Mexican Panel Urges Privatization of 2 Major Airlines

A federal panel told the government Wednesday to sell off Mexico’s two largest airlines as separate businesses, a step that could lead to lower fares and attract direct investment by U.S. airlines.

The Federal Competition Commission held that the government-controlled holding company that owns both Aeromexico and Mexicana is a monopoly and that the two airlines should be privatized separately.

The holding company, Cintra, and labor unions wanted Cintra to be sold as a single company. However, the commission said that would perpetuate the entity’s control of 80% of domestic passenger service, which would violate the Mexican constitution and the competition laws unless impossibly strict regulations were imposed on the firm.

The labor unions, fearing the loss of jobs, vowed to take over airport runways and stage other protests to block the breakup. But travel industry officials welcomed the commission’s ruling as a step toward greater competition that would cut the often-expensive fares on domestic routes.

The government found itself owning the two airlines as a result of the 1994-95 peso crisis. After banks took over the struggling airlines, the government stepped in and took over the failing banks. The government formed the joint airline holding company in 1995 to let the airlines recover.

Today, Mexico’s economy is growing robustly, and Cintra’s passenger volume on trunk routes rose 17% in the second quarter of this year while gross revenues climbed 15%.

Fernando Sanchez Ugarte, chairman of the competition commission, told reporters that each airline could fetch $500 million to $700 million in open bidding. Several corporate investors and wealthy Mexican individuals have been rumored as prospective buyers, but no front-runners have emerged.

The government now owns 66% of Cintra, while banks and private shareholders control the balance. Cintra’s stock market value is only about $570 million, less than half its value when it was listed on the Mexican stock exchange in 1997 and far below the expected sale revenues.

Major U.S. airlines would be likely bidders for the maximum 25% share that Mexico allows foreign airlines to control. Delta Air Lines, which has a successful route-sharing alliance with Aeromexico, and United Airlines, which partners with Mexicana, would be logical investors. American and Continental, which have built up large independent cross-border route networks, might also be interested.

None of those U.S. airlines was willing to comment Wednesday on potential investment plans in privatized Mexican airlines.

Sanchez Ugarte said separating Aeromexico and Mexicana would benefit Mexican passengers, who he said pay premiums of 20% to 30% on some domestic routes.

Cintra said in a statement it was studying the decision and would comment only after completing its evaluation. But Sanchez Ugarte said the decision is, in effect, binding.

A Mexican airline executive, speaking on condition of anonymity, said the two airlines have very different aircraft fleets and that in the five years since Cintra was formed, very few synergies have emerged.

“The important point is that just having a decision will enable the two airlines to get on with long-term planning, make fleet orders and plan route structures,” he said.

“The potential downside is there’s a long-standing rivalry between these two companies, and unless the owners are strict and prevent bloodletting there’s some risk of a price war,” he added. “But given that we have great market growth, there should be plenty for everybody.”