Aeromexico follows United in scaling back on crowded routes

Bloomberg

Grupo Aeromexico SAB, Mexico’s largest airline, is trimming its expansion plans as a seating glut drags down fares.
Capacity will expand 7 percent the rest of this year, said Chief Executive Officer Andres Conesa. That’s down from a previous forecast of about 9 percent, he said, citing the need for increased discipline as rising fuel prices add to earnings pressure.
The carrier is tapping the brakes as a weaker industry outlook has prompted investors to dump Mexican airline shares. Years of go-go growth have left the domestic market awash in capacity, while an open skies deal with the US prompted airlines from both countries to add cross-border flights. United Continental Holdings Inc. said it would chop flights to Mexico, saying service to some markets was unsustainable.
“We’re starting to see the impact on profit, but it has more to do with excess capacity than weak demand,” Conesa said in Mexico City.

Delta Partnership
Aeromexico has been able to fend off some of the capacity-related pressure thanks to its joint venture with Delta Air Lines Inc., which owns 49 percent of the Mexico City-based company, Conesa said.
Passenger traffic between Mexico and the US rose 6 percent in March from a year earlier, according to the Transportation Ministry.
While Aeromexico eked out a slim profit in the first quarter, Volaris reported a loss of $56 million and posted the largest one-day share decline since 2016. The Mexican airline industry is entering a period of uncertainty amid a potentially unsustainable drop in fares, Barclays Plc said.
The highest jet-fuel prices since 2014 — currently at $2.26 a gallon for purchase in New York harbour — are adding to the pressure. Aeromexico hedged for about half of its fuel requirements using call spreads with a strike price starting at $1.78 per gallon, the airline told analysts.
Aeromexico is naturally hedged against peso weakness, with about 60 percent of its sales in other currencies and about two thirds of costs denominated in dollars, Conesa said. But persistent currency weakness represents a risk to Mexico’s boom in air travel.
“If the peso continues to depreciate, it will have an impact on demand, on real activity and that will have an impact on our business and on the Mexican economy,” he said.
The Mexican currency has tumbled 8.5 percent in the last month alone, dragged down in part by uncertainty about the future of the North American Free Trade Agreement.
Aeromexico is still weighing an order of Bombardier Inc.’s C Series planes, Conesa said. The carrier had initially considered the plane when the US slapped tariffs on the Canadian aircraft after a trade complaint brought by Boeing Co. A trade panel’s ruling in Bombardier’s favour paved the way for Delta to get the planes, giving Aeromexico more time to study its fleet plans. The company flies Boeing 737 and 787 Dreamliner planes, while its regional unit operates Embraer SA jets. Aeromexico is also considering an order for Embraer’s upgraded E2 planes — if it takes new planes at all.
“It opened a window of additional time, so we’re analysing whether to bring the C Series, the new E2 or staying as we are,” he said. “We’re hoping to make a decision in the second half of the year.”