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ANALYSIS - U.S. airlines to benefit from Mexicana meltdown

Source : REUTERS
Last Updated: Fri, Aug 06, 2010 05:50 hrs
ANALYSIS - U.S. airlines to benefit from Mexicana meltdown

Possible bankruptcy for one of Mexico's two major airlines could benefit U.S. carriers, but the latest shake-up in a troubled air sector is not seen seriously denting the country's tourism industry for now.

Mexicana de Aviacion, saddled with mounting debts and high employee costs, filed for creditor protection with Mexican and U.S. authorities this week after it failed to get employees to accept further wage cuts.

On Wednesday, Mexicana suspended ticket sales, raising questions about whether it can stave off bankruptcy -- and how long it can continue to operate. On Thursday, the company said its petition for insolvency had been admitted by a Mexico City district judge.

Mexicana's woes could be good news for U.S. airlines also flying to popular beach destinations like Cancun and Acapulco.

"There are three big airlines with exposure in Mexico: American<AMR.N>, Delta<DAL.N> and Continental<CAL.N>, and they are kind of your big winners" if Mexicana goes bankrupt, said New York-based analyst Helane Becker, with investment bank Dahlman Rose & Company, LLC.

Mexicana belongs to the Oneworld alliance, which also has American, British Airways and Lan among its members.

Mexican low-cost airline Volaris, which recently tapped the U.S. market with flights to California, and Mexicana's main rival, AeroMexico, also stand to gain, but only up to a point.

That would be a boon for those airlines, which like Mexicana were battered by Mexico's severe recession in 2009 and by the H1NI flu outbreak the same year.

But the U.S. Federal Aviation Administration's recent decision to downgrade Mexican airlines, on grounds local authorities were not fully complying with global safety standards, will damage their efforts to capture Mexicana's international routes, Moody's Investor service said.

"AeroMexico and Volaris can't put the U.S. airlines codes on their flights now, but they can continue feed traffic to the U.S. airlines," Becker said.

Analysts think it could take up to four months for Mexico to get off the FAA's problem list.

TOURISM VITAL TO MEXICAN ECONOMY

Mexicana's woes also cast a shadow on the tourism industry, which along with oil exports and remittances is one of Mexico's main dollar generators. Thousands of U.S. and European visitors book trips to hot spots like Cancun and Los Cabos every year for vacationing, boosting the local economy.

The potential exit from Mexicana could allow rivals to charge more -- and eventually deter future travelers.

"I would think that the Mexican government wouldn't want Mexicana to fail because AeroMexico can just decide to charge whatever they want ... and American tourists aren't going to be coming to Mexico," said Marc A. Levinson, a California-based attorney and restructuring specialist with law firm Orrick.

The government has said it will not bail out Mexicana. Labor Minister Javier Lozano met with union officials on Thursday, but so far the two sides have not struck a deal.

Mexicana wants to cut jobs and slash wages by close to 40 percent, but pilots and flight attendants have refused after giving up multiple benefits in 2006. Those cuts helped Mexicana save about $35 million per year.

Mexicana is a unit of Grupo Mexicana, which also owns regional airlines Click and Link. Those airlines, which serve domestic routes in Mexico, have not yet been unaffected.

Analysts said Mexicana clients will certainly be forced to reschedule flights, but that for now the impact of the possible bankruptcy will be mostly limited to Mexico.

"Mexicana is big in Mexico, but they are not big worldwide," said Dahlman Rose's Becker.

Mexico airport operators such as OMA, GAP and Asur could also be smarting if Mexicana halts operations, since they depend on Mexicana and AeroMexico for a sizable portion of their revenue.

"GAP is the most hurt one due to Mexicana's share on its passenger traffic -- of 10.2 percent during the first half of the year -- and 21 routes affected," IXE brokerage said.

(Editing by Missy Ryan and Richard Chang)

(For more business news on Reuters India click http://in.reuters.com)




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