Aeromexico Gains Overseas as Local Sales Slip: Corporate Mexico

Dec 19, 2013 4:47 pm ET

Dec. 19 (Bloomberg) -- Grupo Aeromexico SAB is expanding international service and using more fuel-efficient planes to boost profit as competition from low-cost carriers spurred the fastest domestic sales decline since it went public in 2011.

Mexico’s largest airline may add a fourth weekly flight to Tokyo next year, using Boeing Co. 787 Dreamliners that also service New York and Paris, Chairman Eduardo Tricio said. It may use additional 787s on routes to London as it receives as many as three more of the wide-body planes in 2014 to double its existing fleet.

“We think there’s more opportunity to grow in the international market,” Tricio said in an interview Dec. 4 in Mexico City. “Customers appreciate it when you have the right equipment, and Aeromexico is bringing in the most modern planes in the world.”

Flying overseas helps Mexico City-based Aeromexico offset price pressure from discounters, and international passenger revenue surpassed domestic for the first time in the third quarter. Using the Dreamliner will allow Aeromexico to reap fuel savings of 20 percent over comparable Boeing planes it now uses on long-haul routes.

Aeromexico shares rose 3.5 percent to 18.15 pesos at the close in Mexico City, their biggest gain in a month. It’s low- cost rival Volaris, the brand of Controladora Vuela Cia. de Aviacion SAB, fell 2.5 percent to 18.44 pesos.

Before today, Aeromexico shares fell 9.2 percent this year. While that beat Latin American rivals such as Gol Linhas Aereas Inteligentes SA, Latam Airlines Group SA and Avianca Holdings SA, it was the lowest among North American peers, according to data compiled by Bloomberg. The shares have tumbled 43 percent since Aeromexico held an initial public offering in 2011.

Competition Barrier

The airline has four buy recommendations, three holds and one sell, and the average 12-month price target of 21.92 pesos implies a 25 percent gain over the next year, according to data compiled by Bloomberg. Aeromexico’s share price currently trades at 9.7 times earnings, the second-lowest among 11 global peers, according to data compiled by Bloomberg. The multiple may rise to 11.4 times in a year, the third-highest in the group, estimates compiled by Bloomberg show.

International passenger revenue advanced 8.2 percent in the third quarter to 4.67 billion pesos ($362 million), while domestic passenger sales tumbled 8.1 percent to 4.65 billion pesos, the airline said Oct. 22. That marked the first time international sales represented more than half of passenger revenue, Chief Executive Officer Andres Conesa said on an Oct. 23 conference call with analysts and investors.

Aeromexico has cut domestic fares to compete with Volaris, Interjet and VivaAerobus.

“From a strategic point of view, international revenue is a barrier to entry for competitors due to the company’s good position in destinations and frequencies, as well as its fleet investments,” Marco Montanez, an analyst at Vector Casa de Bolsa who has a hold recommendation on the shares, said in an interview in Mexico City.

Dreamliner Echo

The Mexican airline’s effort to put Dreamliners on long- haul routes echoes strategies of carriers such as United Continental Holdings Inc., British Airways and LOT Polish Airlines SA in using the plane’s range and fuel economy to bolster nonstop service to international destinations.

The 787, the first jetliner built chiefly of composite materials instead of the traditional aluminum, entered commercial service in late 2011. The plane makes possible less- traveled routes, such as Denver to Tokyo, that are too small for bigger jets to operate profitably.

Aeromexico is also strengthening U.S. service with smaller planes through its Aeromexico Contigo program, which began in October and caters to people flying between western Mexico and California or Chicago. That helped boost international market share to 18 percent in October compared with a 14 percent average in the first nine months of the year, according to data compiled by the Communications and Transportation Ministry.

U.S. carriers handle about half of Mexico’s international airline passengers, government data show.

Domestic Discounts

Aeromexico used discounting to push its domestic market share to 39 percent in October compared with an average of 35 percent during the first nine months of the year, according to government data.

Domestic price cuts helped cause a 3.2 percent decline in total sales per available seat kilometer in the third quarter, the company reported in October. Costs per available seat kilometer slid 2.3 percent.

“It mirrors a lot of what went on with the U.S. airlines,” George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia. “Airlines in the U.S. until fairly recently had still been chasing market share instead of profits.”

Cost Cuts

Aeromexico is determined to add passengers and win back domestic market share while cutting costs, Tricio said. Net income advanced 17 percent in the third quarter to 495 million pesos after a 31 percent drop in the first half of the year.

The company, which began flying between Mexico City and Acapulco in 1934, is facing newer competitors that are raising money and buying planes of their own. Airlines in Mexico have expanded into a void left when Cia. Mexicana de Aviacion, then the largest based on passenger traffic, sought protection from creditors and ceased operations in 2010.

Interjet, operated by ABC Aerolineas SA, is studying an initial public offering for as early as next year as it adds Airbus SAS A320 planes and Superjet 100 regional jets.

Volaris, the brand of Controladora Vuela Cia. de Aviacion SAB, raised about $400 million in September in an initial public offering in the U.S. and Mexico. Its market value of 19.1 billion pesos is already 53 percent higher than Aeromexico’s.

“We’re growing in passengers, we’re growing in load factor and at the same time we’re balancing that with profitability,” Tricio said. “Our profitability is similar to what we had last year.”

--Editors: Molly Schuetz, John Lear