Aviogenex brought a topic that makes me think a lot: Regional airlines in Mexico and the use of regional jets. I keep discussing this topic with many people because one of my dreams is to establish a regional airline in Mexico.
I keep telling myself that it will be profitable to serve some destinations with regionals. The first time I realized that was two years ago, when I flew AM to Matamoros on a MD83. The airplane was half full. The next day, my brother arrived on the same flight and he told me that the airplane was half full. Two days after my brother arrived, my mother arrived on the same flight and she told me that the airplane was also half full (mmm… weird). I couldn’t believe how AM kept the route running and how they get a profit from flights half full. After discussing this issue with an AM employee, he told me that with the fare structure they use a flight like that needs a 55% load factor to be profitable. Then I realized why AM charges very high fares. For example, Chihuahua used to be a destination exclusively flown by AM. Then MX started one flight a day, and they had to stop service after the creation of CINTRA. After that TAESA flew the route and they had to stop the route after disappointing load factors. Then AeroCalifornia started the route and they decided to compete with AM, but they were intelligent and let AM decide the fares (JR just match AM fares). The cheapest roundtrip fare on the MEX-CUU-MEX route was $350.00 + taxes, making CUU more expensive than flights to US Cities. Today Azteca is flying the route and, although there is not enough evidence on how well they are doing, fares to CUU are 25% cheaper than before. This will be one explanation on why Airlines like AM and MX don’t get regional jets. They prefer to send bigger jets with 55% load factors. If you compare AM and MX load factors with those of any US Carrier you’ll see that airlines in Mexico have very low load factors. AeroMexico and Mexicana averaged a 66% load factor in 2001, when airlines like CO used to had at least a 75% load factor systemwide. Jetblue is getting to the 80%. And you have to add the fact that AeroMexico and Mexicana’s target market is the business traveler. The business traveler wants more frequencies in every route and it is the one that pays the higher fares. So if AeroMexico has a flight half full with “Y” and “J” paying passengers it will make the flight profitable. I will think that what Aviogenex wanted to say is that only 1 – 2% of the population in Mexico travels frequently.
AeroMexico and Mexicana are not used to get competition on the routes they fly in Mexico. AM and MX dominate almost 80% of air travel in Mexico, so it is difficult for other airlines to compete against them if they don’t have enough resources to do it. Azteca is trying hard, but we have to remember TAESA; they try and they failed. AM and MX will always make dumping on the routes they have flown alone when competition arrives in order to kill them. Lets face it. AeroCalifornia challenged AM and MX and know they owe millions to the government and banks.
In conclusion, airlines in Mexico don’t get regional jets to fly from Mexico City because:
1. MEX is a small airport not capable of handling too many regional jets and larger jets at the same time, and the decision of assigning gates is on the size of the aircraft and the amount of money the airline pays to ASA as a hole. That is why AM and MX always get the gates and JR, N4, 6A and ZE always get the remote positions.
2. The business traveler prefers the larger jets, and they will only get into the regionals if there is no other choice. If AM gets a regional and ZE flies a B73G, they will go for the B73G (Although sometimes the regional could be a good compliment in some routes).
3. AeroMexico and Mexicana have a code share agreement with AeroMar (VW) to fly shorter routes with ATR’s. Sometimes AeroMar flies to destinations also served by AM and MX (San Luis Potosí, Acapulco, Leon, etc) to compliment AM and MX service in order to have more frequencies for the business traveler.
4. Regional jets are expensive because they are brand new, airlines like JR, 6A and N4 don’t have the money to get them and they prefer to get DC9’s, B727’s and B737’s to fly the routes with low lease payments.
5. AeroMar decided to fly the ATR, which is cheaper to operate on short flights. They commited to the ATR and they save a lot on maintenance, spares and training by having only the ATR.
If you ask me today, I will say that many mexican destinations flown from Mexico City will be a success using regional jets and there are business travelers (high yield passengers) who need them. AeroMar will have to take some of them in the near future, because they are loosing passengers who don’t like to fly the ATR. Lets face it, flying the ATR in hot weathers is the most disgusting experience I ever had. Once I flew the ATR to get to a meeting, and I was wearing a suit. When we got to our destination, my suit was all wet because the ATR does not have air condition. Which business traveler will like to fly and arrive to a meeting all wet?: NONE. AeroMar flies the ATR because they don’t have competition, if they did have, they wouldn’t be flying the ATR anymore. To explain this, we will have to analyze the case of Southern Winds in Argentina (as IB6400 said) they are the most profitable airline in the country because they tried something different. If any of you have the opportunity to read Southern Winds case, do it, you’ll see that when you innovate instead of imitate, and adapt every situation to the real world you’ll end up in success. Southern Winds has a fleet of CRJ’s and DHC 300. They got the CRJ’s in very good leasing deal because nobody flew bombardier jets in Latin America and Bombardier knew that Embraer was creating a very good product (ERJ) that will keep Bombardier out of the Latin American market. Southern Winds did not want to fly the CRJ, they just wanted the DHC 300, but Bombardier convinced them of getting the regionals and they result was that they hurt very much Aerolineas Argentinas by getting the business traveler. Southern Winds had the advantage of the Aeroparque Jorge New Berry and since they were not a hub and spoke airline, they could fly point to point instead of flying a hub and spoke system from Ezeiza. Aerolineas had to transfer most of their flights to a far away airport (EZE) because they had to feed domestic flights with international flights, and the business traveler did not like that.
IB6400 was talking about people taking the bus instead of an airplane. I once asked a TAESA manager who was the competition of TAESA, and he told me that AeroMexico, Mexicana and AeroCalifornia. And believe me, he was wrong, so wrong that the airline no longer exists. TAESA’s main competition was the bus companies like ETN, Grupo Estrella Blanca, Primera Plus, Estrella de Oro, Omnibus de Mexico, etc. When you study marketing, the first thing you have to do is get to know your target market and your competition, and TAESA never did that, they wanted to get every passenger they could, offering a lousy product with no on time performance. Nobody wanted that. They only got some people trying to fly cheap to Tijuana or people trying to substitute the bus for the airplane.
Another important issue are taxes. As AMX said, taxes for air travel in Mexico are too high. I can see that most of you saw the report in Televisa Channel 2 about the danger on the mexican skies. It was a very good report about how much of each ticket are taxes, about the real situation of most of the airlines and about the expensive services charged by airports in Mexico when they don’t have a good product to offer to passengers. Although they did not comment on the tax structure completely because not all tickets have the same tax structure. Some tickets to mexican destinations have taxes of between 25 – 35% as Ghost said, but it depends where the ticket was issued (SITI or SOTO) and if the destination is international, domestic outside of the border or domestic in the border. Taxes on a MEX-MAM-MEX are only 10% of the ticket while taxes on a MEX-ACA-MEX are between 25 and 35% of the ticket. That is why it is very expensive to fly MEX-ACA-MEX. If the government does not lower taxes for air travel, airlines won’t be able to attract more passengers.
I really try to cover most of the issues discussed in this tread, but believe me, we can discuss this for hours. Some will have one point of view on regional jets, others will say something different, but the real thing is that the history of airlines in Mexico is not good. Lots of them have failed, others are in very bad conditions and we can’t claim we have a company like Southwest, profitable for 30 years, with people that love the company and with a hole success story. I hate that people try to imitate Southwest’s business plan, what people need to see from Southwest is how well the company is managed and the transfer that to another airline with its own business plan and created for the market it will fly. The perfect example of how to tropicalize the Southwest formula to a different situation is Continental. If you can get the book “From Worst to First” you’ll see what I’m talking about.
I will like to see regional jets flying from Mexico City and lower airfares. I could comment on the success of airlines like Southwest, Jetblue, Southern Winds in their markets, but Mexico really needs a good airline with a business plan adapted to the Mexican conditions. Lets face it, if we have very high taxes, why not create an airline capable of offering low fares that could make taxes low. Mexicans always complain about things but they don’t find answers. What makes me mad is the bad managers that Mexican airlines have. They think that the airline industry is so simple and they try to run airlines like normal companies, without knowing the industry. Take for example Mr. Pasquel, he came from Grupo DESC (if I remember correctly) to run an airline without knowing the basics, he could have learned in the process, but most of the times he tried to run the company like a glass company and the airline industry is much more complicated. Take a look at the stupid contract with SAAB for the SF3’s for Aerolitoral. If you make some research, they got those airplanes because SAAB gave the managers of Aerolitoral a bonus for selecting SAAB instead of others. This is well known between the pilots and nobody did anything. They could have sign a better deal for regional jets, but they wouldn’t get them as fast as the SAAB and managers would not have gotten their bonus.
Hope I covered most of the issues discussed in this topic, remember that this is only my point of view and in my opinion there is a market for an airline operating regional jets from Mexico city with a profit. Hope we see them soon…
IB6400 / Ghost77, thanks for your support.
IB6400 (is good to know you are happy with your undergrad, it gives you the whole picture of a company)