Stranded Sukhoi jets haunt troubled airline

Bloomberg

In cavernous jet hangars in and around Mexico City, Interjet has a secret. Four of the Mexican airline’s Sukhoi Superjet 100s—out of a fleet of 22—have been grounded for at least five months because of engine maintenance delays. The Russian-made aircraft, which average just four years old, are now being cannibalised, an industry term for when a plane is slowly scrapped for parts to keep other jets running.
A grounded plane is a wasted plane, and Interjet’s offline aircraft are symbolic of an airline that’s veered off course. Once one of Mexico’s hopefuls to bring a new era of competition to the industry, Interjet has muddled along with a questionable strategy while more nimble rivals have appeared on the scene. Now, the stranded Sukhoi Superjets are adding to concerns about whether ABC Aerolineas, the company’s formal name, will ever thrive.
“There are doubts about the viability of the business,” says Carlos Ozores, an air-transport specialist at ICF, a consulting and technology services company based in Virginia. “The only way for an airline to make money is to keep flying.”
Interjet confirmed the grounded aircraft but said it’s in good financial shape. The parked-plane situation can be traced back to a decision Chief Executive Officer Jose Luis Garza made half a decade ago when he agreed to buy the little-known and largely untested Sukhoi Superjets, which are backed by Italy’s Leonardo SpA and Russia’s Sukhoi. The engines are made by France’s Safran SA and a Russian partner.
JSC Sukhoi doesn’t have a single maintenance facility in the Americas. Airbus SE, which services the rest of Interjet’s fleet, operates three. That’s important because planes need regular and meticulous upkeep. It’s like driving a Hummer in a land of Volkswagens. For a time you’ll be fine, but once the vehicle requires so much as a tune-up, finding the parts and the labor to fix it will be both tricky and costly.
“The supply chain with this aircraft has been a process,” Garza says from his office overlooking the Mexico City airport. “But we’re getting to where we want to be with them.” To ease maintenance problems, a $7 million consignment stock is being set up this year with Sukhoi parts, he said.
“The decision to buy them was a technical and economical one,” he says, calling the deal an “extraordinary acquisition agreement” the company wouldn’t have gotten from Brazilian maker Embraer SA.
Interjet made a splash as Mexico’s first airline for the budget-conscious flyer when it was founded in 2005 by the Aleman family, the son and grandson of a former president. The company’s regional focus and deeply discounted ticket prices quickly turned it into the No. 2 airline by passengers as of 2011. But in the years that followed, the carrier hit turbulent skies, causing the company’s overall market share to stagnate while ultra-low-cost rival Controladora Vuela Compania de Aviacion, known as Volaris, has seen its stake soar.
Becoming a Hybrid
“It’ll be hard for it to survive without a change of strategy,” Ozores says. “It’s hard operating in the middle.” The middle that Ozores is referring to is the point between low-cost carrier and a full-service one. Interjet’s original economic model has slowly morphed into a sort of hybrid, so that these days, the carrier is trying to compete on price and service and falling short on both fronts.
Garza says Interjet has focused its growth strategy on international routes since 2014, almost doubling its share of foreign flights to and from Mexico to about 21 percent as of November from 11 percent in 2014.
While that’s helped boost the company’s dollar income—a boon for companies battered by a local currency that’s lost a third of its value in five years—Interjet has paid a heavy price to compete with its bigger rivals.
Interjet freebies likes snacks and checked luggage put its costs on par with full-service rivals like Grupo Aeromexico SAB. It also boasts of comfy leg room, adapting the seating configuration on its Airbus aircraft so that its planes fly an average 13 percent below capacity. Despite those perks, Interjet’s image is still solidly stuck in the domain of budget carriers. But its prices are sometimes more than double those of Volaris, which started operations in 2006.
“We’re told we’re leaving money on the table,” Garza says. “Does that mean we should overbook flights and start charging for everything? We don’t think so.”
Meanwhile, Interjet’s leveragetops Aeromexico’s ratio of 5.1 or Volaris’s 5.2 times. Says Michael Duff, director at data researcher The Airline Analyst: “A relatively high financial risk is how I’d categorise them.”
It’s for that reason that keeping a constant eye on costs is so crucial. For low-cost carriers, that usually means limiting fleets to a single aircraft to save on maintenance-training costs. But Interjet’s 22 Superjet 100 planes coexist with its 50 Airbus A320 jetliners as well as six Airbus A321 aircraft.
“The most important defining characteristic of a low-cost carrier is an airline that’s able to keep costs low, whatever way they manage to do it,” says Triant Flouris, an International Air Transport Association flight instructor at the Hellenic American University in Greece.
It was about a year ago that CEO Garza’s decision to bet on the Sukhoi Superjet first came back to haunt him in a big way. In December 2016—peak travel season for holiday flyers—the Russian aviation authority warned of a defect in a part that helps the aircraft fly straight in the air. After Interjet inspected its own planes, it grounded half its Sukhoi Superjet fleet and was forced to cancel
25 flights, Garza said at the time.
“The Superjet hasn’t become very popular outside of Russia,” Flouris says. The 2012 Sukhoi Superjet purchase was the best choice for Interjet given Mexico City’s temperatures, altitudes and the routes they were intended to cover, CEO Garza says. It was a bold bet on Russia’s first major passenger aircraft since the collapse of the Soviet Union.
The single-aisle aircraft sold for about a half of the price of comparable jets from Brazil’s Embraer or Canada’s Bombardier Inc.
Today, Interjet is JSC Sukhoi’s second-biggest customer—behind only Russian Airlines PJSC, known as Aeroflot. Interjet board Chairman Miguel Aleman Velasco said at an October event that the company is even considering adding to its Russian-made fleet with the purchase of JSC Sukhoi’s twin-engine MS-21s when they roll out in 2019.