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CEO Interview - Stronger, Faster, Better

AeroMexico CEO Andres Conesa

Aeroméxico CEO Andrés Conesa explains how the economic crisis, influenza A (H1N1), and strong competition have improved his airline

Latin American airlines made a profit in 2009 and is one of the bright spots in the aviation industry. Can the region, and Mexico in particular, continue this performance?

Although the global recession was exactly that, it was less dramatic in the Latin American region than in the more established markets of Europe and North America.

Mexico was hit badly by the crisis though, because of our strong ties to the US market and transborder flights. We were also hit by the Influenza A (H1N1) outbreak far harder than any other country. So it will take us a little longer to recover.

The Latin region has done well because in many of the countries there are at most a handful of airlines. Mexico, however, has struggled because its aviation industry is organized a little differently. In Mexico, there are seven airlines now, but only three years ago we had as many as 13. The domestic market opened up and it got a bit chaotic. We had the classic problem of having no barriers to entry but plenty of barriers to exit. We need it to be the other way around.

This is a complicated industry and we should be very careful about new entrants—about safety. It took time for Mexico to figure this out but we have finally allowed airlines to disappear through bankruptcy and liquidation. We now have fewer, but stronger, players. As a result, traffic is recovering and the situation looks better for 2010. Our yields and load factors are improving. But yields haven’t grown as fast on the US routes as in other areas. Asia and South American routes are doing very well, comparatively.

How did the influenza A (H1N1) pandemic affect traffic and operations, and what have you learned from that?

A (H1N1) hit in May 2009 and traffic immediately dropped by 50%. From June 2009, we started a slow recovery from this particular problem. But we still had the economic crisis to deal with last year. Overall for the year, traffic fell about 10%. So even with growth in Mexico of 4-5% in 2010, we will only recover half of what we lost in 2009. We won’t get back to 2008 levels until 2011.

We were relatively well prepared for the Influemza A (H1N1) problem, and had the flexibility to make the necessary changes. But I think the most important lesson learned is the need to be proactive.
We didn’t know how long the problem would last, so we had to make the decision to move forward aggressively with our plans. We quickly restructured our fleet and renegotiated contracts. Traffic fell dramatically so we had to move fast.

The strategy really paid off. We saw the benefits last year and we’ll see more progress in 2010. We’ve had the best first quarter in seven or eight years. Without the crisis, we wouldn’t have made all those changes – or they would have taken longer. What was thought to be a problem was actually an opportunity.

Mexico is a competitive market. How has this affected Aeroméxico’s strategy?

The positive side of other players entering the market is that it forces you to be more efficient, more productive and faster. Five years ago nobody thought that Aeroméxico would be the leader in the domestic market, but here we are.

In the beginning, when you have new market entrants, there is a bit of a frenzy and passengers naturally want to try the carriers. And of course, they offer very competitive prices to consumers. But getting people to stick with you once the prices go up to normal levels is a separate challenge.

We focused on the corporate segment and, with this group, price is not the only reason to fly. There are other factors involved, from frequencies to frequent flyer miles to food. We are the best in class in this segment. We’ve learned that you need to have a clear strategy—you can’t be all things to all people.
We all have our own market, and there is certainly space for low-cost carriers. But just one or two is enough for Mexico, not six or seven. That was absurd. I suspect there will be further consolidation in the future.

What benefits is the Skyteam alliance bringing you?

Continental left last year but we are very positive about the alliance looking ahead. We have good relationships with all the airlines, especially Delta and Air France-KLM. We are always looking to do more, but we are happy with the progress being made. Going forward, we plan to have a stronger presence in the alliance.

How will you grow your network?

We have two airlines—Aeroméxico and Aeroméxico Connect. Aeroméxico has an all-Boeing fleet, 737 next generation, as well as 767s and 777s. Aeroméxico Connect is all-Embraer, from 50-100 seats.
Basically, Aeroméxico does international services, although there are also some high-density domestic flights. Aeroméxico Connect does the remainder of the domestic services.

There are a number of new destinations internationally—in the US, Colombia, Honduras and Costa Rica, for example. These services will complement our existing network. We fly to Europe and Asia as well. We used to fly to China, but the Chinese government stopped it because of A (H1N1). Nevertheless, we still see Asia as being particularly important in the future. We used to have only a twice-weekly flight to Tokyo. Now we are going to four flights a week and resuming our Shanghai service twice a week. We will look at the possibility of daily flights for both destinations in the near future and we will assess other Asian routes, but we need a stronger product first.

If we can build Mexico City as a hub, passengers from neighboring countries such as Brazil can transit here for connections to Asia rather than go via the US, which at the moment still requires a visa.

Has the delay in Boeing 787 production affected you?

We ordered 787s in 2005. We were due to take our first aircraft in early 2010, but that has now been delayed until 2012. We have met with Boeing and it seems that there is positive progress. Test flights have gone well and production looks to be on track. The 2012 delivery date for our first 787 looks realistic.
In the meantime, we had to retrofit our 767s. We would have preferred to use the 787 but we look forward to delivery in two years. It is a replacement for the 767, not an addition to the fleet.

How would liberalization affect your plans?

Today, Mexico has a very open market in aviation terms. We are well connected with the US, and there are open skies agreements with Europe, Colombia, Costa Rica, Cuba and others. Among all carriers, some 160 cities in the US and Mexico are connected. This is one of the busiest cross border networks in the world.

Liberalization must be managed and introduced gradually. Landing rights must be clear. I can fly to London Heathrow, but I don’t have the money to get a slot even if there was one available. And there can’t be lower costs for domestic players. Fuel prices must be the same, for example.

We compete with Iberia in Madrid, LAN in Santiago, JAL in Tokyo and with all the US carriers. We are not afraid of competition but if you have one country with seven domestic carriers and another with one, that one has a strong advantage. It can reap profits from domestic networks and offer international flights at cost or at a loss. It will capture the market and kill off the competition. The airline that faces domestic competition doesn’t have that luxury. We still have these asymmetries in the industry.

I’m in favor of liberalization—it is good for consumers and good for companies—but we must be cautious.

How is the infrastructure in Mexico? Can that be improved to help you compete?

We need more airports in Mexico, and they need to have fees that are competitive and reflect the levels of service. A new airport is being built just outside Cancún and it will compete with the existing facility. That sets the right tone so we will welcome it. Mexican airports have had good profits for too long, and that is not conducive to a strong airline industry. It has to change.

As a former government official, what would your message be to the politicians regarding aviation and the environment?

It is politically appealing and relatively easy for governments to tax airlines. But the strategy is not supported by the facts. Aviation is a small part of the environmental problem.

At Aeroméxico, we have invested $3.5 billion in our fleet. The average age of our aircraft has dropped and our CO² emissions are a lot less as a result. So any taxes or schemes must make economic sense. Otherwise, the industry simply won’t have the money to invest in new environmentally friendly technology.

Is technology the key to a sustainable future?

We have already used considerable resources to upgrade our fleet and the next important step is strengthening information technology. We will work with our SkyTeam partners to improve our collaboration with the other airlines.

Our reservations system is going to be completely changed, so we have the very best system available. And we will be the first carrier in Mexico to offer self-tagging for baggage. It has got to be good for passengers and airlines, if technology can bring them benefits that are easy to administer.

More information at: www.aeromexico.com

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