Mexican Cap Dance: As Mexican carriers grapple with overcapacity, a sweeping U.S. liberalization treaty beckons

Mexican Cap Dance: As Mexican carriers grapple with overcapacity, a sweeping U.S. liberalization treaty beckonsIt’s now taken for granted. But the most important open skies agreement—the one between the European Union and the United States—was for many years a far-off fantasy. Then one morning in March 2007, the airline world awoke to learn it would soon become reality.

Today, the world’s most glaring white spot for liberalized air treaties is the absence of one between the U.S. and its southern neighbor Mexico. But wait. The world could be less than two weeks away from another awakening, this time to a U.S.-Mexico pact that would tear down most cross-border flying restrictions, even if it might stop just short of being called “open skies.”

More on that in a moment. But first, Mexico as it exists today is a perplexing airline market. It went through exactly the kind of painful creative destruction that seemed necessary for the survivors to prosper: giant Mexicana disappeared, as did smaller but sizeable airlines like Aviacsa, Azteca, Aerocalifornia, Alma, A Volar… those were just the ones that began with the letter “A.” Remaining are one intercontinental giant—SkyTeam member and Delta equity partner Aeromexico—plus three modern LCCs, of which two—Volaris and VivaAerobus—are backed partly by the world’s two big ultra-LCC financiers, Indigo Partners and Irelandia Aviation, respectively. Interjet, a more upmarket LCC, is the other.

One legacy airline and three large LCCs, all of which meet global standards, in an upwardly mobile country of 120m people, on the doorstep of the U.S., would seem like the kind of recipe for success that—sure enough—generated Airline Weekly headlines like (in 2010) “Mexual Healing” and (in 2011) “Out of the Dark.” But something happened on the way to airline heaven. Volaris, having transformed into an ultra-LCC, hasn’t yet mimicked the success of other Indigo-backed transformations north of the border, at Spirit last decade and (so far) at Frontier now. Indeed Volaris, despite reporting a peak-season profit (see page four), actually lost a bit of ground compared to the same period a year earlier and rang up a negative 3% margin for the 12 months through September. Aeromexico is in the black with a 4% operating margin for its most recent 12 months (in its case through June; it will report its Q3 results this week). But that too is hardly a figure to celebrate during what should be benign times.

Why the lackluster financial results? In a word: capacity.

True enough, U.S. airlines, as they complete a giant wave of consolidation, have experienced perhaps the greatest profitability renaissance the world has ever…

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