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Aeromexico: Major expansion to fill gaps left by Mexicana April 2011 Download PDF

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Grupo Aeromexico, the fifth largest Latin American airline group in terms of revenues, raised 3.89bn pesos ($333m) in its IPO on the Mexican stock exchange. The company sold 125.5m shares to 3,000 institutional and individual investors (including an over–allotment option of 16.4m). Although the shares were priced towards the lower end of the guidance range, the offering was two times oversubscribed. Both local and foreign investors participated (the latter’s stake is restricted to 25% of voting shares).

In a sense, Aeromexico returned to the public domain as its previous owner Cintra (the former 60% government–owned holding company that was renamed Consorcio Aeromexico after Mexicana’s privatisation in late 2005) traded on the Mexican stock exchange until its breakup in November 2007, when Aeromexico was fully privatised. In this month’s IPO, Aeromexico floated nearly 18% of its total capital, meaning that its current investors have retained control. The company debuted on the stock exchange on April 14.

The IPO proceeds will help fund Aeromexico’s plans to invest 16bn pesos ($1.37bn) in the next two years in aircraft acquisitions, new technology and airport facilities. The fleet investments will include 20 new aircraft: ten 737–700/800s and ten E190s. The airport investments will include a new cargo terminal and new hangar facilities at Aeromexico’s main hub at Mexico City International Airport.

In conjunction with the IPO, Aeromexico expected to obtain new loans or credit facilities with international institutions in favourable terms (similar to a recent $300m line of credit provided by Brazil’s foreign trade bank). There are also likely to be further share offerings (public or private), since Aeromexico’s stockholders have approved the issuance of 260.1m new shares.

Of course, the local IPO will pave the way for the company’s future listing in the US. Being able to tap the much larger US capital markets for funds (debt or equity) will be helpful in Aeromexico’s future expansion endeavours.

The key selling point in the IPO was that Aeromexico became the country’s only large airline after Mexicana filed for bankruptcy protection and ceased operations in August 2010. The two had competed fiercely since Mexicana left the Cintra fold and particularly since 2008. The most obvious opportunities now for Aeromexico are international, since Mexicana was the prominent carrier on routes to and from Mexico. But Grupo Aeromexico has also seen its domestic market share surge by about 10 points year–on–year, to 45% in the fourth quarter. Even if Mexicana succeeds in re–launching operations, the revamped airline would be a fraction of its former size.

It should be noted that Aeromexico was not able to fill any of the numerous Mexico–US gaps left by Mexicana until the year–end, because in July the FAA downgraded Mexico to category 2 under the IASA safety assessment programme, and category 1 status was not restored until December.

It was an opportune time for Aeromexico to launch an IPO also because competition from LCCs and other upstarts in the domestic market has become less intense in the past two years as a result of many airline failures or groundings. According to the IPO documents, 10 carriers of varying sizes have ceased operations in Mexico since 2007 (Azteca, Aladia, Aerocalifornia, Avolar, Alma, Aviacsa, Nova Air, Mexicana, Click and Link).

Yet, the market obviously has much further growth potential. Mexico is Latin America’s second largest domestic aviation market (after Brazil). Like Brazil, it has extensive geographic distances and large under–served cities. Resumption of strong economic growth (5.5% in 2010 and currently forecast to be 4–5% in 2011), favourable demographics and low penetration of air travel all point to continued rapid growth of air travel in Mexico. In terms of the total market (domestic and international), scheduled passengers are projected to grow from 48.7m in 2010 to 94m in 2020.

Financial turnaround

If 2010 had not happened, Aeromexico would probably not have been able to go public because of its rather poor financial record.

Originally founded in 1934, in 1988 a strike forced it to file for bankruptcy. The following year it was sold to a group of investors, but the country’s 1995 peso devaluation and economic crisis forced the government to rescue both Aeromexico and Mexicana, creating Cintra as part of a $100bn bank bailout. Both airlines improved initially but went on to incur heavy losses in 2001–2003.

Profits in 2004 prompted the government to try to revive long–delayed plans to sell both carriers in 2005. The sales had to be separate because antitrust regulators had rejected the initial idea of selling the airlines as a single entity in 2000. In late 2005 Mexicana was sold to hotel operator Grupo Posadas, but Aeromexico failed to attract sufficiently high bids.

Aeromexico’s sale failed probably largely because of the sudden flood of new LCC entrants in Mexico after mid–2005. Up to that point Aeromexico and Mexicana had had about 80% of the domestic market, but they began to lose market share and see their yields plummet. Aeromexico posted an operating loss of 698m pesos on revenues of 21.1bn pesos for 2006.

Labour costs have traditionally been a problem for Aeromexico. But a May 2007 agreement with pilots and flight attendants to keep costs in check helped restart the privatisation process, even though by then the airline was battling high fuel prices and tougher competition in the Mexico–US market.

In October 2007 a group of investors led by Citigroup and its local unit Banamex acquired the Mexican government’s majority stake in Aeromexico for about $250m and have since then injected another $250m of capital into the company. Employees were granted a small stake. The new owners pledged to continue key existing strategies, including fleet modernisation and simplification and international expansion, and set the aim of making Aeromexico profitable within 12–18 months.

But the surge in fuel prices in 2008, the local H1N1 influenza outbreak in 2009 and Mexico’s deep economic recession in 2009 (when its GDP contracted by 6.5%) meant two years of losses for the airline. In 2008–2009 Aeromexico lost 2.6bn pesos ($224m) on an operating basis and 4.1bn pesos ($351m) on a net basis.

But Aeromexico staged an impressive turnaround in 2010, earning an operating profit of 2.7bn pesos ($232m) and a net profit of 2.4bn pesos ($204m) on revenues of 28.1bn pesos ($2.4bn). Operating and net margins were highly respectable 9.6% and 8.5%. The airline managed to reduced its ex–fuel unit costs by 2.7% and improve its load factor by 6.3 points to 77.4%. Capacity rose by 4.7%.

Less competition (and the resulting tighter capacity and improved revenue environment), a better non–fuel cost structure and continued strong GDP growth all bode well for Aeromexico in 2011.

Fleet and network plans

Aeromexico has been modernising and simplifying its fleet since 2003. Since then it has retired its 757–200s, DC–10s, DC–9s and most MD–80s, acquired four 777s (which have replaced 767s coming off leases), built a 40- strong 737–700/800 fleet, introduced the E190 in medium–density markets and ordered five 787s for future long–haul expansion.

In recent years Aeromexico’s strategy has been to focus on international expansion while covering the domestic market with its lower–cost regional unit Aeromexico Connect, which operates E145s and a growing fleet of E190s. The group also has a charter unit called AM Travel, which operates three MD83/87s.

Nevertheless, in 2010 domestic operations in Mexico (40 destinations) still accounted for 56% of Grupo Aeromexico’s total revenues.

North America accounted for 18%, Central/South America 13%, Europe 10% and Asia 3% of the revenues.

While Aeromexico continues to operate domestic trunk routes, using Connect elsewhere domestically, as well as on thinner Mexico–US sectors, is more profitable and has helped retain market share, particularly given the E190s. Even though many competitors have disappeared, three strong LCCs — Interjet, Volaris and VivaAerobus, which had a combined 49.5% domestic market share in 2010 – continue to provide tough competition domestically.

Internationally, Grupo Aeromexico had a pitiful 10.2% share of the total traffic to/from Mexico in 2010 (and Mexicana’s was only marginally better at 12%; Volaris had 5.5%), because the markets are totally dominated by foreign airlines. Capturing much of Mexicana’s share will be one of Aeromexico’s key aims. However, SkyTeam had 21% of Mexico’s international traffic; Aeromexico is currently the alliance’s only Latin American member, though Aerolineas Argentinas will be joining in 2012.

In the next few years, Aeromexico’s international expansion will focus on the Americas as more 737–700/800s are delivered. At year–end the carrier served 13 destinations in the US and Canada, but only five points in South America and three in Central America/Caribbean – markets that were Mexicana’s stronghold. This year Aeromexico will be opening three new domestic routes and three new cities in Latin America/Caribbean (Caracas, Guatemala City and Panama City), as well as boosting frequencies on many US routes.

New expansion further afield will begin in earnest when the 787s start arriving. Aeromexico currently serves only three destinations in Europe (Madrid, Barcelona and Paris) and two in Asia (Tokyo and Shanghai).

The most obvious potential new long–haul destination is London, which Mexicana served, though the market is now an IAG/oneworld stronghold.

  2008 2009 2010
Op. revenues (pesos - m) 24,282 22,348 28,080
EBITDAR (pesos - m) 1,841 2,718 6,198
EBITDAR margin 7.6% 12.2% 22.1%
Op. result (pesos -m) (1523) (1093) 2,704
Net result (pesos -m) (1779) (2320) 2,382
Net margin (7.3%) (10.4%) 8.5%
Cash reserves (pesos -m) 491 231 1,325
Passengers (m) 10.6 10.3 11.6
RPKs (m) 17,911 16,342 18,632
ASKs (m) 25,089 22,994 24,068
Load Factor 71.4% 71.1% 77.4%
Cost per ASK (pesos) 1.029 1.019 1.054
Ex-fuel CASK (pesos) 0.668 0.771 0.75
  In fleet On order Delivery schedule
777 4    
767-200 2    
767-200 4   737-700/800s: 3 each in
2012 and 2013; 2 each
in 2014 and 2015
737-800 10 10 (700/800)
737-700 28
787 0 5 787s: From 2014 (2 to
be purchased, 3 leased)
Total Aeromexico 48 15
E190 7 10 E190s: 3 each in 2011,
2012 & 2013; 1 in 2014
E145 39  
Total Aeromexico 46 10
MD83/87 3    
Total AM Travel 3
Total Grupo Aeromexico 97 22
Note: Fleet at year-end 2010
Source: Aeromexico IPO prospectus

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