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Analysis

New Air Freedoms for Mexico and the US

Thu, 12/01/2016 - 12:01

In a year where Donald Trump’s intentions to build a wall made headlines, the US and Mexican governments have taken steps in the opposite direction. The Ministry of Communications and Transport (SCT) and the US Department of Transportation (DoT) implemented BASA, whose purpose is to increase the number of passengers traveling between the countries.

After two years of negotiations, Mexico and the US signed the Open Skies Agreement in December 2015. By Aug. 21, 2016, the new BASA was in place, allowing commercial and cargo airlines to freely operate across the two borders. The agreement’s main objective is to expand existing air freedoms and hence the number of travelers.

BASA’s goal is to promote and facilitate binational aviation, while encouraging airlines to implement competitive costs and ensure the highest degree of safety and security. For Miguel Peláez, Director General of DGAC, the deal “offers important and attractive growth opportunities for both countries and the flexibility that will come as a result will generate new business.”

Cargo operations and charter flights will benefit by lifting all restrictions regarding the number of airlines allowed to fly any given route between paired cities. The deal also permits transport flights to third countries, making stops in Mexico or US cities first. Commercial operations will also get a boost from the deal as price restrictions are removed and alliances between airlines are permitted.

Both countries are obliged to maintain equal competition opportunities, without limiting traffic volume and regularity of the service offering. This means any airline can offer flights between any paired city in the country.

Flights to Panama, South America, Canada, Europe or other countries can also make stops on established destinations in Mexico or the US.

Gerardo Ruíz, head of the SCT, said at the signing the agreement contributes to Mexico’s consolidation as an added value logistics platform, with the needed mobility and connectivity infrastructure that contributes to the country’s insertion on international markets. For Ruíz, the deal reinforces the existing high-level of cooperation between Mexico and the US. Anthony Fox, his US counterpart, added it benefits both countries, airlines and passengers, while strengthening the economic and commercial relationship through touristic and business exchange.

For José Garza, CEO of Interjet, BASA allows Mexican airlines to make their way into new markets. “The Mexican aviation market is perceived to be at a disadvantage as it is smaller than that in the US. However, foreign airlines have operated in Mexico for decades and they have yet to be overtaken. BASA will be a great opportunity for Mexican airlines to reaffirm their market penetration.”

Users will experience direct benefits such as an increase in the flight offering and a decrease in ticket prices. According to DGAC, in 2015 a total of 25.2 million people traveled between Mexico and the US by air. By 2020, this number is expected to reach 37 million passengers, up 57 percent. Without BASA, the number of travelers was only expected to increase 33 percent.

Travelers are not the only ones to benefit. Industries such as tourism and manufacturing also will be enhanced. The cargo deregulations are expected to boost the manufacturing industry, allowing regional growth as the existing clusters become better connected with all aerospace hubs in Mexico. Once the construction of Mexico City’s new airport is complete, the area destined for cargo operations will increase to five times its current size.

Commercial airlines were among the most enthusiastic supporters of the agreement and Southwest Airlines was the first to take advantage. The low-cost service expects to operate flights between Los Angeles (LA)-Cancun, LA-Los Cabos and LA-Puerto Vallarta by December 2016. Delta Airlines said in a company statement the agreement “lays the foundations for the growth of the cross-border market” between the two countries.

So far, Aeroméxico and Delta Airlines seem to be ready to take the most advantage of the deal. In May 2016, the Mexican Federal Antitrust Commission (COFECE) approved Aeromexico’s and Delta’s joint venture (JV). The JV would allow both airlines to compete more effectively with other carriers in both countries, generating US$1.5 billion in earnings. Should the JV be approved by the US government at the end of 2016, the airlines would invest jointly in airport facilities, VIP lounges and waiting rooms in the US and Mexico.

Even though the private sector was among the first to applaud the agreement, unions received the news with a more cautious approach. Mario González, General Secretary for the Pilots Union (ASPA), rejected the deal during a protest in front of the media in September 2015, arguing that the survival of the Mexican aviation industry was at stake. “We barely have 350 aircraft, we cannot compete against the 7,000 units the US has. If we allow an open skies policy, the Mexican aviation industry could suffer catastrophic consequences” said González at the demonstration.

Still, at the end of 2015 ASPA endorsed the agreement. Among the reasons for a change of heart, they argued that the text was not as damaging as they had previously thought. They also asked the federal government to protect the domestic industry and conduct annual revisions on the results of the deal.

Joint ventures between Mexican airlines and their US counterparts, such as that between Aeromexico and Delta, will become part of the scenario. “The agreement creates an opportunity for the materialization of alliances between Mexican and US airlines, which will generate more benefits for final-end users,” said Peláez. Interjet already has an agreement on shared codes with American Airlines, which could be used as the foundation for a future alliance.

According to Sergio Allard, President and Director General of CANAERO, BASA will increase flight supply and competition, which will force Mexican airlines to improve practices and customer services. DGAC data states that almost 75 percent of passengers that travel by air to the US do so using US airlines.

For Garza, being able to compete in the US market will be a long-term process. “At this point, both Mexicans and US citizens prefer US airlines, as they believe them to be safer. However, US airlines suffer from disadvantages including older fleets. We believe that once passengers try our airlines they will prefer the younger fleet and overall improved service."