Flight Forecast: Turbulence Ahead

With a NAFTA renegotiation discouraging investment and competitive fuel costs stinting purchases of new, efficient aircraft, Mexico remains a cost-effective and attractive place for foreign companies, says Francisco Bautista, Leading Partner of Aerospace Industry at EY, although 2017 is proving interesting for Mexico’s aerospace market.

“Mexico is a good partner for aerospace companies. I would recommend, however, that foreign investors do their due diligence before doing business here. There are opportunities, you just have to find them,” says Bautista.

EY, one of the largest auditing, tax, finance and accounting service providers in the world, has a diverse range of services for almost any economic sector. In the Mexican aerospace industry, the firm works mostly with multinational companies providing tax and fiscal services followed by auditing services. Bautista says Mexico remains attractive and EY is optimistic about aerospace despite the swirling uncertainty. “We are developing several new projects for the sector, trying to work more closely with governments to develop programs that generate higher added value for Mexico.” The feeling of uncertainty is temporary and should not be a deterrant for companies wanting to invest in Mexico, Bautista says.

He points out, however, that several global economic factors have brought about a slowdown in the entire sector that might impact local manufacturing practices. Hits to the global oil and gas sector have also hurt the aerospace industry. “Low fuel prices make even older aircraft more cost-efficient so airlines are less likely to renew their fleets. This will last as long as fuel prices remain low,” says Bautista. The slowdown might be related to an overall climate of uncertainty, partly as a result of Brexit, explains Bautista. The UK is the fourth-largest aerospace manufacturer in the world with an industry valued by International Trade Centre data at US$19 billion in 2015. Any economic slowdown might expand through the world’s supply chain.

Mexico’s aerospace sector has been threatened by factors closer to home but so far, their impact has been minimal. “Our relationship with the US is not having a drastic impact on the sector as many foreign entities are continuing their investments, they are just keeping quiet about it. Some plans have been delayed but none have been canceled,” says Bautista. Instead, fresh concerns are arising from the renegotiation of NAFTA. “I do not fear an increase in tariffs but rather, the loss of a legal framework that has protected companies doing business in the region,” says Bautista. “Tax reductions and changes suggested by US President Trump could be problematic for Mexican manufacturers. A significant reduction of taxes on products manufactured in the US could counteract any benefit that Mexican companies can offer foreign investors. We still do not know what impact this will have on the Mexican aerospace sector but it is not possible to ignore that the largest company in the sector, Boeing, is based in the US.”

While the picture might seem less than perfect, Bautista does not seem concerned with the short-term future of the sector. “The effects of these reforms will only begin to be felt by late 2018 or early 2019. I do not believe that any company currently operating in Mexico will decide to leave the country but new companies might think twice about investing here, the consequences of which will be lower FDI.”

Despite slowing orders, there is no cause for concern from manufacturers yet as the sector has a production backlog for the next nine to 10 years and orders are expected to recover. Moreover, an increasing desire to travel, especially from emerging economies, will continue to push aircraft acquisitions. “Civil aviation will continue to rise gradually, driven by developing markets including Asia, which is growing at an incredible rate, and South America, which has much unexplored potential.”

In the short term, Bautista expects the Mexican market to continue expanding. “The introduction of low-cost airlines has been beneficial to the Mexican market as competition has lowered prices, leading an increasing number of people to travel and to overall sector growth,” he says. For the past 15 years the aerospace industry has expanded in doubledigits and Bautista estimates 10 percent growth for 2017.