Why a state-run airline is a risky business bet for Mexico

The plan to create a Mexican state-run airline, promoted by President Andrés Manuel López Obrador (AMLO), could prove risky for the government and stress its finances, adding to the grim outlook currently facing the country’s aviation sector, BNamericas was told. 

The plan was reported in the media last year and described by newspaper El País as AMLO’s version of the defunct carrier Mexicana de Aviación (in picture). 

The news was confirmed by López Obrador during the first week of October, when more details came to light including that defense ministry (Sedena) would be in charge through a company called Grupo Aeroportuario, Ferroviario y Servicios Auxiliares Olmeca-Maya-Mexica. This company will also operate the Felipe Ángeles (AIFA), Tulúm, Chetumal and Palenque airports, and the Maya train. 

The project was made official on May 18 when the finance ministry (SHCP) published a decree in the federal gazette authorizing the constitution of a company with majority state ownership called Aerolínea del Estado Mexicano.

According to the decree, the aim of the airline is to “improve the quality and coverage of airline services, as well as boosting connectivity in the market where demand exists.”

Juan Antonio José, a consultant at Eagle One Aviation México and formerly employed at Mexico City international airport and at the civil aviation authority, welcomed the news. “Providing air connectivity is a state responsibility. Investment is good for the aviation sector. It is generating jobs, expanding supply bases and increasing connectivity. It also attends social needs and competitiveness is always welcome, because it benefits the consumer as long as competitors comply with legal requirements,” he said in an interview with BNamericas. 

INVESTMENT 

According to El País, the airline would begin operations with 10 planes, and the cost of launching it was estimated at 1.8bn pesos (US$100mn).

Others believe that the amount would be much more, as it would have to include expenses like airplane leasing, itinerary and crew planning and trained technical staff for hangar operations, among others.

“These are the most important expenses of an airline, but another thing is the day by day. It has been estimated that another US$100mn would be needed to operate it during the first year,” Carlos Torres, an independent aviation consultant with 10 years of experience in Aeroméxico, told BNamericas, who added that a carrier would typically see earnings in the second or third year of operations. 

Juan Carlos Machorro, a legal aviation expert from law firm Santamarina + Steta, also believes the amount could be higher, and adds that international experience regarding state-run airlines does not augur well for AMLO’s one.

“All examples we’ve seen worldwide imply that this will be a ‘budget-burner’ company,” he said in an interview with BNamericas. “[US$200mn per year] does not sound reasonable to me, besides, there was this idea of buying the Mexicana de Aviación brand to use it for the new airline… so we’re most certainly not talking about US$100mn.”

RISKY INDUSTRY 

Despite being optimistic about new investments in the aviation sector, José admits the aviation business is risky, as it requires huge investments and the profit margins are low, and it has big financial and operational risks. 

“It isn’t for every pocket nor for every businessman. Some would define airlines as risks with wings,” he said, while insisting that despite this, the creation of a state-run airline is good news. 

The aviation business depends heavily on the price of jet fuel, which according to daily El Financiero rose more than 100% in 2022 due to the effects of the Ukraine war. The sector is also vulnerable to financial crises, interest rates and labor issues with the presence of robust unions, as well as operational issues like meteorology, maintenance, staff training and safety. 

“Here the main issue is the experience within the ministry of defense to manage a business that is highly risky, that requires a large amount of capital, and that has many external risks. Another challenge would be the lack of civilians in the structure,” said Torres. 

“I don’t doubt the capacity of the ministry of defense to carry out its main activity regarding national security, but when you distract it to operate airports, museums and airlines, that’s when it’s questionable whether or not it will have the capacity to be successful in such a sophisticated and competitive market,” Machorro added.

CONNECTIVITY 

After the news was confirmed in October 2022, the plan to create the airline came in for criticism given that it could take away market share from privately owned carriers. 

However, Torres believes that is not the case as the airline would have only 10 aircraft in the beginning and be focused on routes that are not covered by bigger carriers like Aeroméxico or Vivaaerobus. 

However, that will not help its main purpose which is to lower prices and improve connectivity, he said. 

“They [the government] believe that putting another airline in the market will eventually generate a benefit in terms of prices and connectivity, but I believe the result will not drastically influence [the market] or correct these issues,” he said. 

Machorro goes further by stating that the launch of the airline is a blow to the local industry, which is currently struggling with the downgrading to safety category 2 by the US Federal Aviation Administration (FAA) in May 2021 after determining that Mexico’s oversight of its carriers operating in the US did not fully comply with the safety standards established by the International Civil Aviation Organization (ICAO).

“This is another blow to the industry because the last thing the country needs at this moment is a new airline. What it needs is support for the sector, recovering category 1, maintaining it, and funds, and technological and human resources, instead of spending thousands of millions of pesos on an airline that we don’t need,” said Machorro.  

Photo credit: AFP