What goes up must come down

What goes up must come down

by The Economist online | MEXICO CITY

WITH a fuzzy in-flight movie and a choice of chicken or chicken for dinner, perhaps it should have been obvious on a recent flight from London that all was not well with Compañía Mexicana de Aviación. On August 2nd, Mexico’s first and biggest airline filed for bankruptcy protection in Mexico and the United States, citing debt of more than $1 billion. Most of its services will continue for now, although some flights to California and Panama have been cancelled. Its sister airlines, budget carriers MexicanaLink and MexicanaClick, are unaffected.

Mexicana is the biggest airline to go bankrupt since Japan Airlines, another Oneworld Alliance member, went under in January. It does not come as a big shock: Mexican airlines have faced tough conditions lately, battling the deepest recession in the Americas (Mexico’s economy shrank 9.7% in the year to June 2009, though it has since bounced back). Last year the country’s tourism industry was dealt another cruel blow by the outbreak of the H1N1 virus, which was first reported in Mexico and quickly emptied the hotels of Cancún.

The result for Mexicana has been a loss of $350m since 2007. In a message on its website, the company said its losses were mainly caused by high wage bills. Mexicana pilots earn 49% more than pilots working for the big American carriers, it said, and 185% more than pilots who work with Mexican low-cost airlines such as Volaris and Interjet. Flight attendants earn 32% more than their American counterparts, and 165% more than those with Mexican budget carriers. Although Fernando Perfecto, the director of the pilots’ union, has said that the company’s salary figures are “inexact”, his organisation has not provided its own numbers. The company reckons that once the big wage bill is excluded, its operating costs are slender—30% lower than the big American airlines, it says. Indeed, it claimed that if wage contracts had been “more competitive”, it would have posted $350m of profits rather than losses.

Whatever the likelihood of that, lowering those wage bills has so far proved impossible. On July 1st, 500 Mexicana pilots and cabin crew marched through Mexico City’s Benito Juárez airport in protest at proposals for pay cuts and layoffs. Mexicana’s proposals are swingeing: pay cuts of 41% for pilots and 39% for flight attendants, and a 40% cut in the workforce. The company has laid out another option, of selling the business to the unions for the sum of one peso. The unions have yet to respond.

For now, Mexicana is doing its best to keep its 69 aircraft out of the hands of jumpy creditors. Two were seized in Calgary last week by Air Canada, which had leased the planes to Mexicana and apparently heard a rumour that bankruptcy was in the offing. Other attempts have reportedly been made in Chicago and at JFK airport in New York.
If Mexicana goes under, it will mean a big gap in the market: the airline transported more than 11m passengers last year. It would be bad news for passengers on some routes that already suffer from a severe lack of competition. The Mexico City to London relay, whose only other operator is the strike-prone British Airways, will be watched with special attention by your correspondent.

NB: An earlier version of this post mistakenly identified the last airline to go bankrupt bigger than Mexicana as Air Japan.