Would Air Cabotage Benefit Mexico?
In December 2022, President López Obrador formally proposed to allow air cabotage in Mexico, receiving a negative response from the aviation industry, from workers to associations and companies. While several players claim that cabotage could be very damaging for the sector, removing barriers to entry would be positive, increasing the number of competitors on domestic air routes and benefiting the entire market, as long as there is reciprocity, according to BBVA Research.
The supply and demand theory works the same in aviation as in any other industry. As the offer of domestic flights grows, pressure on the market increases, providing users with more options to fly while companies are forced to improve their prices and quality of service to maintain user loyalty. According to the research by Kwoka and Shumilkina (2010), who analyzed the merger between USAir and Piedmont Airlines, the elimination of a potential competitor allows the other company to raise prices by 5%-6%. In addition, Goolsbee and Syverson (2008) show that airlines present in US domestic routes significantly lowered their rates due to the threat of entry of a potential competitor and saw an increase in demand for their services. According to COFECE, more competition translates into lower rates.
Cabotage rights allow companies from a certain country to trade in a different one. In aviation, it is the right to operate within the domestic borders of other countries. Cabotage is prohibited in most countries due to public safety, protectionism and national security matters. The main exception is the EU, where all member states grant cabotage rights to each other.
López Obrador’s reasoning behind his proposal is that, through the authorization of foreign airlines, regional routes will expand, benefiting users with a greater diversity of options at lower costs, which will also help to boost tourism.
“Foreign airlines arriving from the EU and the US could grow the number of flights in the country. This would mean more competition. Recently, we went to Victoria (Tamaulipas) and there were no flights other than one at 6:00 a.m., which was very expensive. We are working on this (aviation prices) and we are going to solve it,” said López Obrador.
Although the cabotage initiative could work positively for Mexico, there is plenty of regulation work to do, according to BBVA Research. López Obrador’s initiative does not mention anything about the method to assign slots for new routes, nor about the evaluation of the economic and labor impact that the reform would have.
The initiative must be reviewed under a broader framework, “particularly from the perspective of international services and investment markets,” reads BBVA’s analysis: “The opening of domestic routes to foreign companies should only be carried out in a context of reciprocity where [Mexico’s] business partners, who obtain the benefit of operating in the Mexican market, also open their respective markets to Mexican airlines.”
USMCA and other trade agreements in which Mexico participates do not include air transportation of passengers or cargo in their cross-border service trade chapters. In this sense, countries can allow more or less participation of foreign airlines in domestic flights. In addition, countries can negotiate air transport agreements with each other without extending them to other countries participating in the treaty.
In January 2012, Canada and the US signed an Open Skies agreement, which eases restrictions on US and non-US carriers to operate charters within each other’s territories. In most cases, it allows operators to move international passengers between any point, or points, in the foreign country with unlimited stopovers, as long as those movements are part of an original charter contract.
The reciprocity in the Canada-US agreement makes cabotage positive for carriers from both countries. López Obrador’s initiative lacks several details, including slot assignation and further specifications around how cabotage would actually work, including the opportunity for Mexican airlines to offer domestic flights in other countries. Canadian cabotage, for instance, has several restrictions. It is permitted to move passengers, including Canadian nationals, within Canada, as long as the non-Canadian registered aircraft flight originates from outside Canada and all legs/passengers are part of a contract. Also, all arrangements for domestic charter movements by non-Canadian carriers within Canada must be made in advance and foreign carriers cannot offer charter services while in Canada.
Local Industry Rejects Cabotage
Multiple actors within the Mexican aviation industry, including the Air Pilots Labor Union (ASPA), have expressed their concerns surrounding López Obrador’s cabotage initiative. “The premise that cabotage would foster competition within the Mexican aviation sector is false and it would only bring a massive impact on the industry, including job loss,” said ASPA’s spokesman José Gerardo Alonso Torres. “What the president is proposing is to carry out an open cabotage, which means that they [international carriers] would no longer even have to return to their country. This means they would be based in Mexico and that would be extremely dangerous.”
The Canadian Air Line Pilots Association (ALPA) expressed its support to ASPA through a letter sent to the Mexican Union’s General Secretary, Humberto Gual Ángeles, pointing out that allowing foreign airlines to carry out cabotage operations in Mexico would be “impractical and imprudent.”
The Mexican Front for Defense of National Aviation (FDAN), conformed by 11 organizations within the sector, joined the other actors and called cabotage a “false door” to solve the aviation issues in Mexico. “The Mexican air space will be sold to foreigners,” FDAN claimed, adding that a more robust aeronautical policy is needed in the country.
While eliminating entry barriers would increase competition, lower prices and improve quality of service, a public policy such as López Obrador’s initiative must take into account several factors, from international negotiation to gain reciprocity to more clarity around slot assignation, states BBVA Research. The analysis also highlights the importance of recovering Mexico’s air space Category 1 reclassification, which should be the first step before discussing the possibility of implementing air cabotage in the country.