Mexican Airlines at the Mercy of COVID-19

COVID-19’s effect on the Mexican economy has been negative. While some sectors experience more subtle effects, the travel industry is taking a direct hit. Mexico’s airlines are at the forefront of the shockwave, directly impacted by experts discouraging international flights while some countries outright ban them.

The medical community has reached a clear consensus: "To 'flatten the curve,' people should be staying at home, practicing social-distancing and avoiding all nonessential travel," said Dr. Geoffrey Gottlieb, a specialist on viruses at the University of Washington School of Medicine. Some countries like the US have taken these precautions and formed a policy around them. This means flying to the US should only occur if it is strictly necessary. Last week, the US warned its nationals in Mexico to return home as soon as possible as the border would be closed for 30 days starting on March 21.

Airlines see a grim future ahead for their operations. Measures such as cheaper flights, exemplified by     Mexico’s Volaris slashing its prices by up to 80 percent, meant little in the face of actual travel restrictions and closed borders. Even if restrictions were not formalized, either widespread awareness of medical advice or fear of restrictions going into effect while travelling have discouraged people from booking flights. In the UK, the Guardian reported that less than 5 percent of regular travelers were expected to use the country’s airports. While the situation is not as severe in Mexico yet, numbers are expected to drop soon.

So, what does this mean for Mexico’s airlines? COVID-19 will have a negative effect on them, undoubtedly. Yet, the context differs. Viva Aerobus, leader in the low-cost category, reported earnings before (EBITDAR) of US$203 million in FY19. Volaris showed record profits as well in that same year. Mexico’s oldest airline, Aeroméxico, reported a decrease in earnings in 4Q19 compared to 4Q18, however, mainly because of issues with its purchase of now-grounded Boeing 737 MAXs. Interjet faced massive debt in that same year of around US$150 million, with leads insiders to think the government will have to bail out the airline. The latter two airlines are unlikely to improve their outlooks: Reuters reports Aeroméxico will reduce domestic flight capacity by 35 percent and international capacity by 50 percent. Forty airplanes will be grounded immediately.

Employees of worldwide airlines are forced to deal with anxiety regarding their jobs as well. Those who still work are highly exposed to contact with the virus, while fewer flights mean it is exceptionally difficult to retain personnel, which will be difficult to replace if the crisis passes and they are forced to lay them off for the moment. US airlines have already signaled they will be in need of a government bailout if they are to retain their staff.

Standard & Poor’s has already downgraded Aeroméxico’s rating to B-, stating that no matter the precautions, the airline will be unlikely to mitigate the effects of low travel numbers caused by the virus. Investors responded with panic to the current situation, leading Volaris to lose MX$3.67 billion (US$144.4 million) in one day on the BMW on March 16. While debt is generally not considered a crippling issue for Mexican airlines, time might soon run out for them. Nonetheless, if national flights continue to be unrestricted, it will provide a solid basis for airlines to continue their operations. Rating agency Verum considers this to be better news for the likes of Viva Aerobus, with a majority of national flights, than for Aeroméxico that has a portfolio with 60 percent international flights.