier has added a new dimension to the Latin American and Caribbean market and the Dallas based low cost carrier has announced or commenced international service to numerous countries in the region, including Mexico, Jamaica, Costa Rica, Belize, and Aruba.
KEY MEXICAN REFORMS
As mentioned above, the important economic reforms in energy and telecommunications announced earlier in the term of Mexican President Enrique Peña Nieto are expected to continue to support Mexican economic growth and the airline sector in general. For example, the first Mexican oil and gas bid round is currently in process and bids are expected to be opened later this year. AT&T has also recently acquired Nextel’s Mexican operations and its pending acquisition of DirecTV would represent an important foothold in Mexico and other parts of Latin America for the Dallas-based company.
US AND EUROPEAN EXPANSION
Latin American remains an undeveloped region from the aviation sector perspective, with a new emerging middle class of citizens only now beginning to use air service.
The region’s economy also was not as adversely impacted by the global financial crisis, compared to the US and Europe, providing an oasis for besieged legacy carriers from the US and Europe otherwise suffering from a two prong negative effect of rising oil prices and slowing economic growth in their home countries.
Furthermore, US and European carriers face great competition in mature domestic markets, particularly against low cost carriers and, in the case of European carriers, also against state owned high speed train service, and are looking to Latin America for greater growth.
MEXICO: DYNAMIC AVIATION SECTOR
The Mexican aviation sector in particular has recently witnessed an interesting confluence of events that could shape the market for years to come.
Earlier this year, Aeromexico and Delta announced their intent to form a joint venture on international routes between the US and Mexico. To this effect, the airlines have recently filed antitrust immunity petitions with the US Department of Transportation and the Mexican Competition Commission.
In addition, the US and Mexico signed late last year a new Bilateral Air Services Agreement which would remove some historic restrictions on service between countries. The agreement is pending Mexican Congressional approval.
The Mexican Competition Commission has also announced investigations in two areas – (a) the management of slots at Mexico City International Airport, a situation that has in the past generated criticism for its lack of transparency and negative impact on competition, and (b) possible anticompetitive practices in the air passenger and cargo sectors, rumored to be directed at Aeromexico.
The Aeromexico-Delta joint venture arguably presents a conundrum for Mexican policymakers. From one perspective, it is easy to see why Mexico would want its leading national airline Aeromexico to get stronger by pairing up with Delta, thereby becoming more competitive with American Airlines and United, both of whom operate Texas based hubs and offer extensive service to the country, as well as the numerous other carriers that offer service to the market. By the same token, the Mexican domestic market, untouched by the contemplated new Bilateral Air Services Agreement with the USA, does not have the same level of competition as the cross-border market. Aeromexico enjoys a much stronger market position in the domestic segment, and could use the joint venture with Delta to strengthen its position in the domestic market. It would be easy to imagine that economic policymakers would like to see more robust competition in the domestic market among the Mexican airlines so as to generate more domestic travel and commerce.
THE VENEZUELA CRISIS
Venezuela’s aviation sector has been significantly damaged by the Venezuelan financial crisis and the government has not honored the right of airlines to freely convert their sales to US dollars or Euros. Airlines have responded by drastically reducing flying to the country, which has only resulted in further negative headwinds for the economy and cross border trade in general.
Pascal is a partner and the Chair of the Americas Practice Group with Haynes
and Boone, LLP (Dallas). Pascal, who may be reached at email@example.com, wrote this column for Latinvex.
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